Supply Chain Financing is Growing | Innovative Finance Managers are Learning How With the Receivables Exchange

Did you ever wonder why business-to-business transactions are typically settled in 30 days? Why not when goods or services are delivered? Ironically, the concept of trade terms were invented by the Greeks who needed a system to allow for transportation delays.

In today’s economies, we have eliminated many of these delays — and drastically improved the information flows about trade.  In fact, a new set of tools — Supply Chain Financing and Dynamic Discounting are rapidly changing the options around supplier payments.

Supply chain financing is demonstrating value in the weak economy as more organizations and suppliers learn how to use it, experts say. It’s most prevalent in retail and manufacturing, but ANY industry can take advantage of these tools due to the availability of new solutions. “Supply chain financing is still in the early stages”,” says Henry Ijams, managing director of PayStream Advisors research and consulting firm in Charlotte, N.C. “However, this intriguing concept is gaining lots of interest in 2009 due to the ability to extend early payments to suppliers based on the strength and credibility of the payer.”

Accelerated payments for a discount are not new. In fact, tools such as asset based lending and factoring have been in use for many years.  In a factoring relationship, early payment is based largely on the credit of the vendor who’s trying to discount the receivable. With supply chain financing, whether the customer is Electrolux or Joe’s plumbing they get the same discount rate for accelerated payments.  Moreover, a new internet based marketplace, called The Receivables Exchange, is now making it much easier for suppliers to access early payments from a variety of lenders.

The Receivables Exchange
This new twist to supply chain financing, Ijams says, is the concept of a non-bank third party lending the money for the supplier. For example, The Receivables Exchange www.receivablesxchange.com in New Orleans bills itself as “the world’s first electronic marketplace for trading accounts receivable.” Online, lenders that might include private individuals or hedge funds can compete to buy the invoice a major corporation has guaranteed to pay a vendor. Ijams describes the Receivables Exchange as a supplier friendly marketplace for selling receivables to investors and other lenders. “This is a brand new capital source that utilizes the Internet to facilitate transactional transparency fostered by buyer and seller ratings. Think eBay for receivables financing.”

“What we like about the Receivables Exchanges is its powerful ability to allow more people to participate in the financing of trade payables,” he says. “Our analysts think this has some powerful dynamics in 2009. While the credit markets have been disrupted, those who still have cash, like hedge funds, are looking for places to invest money.”
“Supply chain financing is becoming more significant as invoices are approved faster with automated matching and workflow,” he says.  So far, the concept seems to be a win-win for everyone involved.  “With SCF, once AP has approved a payable, and know they’re going to make payment, the buyers shouldn’t care if someone else is using a promise to pay to swap that for early payment. In fact, buyers should promote the use of SCF because it means someone else can potentially lend that supplier money at lower risk and zero cost to us, the payer.”

Future trends
Finance professionals need to stay up to date  with the trends happening in supply chain financing – including its “cousin,” dynamic discount management, says Ijams. The concept involves paying suppliers early in exchange for an attractive discount, which lowers the cost to the organization. It goes against the old adage “Collect early and pay late.”

Staying ahead
The changes in trade payables present a major opportunity for AR, Billing Managers and AP departments to shine, Ijams says.   “Innovative billing and treasury managers must continue to insert themselves into finance opportunities to help their companies find ways to speed up the invoice approval and cash receipt processes. Effective collection strategies will be based on a continued contraction of the invoice-to-approval time.”

Research by PayStream Advisors shows the average approval time for invoices (from Invoice Date to posting or approval date) for F1000 businesses is 20 days. That leaves only 10 days of potential early payment time for a supplier, minimizing the opportunity for early payment, he says.

Many organizations will not realize how supply chain financing can serve them until innovative finance professionals bring it to the forefront, Ijams says. “It’s a way for finance and treasury managers to heighten their credibility and improve their importance in the organization. … in order to be a value-added players, today’s finance managers have to be the eyes and ears of an organization by looking for new opportunities to focus billing and collections organizations on continuous improvement.