Cashing In: 5 Supply Chain Financing Trends
Supply chain financing solutions that allow both buyers and suppliers to optimize cash flow are becoming increasingly popular as more options become available. Here are five trends that are on the money.
Supply chain financing is a strategy that allows both buyers and suppliers to optimize their cash flow.
While most industry experts agree on that definition, those involved in the process differ on the options available for that strategy to happen. Purists say that the term “supply chain financing” only applies to reverse factoring, where the buyer initiates a process that lets the supplier get paid more quickly through an intermediary—typically a bank.
Other experts equate the term with traditional factoring or accounts receivable financing, credit card payments, early payment discounts, and dynamic discounting (see sidebar).
Hanging On To The Cash
Purist or not, the goal of supply chain financing is to let the buyer hang on to cash longer without the supplier having to wait for payment. It’s a win-win for buyers—who can extend payment terms and use their capital in the meantime—and for suppliers, who can’t afford to wait more than 30 days to be paid.
Here’s how “true” supply chain financing works: A buyer with an investment grade credit rating who wants to extend payment terms to 45, 60, or even 90 days partners with a third party that agrees to pay suppliers earlier than invoice terms in exchange for a supplier-paid fee. The buyer notifies the supplier that it is extending invoice terms and offers the third party an early-payment solution.
While suppliers with tight cash flow get paid sooner, there’s yet another advantage. The fee they pay the intermediary is often less than what it would cost them to borrow money to pay bills while waiting for the buyer’s payment. That’s because the rate charged is based on the buyer’s credit history, not the supplier’s. Buyers with an investment grade rating often receive more favorable rates than suppliers that aren’t as highly rated.
In addition, supply chain finance doesn’t count as additional debt for a buyer or supplier.
Financing for Freight
Supply chain financing is particularly prevalent in the freight and transportation side of the business for two reasons. First, because the freight spend commonly ranges from three to 12 percent of revenue, according to data analysis company Aberdeen, freight is a logical source for a working capital improvement initiative.
“Companies that take advantage of supply chain financing are usually in industries such as heavy manufacturing, where freight is a big enough expense to matter,” says Cory Bricker, vice president of corporate development for Cass Information Systems, a St. Louis-based provider of integrated information and payment management services.
In addition, many carriers are small businesses. In fact, 90 percent of the trucking industry is comprised of businesses with 10 or fewer trucks, reports the Owner-Operator Independent Drivers Association.
“These carriers need a quick pay option because they can’t afford longer terms,” says Bricker.
Bricker and other industry sources cite the following five supply chain finance trends to watch in 2018.
1. Financing the supply chain is a more accepted and popular strategy because more shippers and carriers are aware of the working capital tied up in it.
“Both shippers and carriers are watching their days paid out and days sales outstanding more closely,” says Travis Lachinski, senior product manager, freight payment, for U.S. Bank in Minneapolis.
More awareness through education and an increase in the number of businesses facilitating supply chain financing mean more companies are employing this strategy.
“It has become a highly competitive business, so companies are always looking for ways to manage the process more efficiently,” says Rich Piontek, president of Las Vegas-based supply chain payment service provider eCapital.
2. An increasing number of service providers use digital technology to audit and pay invoices, making it easier for companies to take advantage of financing options.
“Bringing together the invoice approval process with the ability to finance the invoice through a single platform is a significant trend,” says Drew Hofler, senior director, solutions marketing, at SAP Ariba, which provides the technology platform many service providers use.
Supply chain financing is an outgrowth of Cass Information Systems’ invoice auditing, payment, and banking services.
“It’s a logical fit for the shippers and carriers we already work with,” says Travis Sumner, director of global sales and marketing for Cass Information Systems.
“We can handle a large volume of invoices with a relatively low value,” he explains. “A company trying to manage this internally can’t always get the throughput needed to approve invoices in time to take advantage of a quick pay program.”
3. More providers mean more financing options.
“We have many more alternatives now than we did when we started the company 12 years ago, when bank funding was the only option,” says Casey McClure, co-founder of Blueberry Diapers, a NetSuite cloud-based financials and enterprise resource planning software user in Knoxville, Tennessee.
McClure now uses PayPal Working Capital, a program that advances cash to a company based on its PayPal history. PayPal automatically deducts a regular, agreed-upon repayment amount from the company’s incoming payments.
This also means that supply chain financing is becoming increasingly bank agnostic. “Our primary competitors are large global banks, but our platform includes multiple funders,” says McClure.
“We’re seeing more of these multi-funder options across the industry now,” says Tom Roberts, senior vice president of global marketing at PrimeRevenue, a working capital financial technology solutions provider based in Atlanta.
4. Participants in electronic payment processing programs want more data.
Because outside processing services work with digital files, they can generate data that’s useful to system participants.
“We can generate reports that produce not what you contracted to spend, but what you actually spent,” says Lachinski. “This is much more useful for understanding trends and future costs.”
U.S. Bank recently began sharing some trends revealed by the data in its system through its quarterly U.S. Bank Freight Payment Index, which measures changes in commercial shipment and spend activity. The Index detects trends that can help shippers and carriers benchmark their performance.
5. Watch for more middle market companies to offer supply chain financing.
PrimeRevenue is working to make the option available to mid-market companies with sub-investment grade ratings. “This is traditionally a market that banks won’t touch, but we know there’s demand there,” Roberts says. “We’re finding non-bank financing for them.”
What does the future of supply chain financing look like? “It was bleeding edge 10 years ago, moved into leading edge, and is now a best practice for many,” says Hofler. “In five years, we’ll see something closer to a self-service cash flow based on a ‘set it and forget it’ system for buyers, and an ‘edit it and forget it’ process for suppliers.”
Is Blockchain in Your Future?
Ron Quaranta, chairman of the Wall Street Blockchain Alliance, describes blockchain as “a distributed decentralized ledger meant to securely and immutably protect data with maintenance performed by a network of nodes, or participants.”
The blocks in the chain are files with the recorded transaction data.
“Financial markets have been working with blockchain for pilots or proofs of concept for about three years, but things have really begun to heat up in the past year and a half,” Quaranta says. “Every major bank, most major fintech companies, and large tech firms that include IBM, Microsoft, and Oracle are deeply involved from a research and pilot perspective.”
MasterCard recently created and tested a blockchain system, while American Express introduced a blockchain-based cross-border payment service leveraging technology from fintech startup Ripple.
On the supply chain side, Maersk recently partnered with several businesses to create the world’s first marine insurance blockchain platform to streamline and automate marine insurance transactions.
Transportation leaders have formed the Blockchain in Trucking Alliance (BiTA), an organization created to develop blockchain standards and education for the freight industry. BiTA believes blockchain “is one of the most significant developments for the trucking industry since the creation of the Internet,” according to a press release.
While payments via blockchain may be a future option, the industry is still in the exploratory stage.
“There’s huge potential, but it’s not totally clear how it’s going to revolutionize the way we transact business within the supply chain structure,” says Rich Piontek, president of BiTA member eCapital.
“Large corporations are exceptionally risk averse,” adds Tom Roberts, senior vice president of global marketing at PrimeRevenue. “They’re not yet willing to put their financials and invoice systems into blockchain ledgers.”
Piontek believes it’s a matter of time before it becomes a payment option.
“Most forward-thinking companies interested in improving the way they interact with clients or manage the flow of information or funds are considering the impact of blockchain,” he says, adding, “but it won’t happen quickly.”
Coming to Terms With Supply Chain Finance
Some experts believe that reverse factoring is the only “true” supply chain financing option, but others extend the definition to any solution that lets the buyer delay paying while the supplier gets paid more quickly. Here are terms you might hear.
Factoring, also known as accounts receivable financing. A supplier that wants to get paid more quickly sells its accounts receivables to a third party (a “factor”) at a discount.
Reverse factoring. The buyer initiates a process that lets the supplier get paid more quickly through an intermediary that is typically a bank. This option is often presented in conjunction with a buyer initiative to extend payment terms on invoices.
Credit card payment. The buyer retains cash longer by paying with a credit card.
Early payment discount. The supplier offers the buyer a discount on the invoice if the buyer pays before the invoice due date. The discount is typically 2 percent if paid in 10 days.
Dynamic discounting. Early payment discounts usually expire on day 11. Dynamic discounting extends the discount period by calculating the discount on a sliding scale as of day 11. The sooner the buyer pays, the greater the the discount.