Deferred Buyer Payment Solutions: The Search for the Holy Grail

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David Gustin is the chief strategy officer for The Interface Financial Group responsible for digital supply chain finance and is a contributing author to Trade Financing Matters.

Most discussions about early payment solutions focus on buyer-centric models, ones that scale by bringing technology, managed services and perhaps some underwriting to offer supplier finance. This is a big opportunity that top providers have been going after for years, of course, and the potential market is huge.

But the flip side of the coin, deferred payment solutions, where sellers are paid early (or based on their standard terms) and small buyers can extend those terms outward to 90 or 180 days, is a less understood market — both in terms of potential, technologies and the type of underwriting to manage losses.

The use case is simple. Consider a large CPG or food and beverage companies (e.g., P&G, AB InBev) that is selling to a small business (e.g., a retail shop, a bar). These buyers would love the opportunity to take 90 or 120 days to pay, especially in emerging markets, and there are potential benefits to the sellers to help their customers stretch their payment terms (e.g., it allows them to remain a customer).

But this risk is unsecured, and while many believe small buyers want to stay in business and need the product (e.g., a small bar or restaurant chain needs beer for revenue), losses happen.  And there is not potential backup to fall on like in the buyer-centric model, where many players require an irrevocable payment undertaking.

Yes, there are clauses that can be inserted to protect the funding provider — for example, using future sales to perhaps pay funders — but most large companies aren’t necessarily going to insert these into their contracts. Generally, no security is taken over the buyer’s assets.

Is this type of lending attractive to large companies selling to small buyers? They don’t need the financing in the form of early pay themselves, so the proposition is based on how they can use this funding tool for their small customers to grow sales.

One area where there seems to be adoption is with services. For example, a funder could pay a cloud computing platform provider upfront for committed purchases, priced by the provider at significant discounts for the committed purchase. The managed service provider would receive the discount, net of financing cost, and has an option to pass discounts further on to customers as incentives.

There are not many companies that offer deferred buyer payment solutions for B2B transactions. (At least a public search on deferred payment does not bring up provider names.)   Risks need to be managed, and they’re not as straight-forward as using a buyer-approved invoice tied to a payment guarantee or an approved invoice tied to underwriting dilution risk.

I would be curious if others are seeing innovative solutions here and to learn how the risk is being managed. There is not a shortage of market (think of all the B2B purchases), but the risks are certainly higher.

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