Busting Payable Finance Myths – Why So Few Suppliers are Reached

Up until about 2010, companies had few options to pay suppliers early.  In fact, if you were not a large, investment grade corporate that could offer bank funded Supply Chain Finance (“SCF”) to your top tier suppliers, your options were limited to pcards and using prompt payment discounts.

Since 2010, our findings indicate early pay solutions offered by Buyers to their suppliers continues to have big gaps around addressing total spend.   Companies that have $500M, or $1bn, $5bn or even $30bn in spend still have a small percentage of total suppliers on some early pay solution.  The figure below shows the supplier focus of early pay programs, and some of the key questions impacting the early pay technique today.

Figure :  A Buyer’s Supplier Portfolio and Early Pay Techniques

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While there are many reasons these techniques only reach a small subset of suppliers, our analysis has shown there are a few key factors :

  • Suppliers’ Capital Structure – understanding how suppliers fund their business relative to early pay offerings is important for supplier acceptance. The vast majority of suppliers >$20M are serviced by an array of conventional (banks, factors, ABL) and non conventional (asset managers, insurers, specialty finance, etc.) financial firms. In addition, to a supplier, most customers are a small percentage of overall receivables and thus it’s more important for companies to leverage their total financial assets for the best structure and rates.
  • Payment terms – this is a win/lose proposition and only the largest companies with leverage in their supply chain can push terms and then offer some form of early payment. Adjusting payment terms is a complex coordination issue between buyer and seller.
  • Indirect versus Direct Spend suppliers – Many large companies have adopted some form of eProcurement, eInvoicing, or Supplier Business Network as part of an overall Purchase-to-Pay solution and have added some form of early pay offering. But for most of these solutions, the spend covered is indirect, or Sales, General & Administration as opposed to direct materials, commodities, and other spend relevant for product creation.  Early pay techniques such as pcards and dynamic discounting are more focused at indirect spend suppliers.  For large companies, much of their connections with direct material companies is done via EDI or some other form of direct connection.
  • Developing Sustainable Funding sources – Using third parties to fund suppliers or even Treasuries own cash is not to be taken lightly, as any company would want to ensure funds provided are not “here today, gone tomorrow”.

So where are we going?  In Busting Payable Finance Myths, Global Business Intelligence conducted over thirty interviews with corporate treasurers who have implemented various programs and are thinking about implementing various programs to provide deeper content than press release type information.  As we move more and more into a digital and smart supply chain, initiatives to enable early pay for a broader segment of a company’s suppliers is increasingly becoming a reality.

 TO GET YOUR COPY OF BUSTING PAYABLE FINANCE MYTHS IN THE DIGITAL AGE, PLEASE VISIT HERE

 GBI has produced five Supply Chain Finance Guide publications (prior publications in 2007, 2009, 2012, 2014, 2016).

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