Trade Financing Content

In Spend Matters’ previous installment of our seven-part GEP review, we called out some of the real strengths of the SMART by GEP platform, including some that are rare in the market today. In this Part 5, we are going to balance our analysis by also pointing out some of the "weaknesses" of the platform, at least against peers. (A weakness isn't a weakness unless you are looking for, or need, a certain capability, which, of course, you may already have in-house in another platform.)

While we may have hinted at these by way of omission of coverage in our solution overview in Part 3 and Part 4, we are going to get more specific so you understand precisely what isn't there (and can make a judgment call as to whether you even need the capability). We’ll look at deep optimization (especially logistics), asset management for direct, VMS, trade financing, T&E and more.

These are some strange times. Look, we have $16 trillion of negative yielding bonds, that’s T, for trillion. I’m asked by non-financial people why anyone would want to buy negative yields (you pay to hold them, btw) and I reply, it’s not about income, it’s about trading that rates will fall further.

Which got me thinking: If we are in some liquidity trap world and negative interest rate environment, what does that do to all these invoice financial models being built using the latest and greatest in artificial intelligence and machine learning?

Editor's note: This is a refresh of our 2014 series on dynamic discounting, which originally ran on Spend Matters PRO.

This Spend Matters Plus brief provides a primer on one of the timeliest topics in receivables and payables finance: dynamic discounting. Note that by receivables financing we mean the selling or other leveraging of “receivables” as an asset on a supplying organization’s balance sheet to receive early payment. By payables financing, we mean the financing of early payment by a third-party (or the buying organizations’ balance sheet).

Even this subset of trade financing is a big and complicated topic, but in this analysis, we’ll discuss how dynamic discounting can reduce risk and create greater liquidity in the supply chain. If you’re in procurement or accounts payable and are new to the topic, this brief will be a useful first step in understanding what dynamic discounting is, how it can help, and which technologies and vendors can enable it.

In life it is important to distinguish between marketing and reality. When it comes to invoice finance, one marketing myth that has persisted is that non-recourse invoice finance shifts payment risk from seller to funder. Unfortunately, non-recourse factoring is one of the most misunderstood subjects in commercial lending. As a result, companies undertaking some form of invoice finance, receivable finance or factoring tend to have the wrong expectation about this product, potentially incurring unnecessary costs and not truly understanding the credit-risk relationship.

Similar to an idea in the movie "Inception," blockchain has been imprinted on our brains as the solution for just about everything. But recently, a number of articles have taken a negative perspective on blockchain. Now I for one am never about technology for technology’s sake. But let’s not throw the baby out with the bathwater. Distributed ledger technology really started ramping up only about 36 months ago. Considering that Amazon was still only selling books online after its first two years, why does blockchain have to change the world so quickly?

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.

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.

“Ahhh. This porridge is just right.”

— from “Goldilocks and the Three Bears”

The Goldilocks principle is named by analogy to the children's story “The Three Bears,” in which finding the right temperature for porridge took some sampling.

So how do you make sure the porridge is just right if you are today’s middle market treasurer and need to balance liquidity, access to capital (and if rated, a quality rating), and ensuring the right amount of cash?

Most middle market companies are not flush with cash. In fact, when thinking of capital structure, there are many things that keep the CFO/treasurer up at night.

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.

In a recent TXF article on Vodafone's supply chain finance program and its early pay program, Oliver Gordon, features editor, said: “Vodafone has been using complex financial engineering devised by GAM and Greensill to enable it to profit from and invest in its own SCF offerings and bolster its DPO (days payable outstanding).”

Personally, I have no problem with a company wanting to use its cash to self-fund an early payment program for their suppliers in exchange for discounts. Many large corporates implement some form of dynamic discounting that enables their long tail suppliers, and specific segments — diversity suppliers, choice suppliers, small businesses — access to early payment once an invoice has been approved. In fact, this practice has been going on for decades and now technology allows companies to systematize it and offer it to select suppliers, different supplier segments or all suppliers.

I also have no problem if a company wants to use this construct to invest in their own payables or some other company’s payables. But this does bring up three important questions.

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.

As we pointed out in our last post, payment companies are looking to convert paper checks to cards, and this is drawing interest from many firms, from private equity investing into payment companies to acquisitions (e.g., Fleetcor acquiring Nvoicepay, Visa buying Earthport). The key weapon of payment companies is to leverage interchange fees to entice their clients (buyers) through rebates and extended terms to provide an early pay option for suppliers, typically with a discount from the invoice of 2% to 3%. Yet there are several reasons why a “card only” strategy from payment companies is suboptimal.

Earlier this week, Corcentric — a provider focused at the intersection of accounts payable automation, order-to-cash, trade financing, procurement consulting and group purchasing organization (GPO) software and services — announced its most strategic software acquisition to date: Determine.

But what are the highlights of the transaction? How do the proposed terms of the combination address Determine’s balance sheet liabilities — and more important, what is our summary analysis of Corcentric + Determine?

In this two-part Spend Matters PRO brief, we will provide an overview of the combination (by the numbers), an analysis of the transaction/valuation, our “elephant in the room” observations, summary recommendations for Corcentric and Determine customers and an analysis of the competitive landscape implications of the transaction.

In later PRO research briefs, we will offer our perspective on Determine’s functional strengths and weaknesses in both the procure-to-pay (i.e., e-procurement and invoice-to-pay) and strategic procurement technologies (e.g., sourcing, CLM, etc.) areas and what these bring to Corcentric, and, with sufficient distribution (that they lack today, at least in North America), what they could bring to the broader source-to-pay market.

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.

In my last post, Many Fintechs Still Rely on Bring-Your-Own-Bank Strategy for Supply Chain Finance, I discussed how source-to-pay platforms and other cloud software providers still rely on their clients’ house banks for supply chain finance and why that might not be the wisest strategy given the times. So if you are a Fintech and want to offer supply chain finance, what are your options beyond a house bank strategy?

Now, digital B2B lenders can use fast data to scour thousands of individual data points — to instantly create a dynamic credit limit for companies that work on a particular supplier portal but only have a small percentage of receivables running through it. By having an off-platform model, this company can fund as many invoices as they want until they reach their credit limit. Virtually every supplier can be funded — only those in bankruptcy or on government watch lists are ineligible. This new form of B2B lending marries two core competencies.