What the White House and the SEC can do to push SupplierPay

With the SupplierPay program, the White House explicitly does not want payment term extension. We can see why that policy standpoint makes sense. Financing for SMEs has not yet recovered from the credit crunch. Securing a bank loan isn’t as difficult for small businesses today as it was during the recession. However, it’s still not as easy as it was prior to the collapse — and that appears to be holding back the broader economic recovery.

This is of particular concern to policymakers since SMEs employ approximately 66 percent of private sector workers in the United States.

Today, Johnson & Johnson or Toyota can benefit from an early pay program for their supplier base one of four ways:

  1. Extend terms
  2. Discount an invoice and pay less
  3. Receive a rebate from the funder (supposedly for approving an invoice and providing some comfort the invoice will be paid at full value). The rebate is in effect “sharing in the net interest rate spread.”
  4. Combination of the above

Payment term extension is the way for many Fortune 1,000 corporations to capture the ROI from bank-led supply chain finance programs. So now, if you want to do SupplierPay, and you don’t want to extend payment terms, what is the economic interest of the buyer to do this? It costs money to set up a program. While not substantial, the costs are not trivial and projects require an ROI. Those costs include:

  • Technology implementation - The cost to implement the technology platform can vary widely but essentially requires taking invoice feeds and uploading to the platform. Generally the technology implementation can be done with internal IT resources.
  • Program management and onboarding - Companies need resources around supplier risk, procurement, and a financial team member to help with onboarding. This generally does not require hiring additional resources but may take ½ to 4 “full-time equivalents” depending on the services provided by the SCF technology/services provider and the scope of the SCF program.
  • Other costs include fees for legal agreements, changes in payment practices / chargeback processing, potential external auditor fees, etc.

So the buyer needs an incentive. I think the White House and the SEC need to get together and come up with a framework that allows incentives without creating onerous term extension and a debt reclassification issue. If we really want a solution that helps inject liquidity into small businesses, we need to do more work than provide a framework. We need an honest discussion. If you do not want term extension, and you say rebates are a no-no, what will work?

Are you listening Obama, Mary Jo White and Maria Contreras-Sweet?

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