How Procurement Tech Adoption is Changing the Early Payment Game for the Better

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The imperative to improve working capital is nothing new. As long as businesses have existed, buying organizations have wanted to hold onto their cash as long as possible, while suppliers have wanted to be paid promptly for goods and services provided. No wonder, then, that one of the oldest mechanisms to alleviate this discrepancy, invoice finance, dates back almost 5,000 years.

But even over such a long history, invoice finance changed little. The products available to businesses remained for many years largely the same, and the third parties willing to finance such programs were limited to large banks. More recently, however, the options available for businesses to improve working capital have both improved and multiplied.

This is in large part due to the increasing availability of technology that can automate transactional purchasing and payment processes. As the speed, cost and accessibility of procurement software such as e-invoicing and purchase-to-pay (P2P) systems have improved, so too has connectivity between buyers and suppliers. And with this increased connectivity comes a wealth of data that can support funding models beyond invoice finance — including technology that offers instant funding at the click of a button.

From Portfolios to On-Demand

For as long as it has existed, invoice finance has been the province of commercial lenders. Banks would consider a portfolio of a supplier’s accounts receivables to determine whether they could extend a line of credit, and that was it.

But this approach served only businesses with the heft or creditworthiness to attract those banks’ attention. Many additional buyers and suppliers within the supply chain remained underserved. So, in the latter half of the 20th century, alternative lenders started taking a different approach. Instead of considering broad portfolios of accounts receivables, these businesses decided to offer funding at the transactional level, for specific invoices.

One such company, The Interface Financial Group, created in 1972 an offering it called “invoice finance on-demand.” The service allowed companies to pick and choose which invoices they wanted to pay and which they wanted to fund. This would allow businesses to access invoice finance as they needed it, providing them flexibility that commercial lenders could not be bothered to provide.

“The old idea was that doing transactional funding was too much of a headache,” says George Shapiro, CEO and chairman of IFG. “To do small invoices, small funding transactions, there are a lot of costs and risks you have to swallow. A client could fund one invoice and never contact you again. That’s a lot of effort to do just one invoice, so IFG created a new system to fix that.”

Creating Digital Supply Chain Finance

While these alternative lenders began offering transaction-level financing decades ago, their value proposition really took off over the last 10–15 years, as companies began to digitize their business processes.

The rise of electronic invoicing technology, in particular, has created numerous opportunities for buyers and suppliers to improve working capital. Whether used as standalone software or as part of a broader system such as a purchase-to-pay (P2P) or source-to-pay (S2P) suites, e-invoicing digitally connects and consolidates information about transacting parties, such as data typically gathered in the on-boarding process. This newly accessible data allowed lenders to create a new subset of the invoice finance market: digital supply chain finance.

Traditional invoice finance mechanisms, such as invoice discounting and factoring, offer funding based on a company’s receivables, using the debts of a company’s customers as security. Supply chain finance, however, looks down the supply chain to suppliers, facilitating early payment between these businesses and buying organizations.

One way to understand digital supply chain finance is as the next step beyond commonly available early payment methods. Take dynamic discounting, for example. In this method, buying organizations and their suppliers initiate early payment discounts on an invoice-by-invoice basis. The buyer makes an early payment using its excess cash, and in return the supplier brings down the cost of its goods or services. The “dynamic” part comes from the lack of fixed discounts: the discount is calculated as a function of the time of payment (i.e., the earlier the payment, the lower the price — no static, time-bound discount required). 

But while dynamic discounting relies on the buying organization’s available capital, allowing them to offer early payment solutions to their higher tiers of suppliers, digital supply chain finance extends early payments offering to all suppliers, including long tail.

Digital supply chain finance became possible because e-invoicing technology brought procurement activity into the limelight. Rather than suppliers trying to prove they had enough sales to support financing, funds could now cover the full extent of transactions between buyers and sellers, creating new opportunities to ease working capital issues on both sides.    

Spreading the Benefits

The benefits to digital supply chain finance approaches are obvious. What’s less clear, however, is how to make these options for early payment available and attractive to the majority of supply chain participants — to create a true “button money” early payment offering for all buyers and suppliers. 

At the moment, most supply chain finance is bank-led. Commercial lenders have significant expertise and experience operating in the invoice finance market, and thus have been best positioned to branch out into SCF.

But the dominance of banks has prevented buyers and suppliers from adopting SCF on a large scale. Instead, most available programs focus on large enterprises, helping a handful of organizations improve working capital while leaving the long tail of suppliers locked out from such opportunities.

Fortunately, procurement technology providers have an opportunity to change this. P2P providers in recent years have begun years augmenting the connective and transaction processing elements of their software with various early payment capabilities. The leap from these capabilities to fully digital supply chain finance is a logical next step.

Yet today, few technology providers have the ability to offer digital supply chain finance independently. This is because acting as the financier of early payment carries significant complexity and risk — hardly attractive features to add to a sales pitch. To get around this, technology providers are looking at hybrid models that can integrate third-party financiers into their solutions, offering instant access to funding right where buyers and suppliers are already transacting.

Advancing SCF Capability

Of the third parties hoping to make approach a reality, Shapiro’s IFG is one example.

“To be sure that their supply chains are stable, buyers need a solution to their working capital issues. This solution is digital supply chain finance as an extension of dynamic discounting,” says Shapiro. “Buyers have no impact on the way they do business — and can optimize their working capital. Suppliers can receive early payment on the day they need it, in the amount they need.”

IFG partners with technology providers to offer early payment as an extension of dynamic discounting capabilities. To ensure it can mitigate the risks associated with funding early payment, IFG’s decision engine performs millisecond-level analysis and produces dynamic credit limits associated with prediction of post-conformation dilution. These analyses, made possible by accessing the data available in e-invoicing systems and from thousands of other data points, allow IFG to provide working capital flexibility to both sides, whether a multinational corporation or a niche component manufacturer.

By taking a hybrid approach to supply chain financing, P2P systems can offer their customers additional services beyond basic dynamic discounting — without taking on the development and lending risks necessary to offer such programs.

Ultimately, the availability of improved technology and new sources of funding can help make true digital supply chain finance a reality for all parties in the supply chain, changing the early payment game for the better.

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