Overcoming the Absurdity: Aligning Payment Term Extension with Trade Financing

early pay

There has never been a more absurd situation than exists now between procurement and supply chain practitioners and finance team members.

On the one hand, there are countless programs attempting to unify and extend payment terms to suppliers, to the greatest degree possible. Such activity can have a negative procurement interest on supplier relationships while increasing supply risk, especially with lower tier suppliers, where visibility into financial health and stability is often lacking but where the trickle down effect from payment term extension ultimately comes home most to roost.

Yet on the other hand, we have access to a truly amazing array of new technologies that accelerate and provide visibility into approvals and trade documentation, combined with what appears to be a near limitless supply of third-party capital, which is willing to invest in and fund both receivables and payables financing programs. Collectively, the combination should drive down the cost of capital for early payment programs, accelerating the flow of cash in the supply chain.

But all too often in practice, procurement and finance are not aligned. Finance gets on-board with a program to push out payment terms or play around with them – e.g., having the payment clock start on invoice receipt – and procurement pushes its own pet programs around supplier management and supply chain risk.

When will the two meet and connect? It’s like two people meeting at a get together with the potential to fall madly in love but speaking entirely different languages so that a fleeting conversation remains just that – and is quickly forgotten.

I’ve consulted, lectured and written on this topic for years, primarily around the technology that can enable trade financing to happen more efficiently while aligning the interests of all parties. But a recent article in Banking Technology, authored by Deutsche Bank’s James Binns, does one of the best jobs I’ve seen at capturing the spirit of this needed coming together.

To summarize just some of his ideas, he writes:

“Dependency on external sources for working capital or funding is a risk in itself – subject to the lending environment, interest rate volatility and a corporate’s own credit rating. But the alternative – looking within the corporate body to generate capital – generally means shortening the cash conversion cycle. Furthermore, this is achieved by imposing harsher payment terms on trading partners, which can also create a sustainability risk.”

“Into this struggle entered supply chain financing offerings … Financial Supply Chain (FSC) solutions are “win-win” arrangements that lower financing costs – for the implementing corporate and for onboarded trading partners – by improving payment terms in both directions, with a banking partner bridging the gap … In all, FSC schemes strengthen and harmonise supply chain relationships to share information and lower operating costs, leveraging access to liquidity and reducing the risk of supply-chain shocks. They have been proven as a tool for ensuring ethical trading and facilitating growth – and through the use of granular metrics their application can be honed to further enhance their benefits.”

As more and more experts on the finance and banking side of the financing and purchase-to-pay (P2P) equation begin to think like this, I believe we’ll see greater uptake overall around technology to enable the balancing act of improved working capital management and supply risk reduction. After all, with the right mandate, finance and treasury – which have the banking relationships – are sitting in a better position to drive alignment with procurement and supply chain compared with the other way around, at least in my experience.

Want to learn more about how companies are accelerating cash in their supply chains? Check out David Gustin’s recent paper, Accelerating Early Payment: Techniques and Approaches for Accelerating Cash in the Supply Chain.

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