The prolonged recession that has afflicted many regions of the world since 2008 has only intensified the need for corporates and their treasury divisions to secure effective supplier finance. Both buyers and suppliers are looking to optimise their working capital and streamline business processes to reduce cost and provide a competitive advantage.
Supplier finance refers to a programme or solution that enables the buyer to improve their working capital position by offering suppliers the ability to take early payment for invoices in exchange for extended payment terms. The supplier is financed by the bank based on the buyer’s credit risk, while the supplier gains access to early discounted payment at attractive rates of funding when compared to traditional financing facilities. Supplier finance also affords the opportunity for both the buyer and supplier to simultaneously achieve their competing working capital objectives.
The market opportunity for supplier finance is significant, with the worldwide market for receivables management estimated at US$1.3trillion. There are currently only a small percentage of companies using supplier finance, although estimated suggest that many more are investigating supplier finance solutions.
There are benefits for both the buyer and supplier from participating in an efficient online supplier finance programme. The buyer may benefit from either an improved working capital position through extended payment terms or cash discounts through early payment terms. Other benefits beyond financing include:
- A more efficient online payables process with a reduction in error and re-work.
- Greater visibility of cash and liquidity providing the ability to make informed working capital decisions.
- No change in their debt profile.
- The ability to minimise issues related to supplier liquidity.
The supplier will, in turn, benefit from earlier access to funds at a potentially better financing rate than would be achieved independently and without the need to provide traditional collateral as security. There is also the advantage of ease of projecting revenues, given agreed payment terms within the supplier finance programme.
A financially viable supply chain is a stable supply chain, in which buyers and suppliers collaborate to remove payment uncertainty and assure liquidity.
What Challenges Remain?
There are still further issues to be resolved if a corporate is to develop an efficient supplier finance programme.
An integrated payables and supplier finance solution: This will ensure that the end-to-end business processes are streamlined, costs are minimised and both manual handling and paper processing are eliminated. The challenge for treasury is to ensure that its current payables processing and supplier financing needs are well understood, and the business is ready and willing to implement an end-to- end integrated payables and supplier finance solution. Figure 1 outlines how this might be achieved.
Figure 1: How a Corporate might Implement an Integrated Payables and Supplier Finance Solution.
Implementing the right technology solution: Achieving this for all parties in the value chain can be a challenge in and of itself. The appropriate technology is a critical enabler of a mutually successful supplier finance programme. The technology solution must be online, highly functional, able to be integrated and easy to both access and use. It must also be scalable to manage a growing programme and must not be labour-intensive to manage. The solution should also provide access to appropriate and timely buyer and supplier data, and accommodate the entire payables and supplier finance process end to end.
Change Management: This can present an issue for both buyers and suppliers, with good change management being the key to reaping the benefits of the supplier finance programme. For both buyers and suppliers there will be a need to change internal processes, implement technology and agree common data standards for the transfer of information in the online environment. A well thought out and communicated change management plan will take into account the required changes in the buyer’s payables processes, articulate the supplier onboarding, invoicing and financing process, and will monitor and review the progress of the supplier finance programme over time.
Supplier take-up: A critical element in the success of any supplier finance programme. Too often programmes are poorly communicated and overly complicated, meaning that the working capital advantages are not well understood by the supplier. The end result is that supplier take-up remains low and without their active involvement a supplier finance programme cannot succeed. The programme provider needs to work closely with suppliers in the initial stages by engaging them through effective and timely communication, ensuring a seamless supplier onboarding process and providing a structured workflow that is straightforward and intuitive to use.
A well-articulated value proposition: This often presents a challenge for the supplier finance programme provider. The onus is on the provider to translate the inherent complexity of the programme to both the buyer and the supplier. Its success depends on the use of the online solution by both the buyer and supplier, which can only happen when the value proposition is clear to all parties. In the absence of a well-articulated value proposition, the programme will not be utilised to its utmost potential and ultimately will fail.
Functional alignment: Within an organisation this is often a barrier to the implementation of a supplier finance programme. There are often competing priorities between a chief financial officer (CFO), treasury and the procurement department. The CFO and/or treasury will often have a working capital and efficiency objective, whereas procurement often focuses purely on the relationship with the supplier. It is important to address this potential divergence early and recognise that all priorities can be met by the implementation of a supplier finance programme.
Financial strength and stability: A potential challenge to some providers of supplier finance programmes. In choosing the right provider, you need to be assured that they are in a position to provide an adequate level of funding, both at the inception of the programme and well into the future to ensure its ongoing operation and viability.
In summary, a corporate should carefully select a provider with an in-depth knowledge of their business and the financial strength to support their supplier finance programme on an ongoing basis. The corporate should be willing and able to partner with the chosen provider to implement an integrated payables and supplier finance solution that is efficient, scalable and online, with a clearly- articulated value proposition. It is critical that the technology solution meets both the payables processing and working capital needs of the buyer, and the invoicing and supplier financing needs of the supplier if the programme is to provide the maximum benefit to all participants.
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