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4 payables financing options: unlock funds and remove risk

by | June 2, 2016

  With an estimated £327bn of trade credit locked up in the UK trading network alone (N.Wilson CMRC), and at least 30% of global suppliers being paid 15 days or more late (survey by Taulia), the most forward thinking Procurement, Finance and Treasury professionals have recognised the opportunity for growth that can be unleashed through optimising the sequence of payments for goods and services. In our recent blog “Five key advances in supply chain technology” we explored the technology that is facilitating this. In this blog we explore four payables financing options that are currently being used by organisations in order to de-risk their supply chain, promote growth, and generate savings.  

Approved payables financing or Reverse factoring

Approved Payable FinancingThis option is only really viable for the top few buyers in the supply chain, and involves approaching a bank or other financial institution in order to finance supplier invoices. The money to pay this loan can be borrowed at the rate relevant to the risk profile of the buyer, so is often more favourable than a supplier can get directly. Discounts can be arranged with suppliers for early payments of invoices, which can finance the loan. The benefit is improved working capital for the buyer by an artificial extension to their days payable outstanding (DPO), without harming the cash flow of their suppliers.  

Early payment discounting

Early Payment DiscountingEarly payment discounting clauses can be introduced into supplier contracts: agreements whereby buyers can pay invoices early, at their discretion, and in return receive a discount on that invoice. As no additional bank / financial institutions are involved this option is viable for all buyers, not just the top few in the chain. This approach decreases the buyer’s DPO, but can be a more effective investment of the company’s cash. The agreement delivers risk free cash to their bottom line; significantly more than the interest that would have been accrued in the bank. However if manual Purchase to Pay (P2P) processes are being used, it can be a challenge to get an invoice ready to pay in a time that warrants consideration for early payments, and requires Procurement teams to reopen invoices and revisit agreed payment terms.  

Dynamic discounting

Dynamic DiscountingVery similar to early payment discounting, however it is dependent upon increased collaboration and transparency between the buyer and the supplier. There is no negotiated fixed discount for a fixed reduction in days to pay, instead “ready to pay” invoices are shown to the supplier who can choose a sliding scale of discount over a chosen date range. This solution has all the same benefits as early payment discounting, but with added flexibility to both parties, and does not need the reopening of supplier agreements. It is almost impossible to facilitate this without a portal between the supplier and buyer such as that provided by Taulia business exchange.  

Supply Chain Finance Plus

Supply Chain Finance PlusSupply Chain Finance Plus is an amalgamation of dynamic discounting and approved payables financing, utilising the latest procurement technologies and flexible third party financing agreements. The buyer can use their own cash, third party financing, or a combination of both to fund dynamic discounting. This flexibility allows them to successfully balance managing DPO and discount capture to an optimal level, as well as supporting the suppliers on who they are ultimately dependent.  

To summarise

As these options become increasingly complex, not only do we see an increase in potential benefits and savings, but an increase in the flexibility needed to take advantage of an ever changing business landscape. However the options are also increasingly dependent upon the latest technology platforms to facilitate the necessary collaboration and transparency between buyers, suppliers and third party financiers. If you would like to discuss these financing options, or the technology available to support them please contact one of our team of procurement experts:   Whitepaper button