Last year, more than ever before, we saw companies adopt electronic invoicing. One of the items I, and many others, have previously talked about is the perfect synergy between electronic invoicing and early payment. As invoices are received quicker and with fewer errors, they are processed faster — allowing companies to capture almost all existing standing discounts (invoices which already have discount proposals on them). With a bit of focus, companies can also look to extend discount terms to new suppliers and start to rationalize invoice terms, especially now that the EU payment legislation has come into effect.
In many respects, we are in a perfect storm for early payment. Large companies are holding, on average, three times more cash reserves than they were before the recession and placing more than 90 percent of this capital in overnight funds with a low rate of return. Conversely, small and medium-size corporations are finding their traditional sources of capital, via banks, hard to get hold of. In fact, the need for capital is now so great that a number of specialist companies have emerged to fill the funding gap when corporate treasury departments and banks don’t wish to use their capital for such programs.
So we now enter a world where e-invoicing platforms are starting to merge with payment platforms and vice versa. New business models are emerging; the once-clean lines between supply chain financing and factoring are becoming blurred.
With that in mind, let’s review the classic approaches to early payment we see today:
- Standard Discounting – A company uses its own capital to pay an invoice early; it is traditional discounting at its best and known as two-party financing, as there are only two parties involved: the buyer and the supplier.
- Supply Chain Financing (also called Supply Chain Finance, Supplier Financing, or Reverse Factoring) – Banks put up the money for the early payment instead of the corporation, in a
prearranged program. We would call this three-party financing, as there are three parties involved: the corporation, the bank, and the supplier. The financing risk is based on the buyer’s promise to pay.
- Factoring – A financial institution puts up the money, but the request or initiation for the early payment comes from the supplier as opposed to being prearranged by the corporation, as in the previous two examples; for this, the corporation is not involved. In factoring, the financing risk is based on the recourse to the supplier in the event of non-payment.
- Credit Card Facilitated Early Payment – Companies like Visa and MasterCard are the vehicle for the finance. But the funds still come from the bank in a prearranged program. In almost all respects this is supply chain financing (SCF), but the payment is facilitated via the credit card company and leverages the established payment network. The difference here is it can be applied to many more suppliers than SCF, which is typically reserved for the top tier of the supply chain. Credit card-facilitated early payment could be seen as four-way financing, as it involves the corporation, the bank, the credit card company, and the supplier.
While 2013 saw growth in all early payment areas, most of the new entrants have been in the factoring area. The factoring companies themselves are changing and evolving to be more than standard factoring agents. Emerging entrants now offer platforms for a wide range of finance providers that are committed to “buying” invoices and bidding on them in eBay-style auctions; institutional investors, high-net-worth individuals, asset-based lenders, and cash-rich companies are all now funding programs.
Traditionally, factoring companies have partnered with e-invoicing providers to allow both the factoring company and the supplier to easily find each other and to provide the business network with an added reason for suppliers to join. More and more networks are extending their platforms to accommodate this additional functionality either through partnership or acquisition.
What is new in 2014 is the addition of Big Data — i.e., networks can provide the factoring companies with a trading history of both the corporation and the supplier. Factoring companies can use this to lower the risk associated with the early payment and therefore offer a lower APR. This is now getting to a point where factoring companies can offer an APR low enough to compete with a corporate-funded discount or a supply chain finance arrangement.
It would not be uncommon in late 2014 for a supplier to have a myriad of choices at its disposal for early payment: a corporate discount, a factoring platform, a credit card provider, or even a bank-led program like supply chain financing. One thing is clear: The networks level the playing field for those wishing to offer funds for early payment. Very much like consumer comparison sites, you put in your details and they list you the rates available, sorted by the most attractive ones.
Will 2014 be the year of the early payment? When combined with e-invoicing, I see no reason why not.
Richard Downs is Europe, Middle East, and Africa (EMEA) director of solutions marketing for Ariba Inc., an SAP company and the world’s business commerce network. Richard is responsible for all aspects of product marketing for Ariba’s on-demand invoice and payment services, discount management, and working capital optimization within EMEA. He has over 12 years of sales and finance automation experience.
This article was published by Richard Downs on The Networked Economy and has been adapted with permission.