Pay Your Own Way
New supply chain finance strategies let shippers and carriers keep cash in their wallets.
It’s the classic win-win: Companies that buy a product or service get one month or more to pay, while sellers get their money in just a few days. Trading partners have used factoring, supply chain finance, and similar strategies for some time to maximize their cash flows. Today, though, advanced technologies are increasing the variety of available financing options.
Probably the simplest strategy buyers and suppliers use to optimize cash flow is a discount for early payment. For example, a seller’s invoice stipulates payment in 30 days but allows the buyer to take 2 percent off the price if payment arrives within 10 days. This strategy is also called dynamic discounting.
Some companies choose this method to get a better return on their money than they could by hanging onto cash—say, leaving it in a low-interest bank account. “We’ve seen up to 20 percent annual return on some dynamic discount programs,” says Michael Jud, director of product marketing at San Francisco-based Tradeshift, which operates a cloud-based network for supply chain payments, marketplaces, and applications.
A Cash Infusion
A buyer that pays early gives a supplier the infusion of working capital needed to make products or provide services. But interest rates have been rising, and many buyers need capital for mergers and acquisitions. Those conditions provide an incentive to hold onto cash as long as possible. “So they’re turning to third-party financial institutions for supply chain financing,” says Bryan Nella, senior director of supply chain thought leadership at Infor, the New York-based firm that operates the GT Nexus supply chain trading platform.
One traditional source of third-party cash in supply chain transactions is factoring. A factoring company generally offers its services to small sellers—trucking companies, contract manufacturers, suppliers of materials or components, or others.
Small firms might not have access to traditional bank financing. “The best way to manage their liquidity is to find a third party that will step into that cash flow position,” says Erik Meek, CEO of FreightRover, a freight payment services firm in Indianapolis whose solutions include factoring for motor carriers. The factor buys invoices from the carrier at a discount, giving the small company immediate cash. Shippers then pay the full value of their invoices to the factor in 30 days, 45 days, or whatever payment terms they have established.
The Factoring Factor
RTS International, part of Shamrock Trading Corporation in Overland Park, Kansas, provides factoring to exporters around the world, focusing on those that sell to companies in the United States and Europe. It conducts some of those relationships, mainly in the apparel and footwear industries, through the GT Nexus platform. Outside that platform, RTS provides factoring for companies in many industries.
“Instead of waiting 30, 60, or 90 days to get paid on invoices, our customers submit those invoices to us,” says Luis Mondragon, vice president of RTS International. “We pay them 80 to 100 percent of the total invoice within 24 hours of the request.”
In its general business—outside the GT Nexus platform—RTS starts its relationship with a vendor by asking for a list of companies it sells to. “We look into which of those buyers we can finance, the ones my credit department will approve,” Mondragon says. For each buyer, RTS considers its transaction volume with the seller, the payment terms it offers (30 days, 60 days, or longer), and the country where it operates. Those variables help determine what discount RTS will require when it buys the seller’s receivables. “Then we make the proposal, based on that specific volume and risk, to the approved buyers,” he says.
The process on the GT Nexus platform is a bit different. Staff at Infor identify supplier-buyer pairs already using GT Nexus to conduct transactions, and they ask the vendors if they need financial services. “If they do, we get engaged in the conversation,” says Mondragon.
Once a vendor becomes a customer, RTS can provide factoring for the vendor’s sales to other customers as well—either through GT Nexus (if the buyer uses that network) or outside of it.
Mitigating the Risk
One company that uses GT Nexus to receive payments from RTS is Orient Craft Ltd., which supplies ready-made garments and home furnishings to retailers in the United States and the United Kingdom.
“We recently started a relationship with RTS to factor invoices from our customers, such as Zara and Abercrombie and Fitch,” says Anoop Dhanda, the company’s finance director. “RTS mitigates the risk of cash flow disruptions due to bankruptcy, provides us with immediate liquidity, and further saves our banking limits.”
RTS averts disruptions by monitoring the credit profiles of Orient Craft’s customers, alerting the vendor if the buyer faces financial challenges that might keep it from paying its bills.
Once Orient Craft ships its products, it enters details about the invoices, packing lists, and transportation documents on the GT Nexus portal for approval by GT Nexus. “The process takes two to three days maximum, from uploading the details to release of export proceeds by GT Nexus,” Dhanda says
Another option involving a third party is supply chain financing, also known as reverse factoring, or quick pay. In this case, the third party makes an initial arrangement with the buyer, rather than the seller.
FreightRover, for instance, approaches shippers and transportation brokers, offering to pay carriers on their behalf. If a carrier agrees to the shipper’s regular payment terms, FreightRover makes the payment at no extra charge. But a carrier that wants a quick payment from FreightRover can get that, at a discount.
Tradewinds, a long-haul, dry van carrier in Westfield, Indiana, uses FreightRover to pay the independent contractors who haul its customers’ loads. “Most carriers now want to be paid once they deliver, for cash flow purposes,” says Benjamin Cook, the company’s president.
When a carrier sends proof of delivery, that’s the signal to make a payment. “We indicate that on the FreightRover platform, they pay the carrier within 24 hours, and they charge the carrier a fee, from 1 to 5 percent,” Cook says. The shipper pays Tradewinds, typically in 30 days, and Tradewinds pays FreightRover.
The quick payments seem to be helping Tradewinds find capacity for its customers. “Because we advertise that we utilize the FreightRover payment service, we’re having an easier time getting carriers,” Cook says.
TriumphPay in Coppell, Texas, provides supply chain financing mainly for transportation brokers. The goal is to get quick payments to carriers that haven’t made arrangements with factors.
About 80 percent of brokers already offer their own quick pay programs to carriers. “But they typically haven’t been super effective, because the broker’s job is to get the load moved, not to push the quick pay,” notes Brandon Bauer, vice president and business development officer at TriumphPay. TriumphPay streamlines the process, making it easier for companies that aren’t factoring to get accelerated payments without infringing on brokers’ cash positions.
Not every carrier chooses quick pay or factoring. Larger carriers don’t usually face the same cash flow problems as smaller companies, so they may prefer to forego the discount. “If they can wait 30 days, they’re issued the full payment,” Bauer says.
When a shipper opts for supply chain financing, rather than relying on carriers to sell their invoices to factors, it gains a simplified process. “Traditional factoring involves Uniform Commercial Code (UCC) filings and invoice validation,” says Meek. “Shippers receive bills from thousands of different places; they have to do all their own three-way matches.” With supply chain financing, the shipper pays only the service company, which then makes payments to all the carriers.
Trading partners on the Tradeshift or GT Nexus platform also can take advantage of supply chain financing. In both of those cases, the financers are banks or other investors, rather than the companies that operate the platforms.
For vendors, one benefit of the platform model is competition, as more than one bank on the network might offer to provide financing. “A seller could look at multiple banks and get a better offer,” Jud says.
Also, supply chain financing often provides better credit terms than a small company could get on its own. Consider the case of a large fashion brand that wants to extend its payment terms to 45 days. Those terms might be tough on an overseas contract manufacturer, so a bank operating on the GT Nexus platform offers to finance the purchase and pay the manufacturer in five days.
“Instead of getting paid, say, $100, they do the financing and get paid $95,” says Heidi Benko, vice president of solutions, strategy and marketing at Infor Supply Chain Management. The bank agrees to just a 5 percent discount because the fashion brand’s credit rating is excellent.
Pin It to the PO
The market also offers other variations on supply chain financing. One that’s available through GT Nexus is export financing, which comes into play earlier in the export cycle. Rather than making a payment when a vendor issues an invoice, a bank or other investor might pay the vendor when the buyer issues a purchase order (PO).
This type of financing carries a bit more risk than invoice-based financing. Because the supplier hasn’t yet produced the product, there’s less assurance that the buyer will pay.
“But suppliers need funds to keep production going, to buy materials,” says Benko. That’s why they seek PO-based financing.
Because this is a more risky situation, banks typically don’t finance the full cost of the product, they charge higher rates, and they often require collateral. But because the GT Nexus platform displays the history of transactions between the buyer and supplier, including the supplier’s track record for delivering on its promises, investors feel more comfortable about PO financing.
With the support of newer technologies, such as blockchain and wireless apps (see sidebars), the market will soon offer even more options for buyers and sellers looking for ways to optimize their cash.
Blockchain Provides Trust Funds
Because blockchain technology provides an unalterable public record of transactions, it can also increase the level of trust in finance arrangements. That’s the theory behind a new product, Tradeshift Cash, that supply chain network Tradeshift has been piloting with a freight forwarder in Europe.
Here’s how it works: A vendor of products or services goes to the Tradeshift platform with a set of invoices, looking for financing. “Tradeshift Cash creates a market using the blockchain,” explains Michael Jud, director of product marketing at Tradeshift in San Francisco. “The system won’t necessarily identify the vendor, but it does confirm it’s a trusted party.”
An investor—an institution or an individual—agrees to fund that collection of invoices, giving the vendor cash in exchange for a subsequent payment from the buyer. The blockchain records the trust factors for all parties involved in the transaction. It also organizes the transaction, stipulating where payments will go, from whom, and when.
The blockchain provides information such as the buyer’s credit worthiness. This allows the investor to evaluate the risk attached to each transaction when making an offer. “Or the investor could bundle several investments to create a balanced portfolio of some risk and some confident opportunities,” Jud says.
Cash in Hand 24/7/365
Truckers that can’t wait even 24 hours to receive payment from a factor will be interested in a new mobile technology solution from FreightRover in Indianapolis. The program will allow independent truckers to receive payments not just during business hours, but at any time of day, any day of the year.
“Transportation is a 24/7/365 thankless job,” says Eric Meek, CEO of FreightRover. An owner/operator who accepts a load needs liquidity to pay the costs of hauling that load.
“We want to instantly make the money available on the owner/operator’s phone, or on a card, through a solution that will let them withdraw from an ATM without fees, and get that cash distributed as fast as we possibly can,” Meek explains.
Eventually, FreightRover might be able to use GPS data transmitted from a truck’s electronic logging device (ELD) to signal when it’s time to release a payment.