Early Invoice Payments: Reaching the Long-Tail

We welcome this guest post from David Brown, Co-founder and Head of Innovation at Previse, who argues that while supply chain finance can be a useful tool for offering early payment to some suppliers, traditional programmes have three significant blind spots: supplier size, their technical maturity and speed of the programme. 

When early payments can ensure that a supplier is paid the day an invoice is added to the system, it can seem counterintuitive to be talking about the need to speed things up. However, it is important to recognise that the point at which an invoice is put into the system is not the beginning of the process.

When we consider the payment lifecycle, although there is variation with different buyers’ particular terms, broadly speaking there are three stages: the invoice arriving with the buyer, being input into the buyers' payments system, and approval. (It is worth remembering, that each stage of this process is adding additional costs for the supplier in terms of the opportunity cost of not receiving the payment and, potentially, the costs of credit it has taken out to cover any cash flow shortfall.)

Time is Money

The time between the invoice arriving with the buyer, for example the PDF invoice landing in the payment department’s inbox, being input into the buyers' payments system and approved, can be as long as a month. At this point the ‘clock starts’ and the payment terms begin to tick down. This is also the first opportunity a traditional early payment method, such as reverse factoring, can take effect. Payment will usually then occur near the end of the payment terms.

Using a traditional early payment technique, such as supply chain finance (SCF) there is no opportunity for payment before the beginning of the payment term. Payment can only take place once the invoice is approved. With 30-day payment terms, the best an early payment system can achieve is a 50% overall reduction in payment time. This is a positive step but leaves much of the work to be done.

Of course, one approach would be to try to reduce the time it takes for an invoice to enter the payment system. Services such as e-invoicing can help here, but, due to the costs of onboarding a supplier (estimated by one report to be as much as $4000 per supplier), these are typically only available for larger and more technically capable suppliers doing regular business with multiple buyers. Small suppliers and those transacting only intermittently with the buyer will usually not be able to make the economics of such a service stack up. Those without significant technical capabilities may also not be able to complete the intensive onboarding process, even if it would be economically beneficial. This leaves payment teams with the task of manually checking and inputting the huge number of paper or PDF invoices which a large corporate receives each day.

Reaching beyond the 10%

Even if the time to get an invoice into the system is decreased, most early payment solutions are only being used by a few of the largest of a firm’s suppliers. A PwC survey from 2018 found that nearly half of all programmes include only the largest 25% of a firm’s suppliers, while the majority of programmes cover only 20% of a firm’s overall spend.

The lack of uptake for SCF programmes has often been attributed to a reluctance among small firms to engage with SCF programmes, but our research demonstrates this is far from the case. 77% of small businesses claimed to be damaged by slow payments with 93% saying they would be prepared to pay a small fee for immediate payment.

Instead, the low involvement of SMEs in SCF programmes is likely to do with the poor economics of such programmes for smaller suppliers. Reverse factoring and other SCF services are technology-intensive, for both buyers and suppliers. Additionally, the systems employed by the wide range of providers are not interoperable, so if a supplier had five buyers running five different SCF programmes they will need to invest in on-boarding five separate times. Many smaller suppliers simply do not have the available capital and manpower to get up and running with such systems and, even if they did, the relatively small value of the invoices they are sending to each of their clients means that the costs are largely uneconomic.

As a result, most firms’ SCF programmes are only covering a small fraction of the addressable market, with many suppliers (and thousands of dollars of invoices) left without affordable financing.

Going faster and further

Taken together, these two problems, time and scale, mean that even the best traditional SCF programme can only ever be partly effective. If a firm wants to implement a programme to help suppliers manage the invoice payment terms, we need to adopt a different model altogether.

What if we could automate that process of taking an invoice and doing the initial check to make sure the information is correct? A computer can check invoices faster and more accurately than any human. We could determine straightaway that the invoice was good, and the large, cash-rich buyer was prepared to pay it. Then it would be a low-risk proposition for a third party to step in and pay the supplier instantly, taking a similar function to the reverse factoring bank.

The big problem standing in the way of such an automated invoice check is a data one. We all know that the world is becoming increasingly ‘data-driven’, but most of this data is well structured and ordered so that an algorithm can process it. While an e-invoicing system provides this kind of structured data, traditional invoices, on the other hand, are a very different matter. Each supplier will provide its invoice with a different structure, describe products differently and, usually, submit the invoice in paper (or PDF) form with the information dotted around the page. This unstructured data is virtually useless for most automation processes. As we have already explained, many suppliers don’t have the technical capabilities to install an e-invoicing system, so how can these suppliers be serviced by automation?

This is where the latest advanced machine learning steps in. These new data tools can take unstructured data in invoices and identify the relevant information to turn that information into the kind of structured, normalised data needed for an automated approach. Once that is done, machine learning can again step in to provide a highly accurate detection tool for the few incorrect or fraudulent invoices, so the rest can be paid.

The advantage of this kind of approach is that the supplier need do nothing different in terms of their invoice process because the technology can handle their invoice no matter its form. This means that such a system can reach right down into the long tail of suppliers. At the same time, because the technology can analyse invoices instantly, invoices can be paid (providing they pass the automated checking process) as soon as they arrive with the buyer.

Through this approach, a buyer can offer all its suppliers’ instant payment. Finally, after so many years of pressure from the media, government, suppliers and investors, buyers can ensure none of their supplier’s need be paid late in a fully sustainable and economically advantageous way.

 

 

Disclaimer: the opinions expressed are those of the author and do not necessarily express the official position of Spend Matters.

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