Third-party financing: Suppliers explore Supply Chain Finance alternatives beyond traditional banks - Part III

November 12, 2013 Ankita Tyagi

This is part 3 of a 5 part series. Check out part 1 and part 2.

In our conversations with executives over this year, one particular theme gained prominence: exploring alternate sources of funding for suppliers to ensure liquidity during lean times. Activity in non- traditional sources of funding is growing. In this tight liquidity economic environment, where funding can be an issue, it is particularly challenging for small businesses, who may not have enough credit points to ensure a cash supply to fund their operations.

Some solution providers identify this as an opportunity and now offer financing to suppliers, going beyond the banking realm. In some case, these third parties still engage with financial institutions as they match suppliers to banks or another third-party financier for a small fee. The matching is a critical component as it is done based on the nature of the supplier's service or product, industry, size, risk profile, and related factors. Like banks, these intermediaries only take on a supplier after the PO has been approved. As solution providers, these intermediaries integrate different document management technologies with capabilities such as invoice management, real-time visibility into invoice status, PO matching, contract management, and Electronic Data Interchange (EDI). This integration reduces or even eliminates processing expenses and overhead costs.

Similar to the traditional routes that involve early-payment discounts, some solution providers offer rebates or discounts to buyers who pay the invoice prior to order fulfillment. Some begin with buyer evaluation, which is their ability to pay the supplier on time and then craft solutions based on terms which both the suppliers and buyers agree upon. Irrespective of the incentive or payment break, these third-party solutions offer agile solutions and provide an alternative to suppliers beyond the traditional bank. Compliance and disclosure is still something worth considering though, and it’ll be interesting to see if the government offers a regulatory framework similar to crowd-sourcing.

However, they still offer some good value by serving as a shared service center when it comes to invoice management and trading partners can still realize benefits in terms of processing time and cost. In my opinion, this is an interesting space and worth following in the months to come. Stay tuned...

Until next time,

Ankita Tyagi

Research Analyst

Financial Management & GRC

Aberdeen Replay

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