Getting paid is still tough, but buyers are becoming far more aware of the plight of suppliers and are using new financial tools to help cash flow through the chain more easily. By Nick Allen.
All supply chains are dependent upon the efficiency of the financial structures that support them. For both suppliers and buyers cash flow is critical and in a trading environment that is flat, and where credit is hard to come by, cash flow is more crucial than ever.
The problem is everyone wants to hold onto their cash. But there may be some good news. Dun and Bradstreet’s 2012 European payment trends report points to an improvement in payment performance in the UK. “The average time taken by British businesses to pay bills has improved by two days throughout 2012 to an average of fifteen-days late against agreed payment terms. British businesses have been steadily paying bills later in recent years, from thirteen days late in 2006, peaking at seventeen days in 2011,” says the report.
Although this may sound encouraging, it is worth noting that payment is still two weeks late against agreed terms. If buying organisations wish to protect their supply chains in these tough times, then helping key suppliers by paying up on time, or even paying early, would seem prudent. And since the global economic crisis of 2008/09 a growing number of forward-thinking larger companies are looking for mechanisms which help their suppliers get paid earlier.
Ray Zabarte, head of trade finance product management at Barclays, believes supply chain finance is changing with new facilities becoming available to help suppliers. “If you are looking at well organised supplier finance programmes it is easier today than it ever has been,” he says.
Referring to “buyer centric supplier finance”, an area where Barclays has an offering, Zabarte says: “Pre-2008, these kinds of programmes were not so well accepted in the market. As we stand today, in 2013, they are very common. There are many providers with similar offers for buyer centric supplier finance and the buyers are actively looking at these kinds of opportunities to help their suppliers. So it’s relatively easy today because there is a better understanding in the market place about it.”
How does buyer centric supplier finance work? “Our programme is based on working with a large buyer, we predicate the credit decision on the buyer’s risk and we provide the buyer with a technology solution, a website, where their suppliers can obtain early payment of invoices that are payable to them,” he says.
But then, how early is early? According to Zabarte it really depends on the payment terms between the buyer and supplier and that ranges from 30 to 60 or 90 days.
“The amount of time that you can save, to bring forward that payment, is really determined by the approval time frame within the buyer’s organisation,” he says. “And many of them are very good at that today. They will approve invoices for payment within days.
“If it was a 30 day invoice and it took, say, five days to approve the invoice for payment, then the supplier would get their payment 25 days early – of course, less the cost of money,” he says.
So even though it may be in their contract to get paid at 30 days a supplier may get their money much earlier. Zabarte points out that this is central to the supplier finance programme. “Of course, the benefit for suppliers is increased when their terms are longer – let’s say 60 days or 90 days, which is pretty typical,” he says.
“If it takes five days on a 90 day payment to approve an invoice, that’s 85 days of cash-flow benefit going to a supplier that they would not otherwise have been able to find and is almost certain to be cheaper funding than they would have otherwise been able to secure from other methods.”
But what happens with buyers that take 60 days or more to approve? “There are examples of those kinds of buyers, but in our experience the buyers that we have dealt with are usually much quicker than that time frame,” he says. “They enter into these kinds of programmes recognising that approval is the key step to increasing the cash-flow to their suppliers.”
Zabarte believes there are many organisations out there that take this very seriously – they take care of their suppliers because it is part of their business model. He says it helps buyers build relationships with suppliers and in some cases, contributes to attaining a preferred relationship. “Many suppliers will deal with multiple competitors in the same space, so having programmes like this can give them [the buyer] a slight advantage in the supplier relationship, giving them a slightly more preferred status,” he says.
Of course, it makes sense that a large buying organisation would want to protect their supply chain, and their business, by easing the cash-flow of its suppliers. But what about small to medium sized enterprises that are looking for finance to support growth in new markets or new product ranges?
The latest research by Demica highlights the fact that downstream activities can also be vulnerable. Many SME distributors in high growth regions are confronted with the high cost of funding, exacerbated by sellers’ pressure to increase sales, the research reveals. They suggest there is growing interest in distributor finance schemes which support the working capital needs of a corporate seller’s distributors and gives them access to affordable finance, enabling them to increase sales and grow business volumes with lower capital requirement.
So what is the market like at the moment for SMEs trying to fund expansion? According to Mark Chilton, chief finance officer at TradeRiver, the well publicised barriers for small to medium sized enterprises obtaining access to finance for growth is a real problem.
“SMEs may have existing bank facilities but if they are trying to grow their business they are really restricted,” he says. “They will have finance at the bottom end of the supply chain, with invoice discounting, but they can’t grow. And that is a particular area where we have found people coming to us – we’re enabling SMEs to import new product ranges and increase their turnover.”
TradeRiver is not a bank – it’s an online trade finance service that offers a pre-approved revolving credit facility, giving buyers the ability to pay sellers in full immediately.
Chief executive Richard Fossett, explains: “There are typically two halves to an SME’s supply chain, one of which is the purchase of goods that they use to reprocess, and then there is a second half where they have sold those goods on to an end customer or a buyer. In both cases the SME that is buying the goods will probably need to pay the supplier at the point of dispatch.
“If it is a cross-border trade they will have a shipping period or they will have a manufacturing process period during which the goods are being held in their premises and being used to manufacture the end product, they will then sell that end product, and undoubtedly the people that are buying it will want a deferred payment of 60 or 90 days to pay them. So that supply chain could be up to 240 days – although an average is usually about 180 days.”
“Classically, what would happen is that the SME would have an invoice discounting facility on the bottom half of that supply chain – so in other words, they would be easing their cash-flow or working capital needs by selling those invoices to their end buyers to an invoice discounter – it would then be providing spot payments against a deferred payment term,” he says.
Fossett describes how Steps, the company’s trading platform, works. “The buyer and seller register. They are then issued with securely encrypted tokens, very similar to those used in online banking, and then they have access to trade. They will go through the normal steps that they would go through in a normal trade transaction,” he says.
“So they would order the goods, the goods would be dispatched and then the buyer would accept the goods either at the point of dispatch or when the goods have been received in their warehouse. And at that point in time the buyer accepts the goods and, critically on the platform, accepts a ‘confirmed payment obligation’. This is an unconditional and irrevocable piece of debt that they will pay us at a date further in the future, up to 120 days.”
At the point of accepting the payment obligation the seller is paid.
According to Chilton, with most forms of supply chain financing the vendor is looking at the supplier’s credit worthiness. “So where you do invoice discounting, a bank will say to you: ‘Okay you’ve got a book of invoices, we will advance you up to 70 or 80 per cent of the value of the invoices outstanding, but if they don’t pay it all comes back to you, so we’re looking at your credit’.
“TradeRiver only looks at the buyer’s credit for transactions, we are not concerned about the seller’s credit – the transaction is non-recourse to the seller.”
Chilton believes this energises the supply chain. “Generally you have small guys supplying, larger guys, supplying very large guys. What it means is we can use the credit quality of the larger company, the buyer, to effectively provide working capital in the supply chain to the seller who is much smaller and may not be so credit worthy,” he says.
“SMEs are finding it very difficult to raise cash. It’s not necessarily that the banks don’t want to lend the money but they are being very, very tough on credit terms. We’re rigorous on the credit we give, but because we are swapping it up the supply chain we’re able to enable more people than conventional bank finance would be able to do,” says Chilton.