There is this fundamental problem in the financial supply chain: Suppliers want to get paid as early as possible, while buyers want to pay as late as possible. This is the age-old conundrum that organizations face, creating friction around payment terms. Small and midsized business suppliers are waiting longer and longer to be paid after delivering goods. This trend has a big impact on operations because cash flow is one of the biggest concerns facing small and midsized businesses (SMB).
What has been done in the last 5 years?
For some time now, administrations have been under pressure to respond to these situations. In 2013 Prime Minister David Cameron met with the leaders of some of the UK’s largest companies and agreed to boost supporting their supply chains by evaluating the implementation of, or continuing to offer, Supply Chain Finance. In 2013 the Obama administration announced an initiative called SupplierPay, pledging companies to pay their small suppliers faster or enable a financing solution that helps them access working capital at a lower cost. In 2014 Henk Kamp, the Dutch Minister for Economic Affairs, announced a new programme called BetaalMeNu. Translated quite simply as Pay Me Now, the purpose of this initiative is to encourage large Dutch buying organisations to offer SCF solutions to SME suppliers. The aim of these initiatives is always the same: – large companies should either commit to paying their suppliers quicker, or otherwise give them access to lower cost capital!
Where are we in 2018?
A recent study from PWC in November 2017 says the following: “Despite a changing landscape, reverse factoring on a bank platform remains the most widely used SCF option…”
Reverse factoring connects buyers, suppliers, and multiple banks through a software platform to support the early payment of invoices. Pre-arranged financing is provided by the banks.
But then it says the following:
“For 1/3 of the SCF programmes all suppliers are eligible“ and continues “A typical SCF programme for respondents covers 20% of spend value and less than 100 suppliers….”
So here you have it: despite all governmental efforts to improve the situation, we are still very much at the beginning of this journey – as these 100 suppliers mentioned are in all likelihood the biggest suppliers. But the actual main target group – Small to Medium Businesses – are still left out. Not much has changed.
The problem is in the long tail
As we see, companies have not rushed to implement SCF programs and are not addressing the long tail. That does not come as a surprise, since typical SCF programs via banks will often have a limited pool of cash allocated to a SCF programme and involve complex legal frameworks and administrative effort like “know your customer” etc. and are therefore limited to the biggest players in the game.
This situation has led to rise of Fintech companies like Taulia. They are creating a win-win situation for both suppliers and buyers, including all smaller businesses that were previously excluded, because – as we saw in the PWC story – buyers mainly just focus on their largest suppliers.
With Taulia, buyers can now use their own high credit rating to secure low-cost financing for all suppliers without using their own cash. By offering a wide array of automated products, like electronic invoicing, supplier financing and supplier self-services, they enable both the buyer and supplier to improve their working capital, improve their yields and lower their operating costs. Taulia’s early payment programme can be either self-funded by the Buyer (Dynamic Discounting) and/or 3rd party funded. With over 100 existing Bank & Capital Markets funders eligible for a SCF program, companies remove the risk of a Bank hitting its credit cap and maintain the best possible pricing for suppliers!
Good news: Even if buyers will never want to pay their suppliers early, the PWC survey indicates 84% of the respondents who do not have a SCF programme are interested in implementing, or intend to enhance existing SCF solutions. This is a positive sign that there is definitely room to grow.