The Challenges of Supplier Financing Adoption within P2P

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Our colleague David Gustin recently published a post detailing the results of a study on supply chain financing over at Trade Financing Matters, and I thought it would be worthwhile to expand the insights gained related to procure-to-pay (P2P) processes and solutions.

In his article 5 Hypotheses Tested on Supplier Use of Supply Chain Finance, Gustin explores some conclusions from a study developed by Prof. David Wuttke of EBS Business School together with Prof. Eve Rosenzweig of Emory and Prof. H. Sebastian Heese of North Carolina State University where they observed patterns of conduct on the subject of supply chain financing.

First, the study verified that small suppliers are indeed more interested in obtaining a quick payment benefit. This is not only because of their need for cash flow and working capital for their daily operations but also because of the arbitrage opportunity between their higher cost of capital and lower cost of capital enjoyed by large buyers — which in turn attracts more supply chain finance providers willing to partner with P2P technology providers to meet this need.

From a purchasing perspective, these financing mechanisms have existed for decades, although not necessarily through digitized mechanisms. What P2P solutions have achieved is to digitize P2P processes and drive the availability and adoption of financing options such as early payment to suppliers.

From the perspective of P2P solutions, however, there are other challenges to conquer to offer these financing services to suppliers (small and large), the first being the on-boarding of suppliers onto the P2P business network or portal. This requires specific mechanisms or promotional campaigns that add suppliers to these portals, through which options such as early payment to suppliers and other benefits related to the purchasing process are then offered.

After acknowledging the challenges of supplier on-boarding — and noting that the study results indicated that smaller suppliers adopt SCF faster — the next challenge is to show suppliers the benefits of on-boarding (which includes SCF options). For this, on-boarding managed services and training (to use the capabilities of the portal) are critical for these smaller firms, which are often averse to new technology or simply are not tech savvy.

Once on-boarded, the final challenge lies in the SCF capabilities of the P2P solution and its ability to promote its financing options to suppliers. The campaigns and the recurring communication with suppliers can be a good instrument to make the SCF options known.

This leads us to the study’s insights about SCF adoption behaviors. Regarding SCF capabilities, some P2P solutions have chosen to integrate with specialized SCF solutions, although the vast majority are choosing to offer at least the option of early payment and dynamic discounts from their own solution's capabilities. The issue of using self-funding or third-party funds for SCF, however, is more a business consideration than that of capabilities.

In conclusion, P2P solutions have no doubt pushed the adoption of SCF to suppliers, and we hope to see continuous advances in P2P SCF capabilities and in the adoption of the suppliers to SCF in the near future.

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