Flexible Funding No longer an Option for Large Corporate Early Pay Platforms

Many large Corporates now run multiple early pay finance programs, doing a bit of dynamic discounting over here, pcards for some smaller suppliers, some supply chain finance with a bank or third party over there, and even maybe a C2FO working capital platform as well.

This presents the Treasurer not only with multiple systems, but two challenges:

First, Treasurers need to give their banks more business. Previously, banks would be happy to be in a company’s revolver as the returns would hit their RAROC hurdles.  Now, as Basel III raises the cost of capital, more banks are looking at overall relationship management and overall customer returns.  Today, the majority of banks will say I will be in your revolver but are asking what other business will you give me, FX, cash management, SCF, etc.  Wallet share matters.

Second, Treasurers may be happy they can apply surplus cash to suppliers at yields that are considerably more than other options they are able to invest in according to their investment guidelines, but Treasurers have told me if there is an event in the market, and they need to conserve that cash, its hard to pull that cash away from suppliers who have started to rely on it. Dynamic discounting tends to be for their smaller suppliers who face higher alternative finance options as well.

So What is a Treasurer to do?

Many solutions in the market today either are tied to use your own cash or if there is third party cash, that cash is tied to a specific funder or agent/arranger, thus not allowing the company to work with their relationship banks.

Companies that have been offered platforms that have enabled them to do early pay finance typically get a choice – fund with your own cash or fund with a third party.

Flexible Funding will become an important option for large companies that want to finance but can turn it off and have the funder “fund” suppliers, thus giving the treasurer control over who they select to participate.. This can take two forms.  In one arrangement, you want to work with your 4 or 6 relationship banks to provide them an option to provide funding if you want to preserve cash.  The second form is where you are using an einvoicing or eprocurement vendor with a portal that enables for dynamic discounting, but you decide not to fund your suppliers this coming week.  This model takes a deep level of integration and ability to manage credit risk.

The point is with Flexible Funding, funders do not compete with Treasurers, who have the first option.

There are not many solution providers that offer either option above, but TFM believes this will become increasingly important as Treasurers running multiple solutions look to both link them more effectively and to have options to use relationship banks or third parties when cash needs to be preserved.

GBI 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. The guide will look at this space from the company perspective and the questions they are asking their various solution providers on issues such as Accounting Treatment, Revenue Share, Linking Programs, Flexible Funding, Supplier Finance costs, etc.  If you are interested being involved in the Guide, contact me at dgustin@globalbanking.com


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