Die Factoring, Die – Middle Market Companies Use of Early Pay & Invoice Finance – Post 1

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The fact that there are so many structural changes going on in the banking, capital and credit markets means working capital will only stay an executive issue for some time.

Many middle market companies selling to Amazon, Costco, CVS, Walgreens, and other large companies now have options to retire receivables early via various forms of transactional finance such as supply chain finance, dynamic discounting and invoice discounting.

Jason wrote a post called Die Factoring, Die! in which we talk about the future of factoring vis a vis new models of transactional finance.  While the subject sounds pretty harsh, new forms of P2P-enabled trade financing models using data science are being pushed forward.

As of now, many companies have not elected to use these various techniques other than smaller companies in targeted industries who have been users of merchant cash advances – see Are Merchant Cash Advances eating into Factors Market at Low End

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Does that come as a surprise? It shouldn’t.  I have talked to a number of corporate credit managers, finance execs, and even a few CFOs and many will say a big goal is to reduce DSO and improve cash flow by lowering DSO. One issue is factoring and asset based lending can target a higher proportion of receivables.  But that is starting to change, as I will address tomorrow.

And when I ask why don’t you take early pay from your suppliers via C2FO, dynamic discounting, invoice finance, reverse factoring, or some other early pay, they say to me:

David, we are making investments in epayments, improving our cash application process, investing in collection software systems that help us do a better job in communicating with customers to manage late payments. We have 1K, 10K, or even 50K customers, and only 100 or so where buying clients that use Ariba, Taulia, AvidXchange, etc. and force us to send our invoices through their network.  We arent interested in early pay from these vendors (and actually hate using some of them, because of all the supplier fees.)

But what about the goal of reducing DSO, early pay and invoice finance certainly can help?

To date, there is no study (other than self-serving vendor studies of their own network) that has examined how these middle market companies will use existing credit facilities versus the emerging alternative business finance techniques (primarily supply chain finance, dynamic discounting, invoice auctions, eFactoring, and to a much lesser degree for smaller mid market companies, pcards, merchant cash advances & marketplace lending).

  • For various techniques such as supply chain finance, dynamic discounting and invoice discounting, why are companies using AND not using the services?
  • What barriers exist to them using these services?
  • Can they be enticed further to use these transactional services?

Tomorrow we will look at how einvoicing and portal proliferation present both challenges and opportunities in this space.

Give either jbusch (at) spendmatters (dot) com or myself at dgustin (at) tradefinancingmatters (dot) com.a shout if you would like to chat further.

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