Flexible Early Pay Funding Models Emerge for Corporate Treasurers

As companies start thinking about the different buyer-led techniques they have deployed to provide early pay relief to their supply base, they also need to think about how that impacts their use of short-term cash. In the past, either you used your own funding or you used a third party – and you may have had an option to change the mix over time.

This is timely as AFP’s recent cash study showed treasury and finance executives are increasingly concerned about the economy and are stockpiling cash reserves.

As I said in my prior piece, Flexible Funding No Longer an Option, many large Corporates now run multiple early pay finance programs.  In discussions I have had with Treasurers, their views on using cash for early pay finance center around three issues:

  1. A concern about committing their own cash in a material way to fund their supply chain, impacting DPO negatively and being viewed as a banker to their suppliers. Companies understand funding suppliers early is not something to do one month but not the next. It is a commitment.
  2. The reward structure for treasury does not give it an incentive to be aggressive with early pay solutions. Companies, and the people that run them, are very rational. If there is no clear incentive to do so, they will not pursue early pay solutions.
  3. Models are based on looking at cash as a resource. Large company cash priorities are focused on managing the balance sheet and having options. Those options could be share repurchases, committing to dividends, M&A or research.  Now, techniques enable companies to offer early pay finance to their total supply base. It used to be with a few of the techniques, the focus was on a subset, sometimes a small segment, of your supply base. For example, pcards was typically focused on those suppliers issuing invoices <5K and supply chain finance was focused on large strategic spend suppliers.

Now, techniques have come into play using the latest data science and artificial intelligence tools that can enable you to offer Early Payment to every supplier and use either your own source or others cash. This comes in handy in certain times, such as quarter end, when you want to pull your own funding, and can sub out cash and use third party cash.

I have seen four models deployed for flexible funding:

  • Change controls within P2P, Supplier Management and or eInvoicing networks software solution.  Probably the most basic method is for the Treasurer to change a set of controls that sits inside the software to use other cash or your own. You can change those setting to change funding source.
  • Digital Lending which enables suppliers to be financed by third parties for both on platform and off platform receivables. Solutions are emerging that enable early payment services that complement a buyer’s dynamic discounting solution by being tightly integrated to switch funds when the buyer decides to opt-out for a period of time. These solutions can use fast data to predict dilution instantly and generate dynamic credit limits for the suppliers and do so for both on platform and off platform suppliers.  Typically these solutions are connected to a S2P Network (eg, Supplier Relationship Management, eInvoicing, etc.)
  • Work with your core relationship banks who fund an account structure managed by an asset advisor/broker.  Say a large corporate has 6 key relationship banks it wants to keep happy and you do not want to create a situation where your relationship banks bid on these invoices. You can enable a funding vehicle that is set up as a bank account to pay these suppliers. The corporate will say I want these 3 relationship banks to be funders (ie, for wallet share reasons), and they talk to the banks to tell them they will work with the advisor and they fund the bank account to pay suppliers.
  • Use an Asset manager to develop a financial structure where companies can invest in their own or other supply chain payables.  Rather than directly pay suppliers early, you pay your own money into an account as asset manager sets up and those funds becomes an asset and that asset class is your own payables, you can invest in your own and other supply chains payables. Note, please seek accounting treatment opinion on DPO, because this introduces “an investment” feature into the balance sheet, as companies are now retiring payables through an investment.

As more companies adopt more comprehensive solutions, flexible funding will no longer be an option.

Global Business Intelligence will be putting together their 2018 Buyer-Led Corporate Practitioner Guide to help companies address questions they have on various buyer led techniques such as pcards, dynamic discounting, and supply chain finance. If you are interested being involved in the Guide, contact me at dgustin@globalbanking.com

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