Financing the supply chain is an age-old challenge for corporations, banks and suppliers, and the CFOs and treasury teams who manage procurement budgets. What has changed in recent years is the adoption of innovative technology solutions that create a dynamic layer of visibility in the supply chain, adding opportunities for suppliers who have otherwise funded their receivables up to 140 days or more before they had any notification that they would be paid by their customers. In fact, a recent article in The Economist explored how technology is the missing link in the buyer-supplier relationship, and points to a better way for buyers and suppliers to work together. According to Mark Ferguson, CEO of Innervation Finance, and a client of Kyriba, in the absence of a technology that can bridge the access-to-capital gap, or one that adds clarity and confidence to the buyer-supplier payments workflow, suppliers bear the brunt of the financing burden.
In fairness, buyers have few alternatives other than manipulating DSO and DPO terms to hit their working capital targets, putting a strain on the supplier, who racks up bad credit and faces steep interest rates to finance working capital. On the other hand, if the buyer can find creative ways to support its suppliers, they significantly reduce the risk of supply chain disruption.
To get a deeper understanding of how SCF technology unlocks value for the bank-buyer-supplier relationship, Kyriba interviewed Mark Ferguson.
Q: Mark, you have extensive background in finance, working with JP Morgan to support banks, and also as an entrepreneur who needed the support of banks to survive. What is exciting to you about new innovations in supply chain finance technology?
A: Technology providers are leading the charge in creating opportunities to fortify and expand the business ecosystem—where access to capital is the gravitational force that pulls banks, buyers and suppliers together. It’s exciting to meaningfully and credibly support growing business communities.
Additional Reading: Making the Business Case for Supply Chain Finance
Q: How are SCF platforms expanding opportunities for banks, corporate buyers and suppliers?
A: Modern SCF technology gives corporate buyers a tool to better manage their working capital and gives their suppliers access to early payments through the use of dynamic discounting or reverse factoring solutions that accelerate payments to suppliers by leveraging strong banking relationships. What is key is the acceleration of payments for suppliers, especially the small and diverse suppliers that Innervation Finance represents, and the visibility they all gain into the payments process. With this added visibility, suppliers have more confidence in making strategic decisions about the future of their businesses.
Q: Mark, you’ve said that access to capital is a significant challenge for your clients. How does that equation breakdown? What is the opportunity cost to a supplier of funding its own working capital needs for let’s say 90 days?
A: Large companies finance themselves on the backs of small companies every day. This is not a new phenomenon. It occurs when suppliers agree to long payment terms. To your question, the cost of waiting 90 days to be paid on a $1 million invoice is $30K for a supplier that funds itself at 12 percent per year, which is the low end of where many small and medium-sized companies borrow today — and that is a conservative number.
If a buyer chooses to push payment terms out to 140 days, that same supplier will incur nearly $50K in financing cost just waiting to be paid.
The alternative is a buyer-led supply chain finance solution like reverse factoring and dynamic discounting where suppliers can take their financing costs down to five percent or less and receive payment inside of 10 days. With this method, the supplier’s financing cost can go from nearly $50K on 140-day terms to less than $20K, optimizing working capital for the supplier, too.
This is where a SCF program shows not only its ROI but also the competitive advantage it delivers to suppliers—$30K in savings on every $1 million, assuming up to four receivables turns a year, represents nearly $120K in direct savings. That’s nearly $120K back in the supplier’s pocket to be used to hire more people – and grow their business – and grow the community where these people live.
Q: There are other technology providers that offer supply chain finance solutions, why Kyriba?
A: Kyriba matters because the company has been around for 17 years, and is respected by more than 1,600 great companies globally. It is also tested, secure, and has more than 500+ direct bank connections around the world. These are all important ingredients in a platform partner for us and the clients we serve.
Q: How are you and your clients using Kyriba?
A: Innervation Finance uses the Kyriba platform as the engine that drives our supply chain finance offering. We leverage Kyriba’s full suite of supply chain finance tools to onboard our buyers and suppliers. Our buyers and funding partners have access to customized reporting and the flexibility to manage all aspects of the payments process. The supplier portal provides easy access to outstanding invoices, making it simple to facilitate early payment request.
Request a Consultation: See How a Supply Chain Finance Program Can Unlock Your Working Capital
Q: How are your clients benefiting from seeing the SCF payments process?
A: Visibility is critical for finance leaders and business owners to make confident, informed decisions. With the payments portal from Kyriba, our clients can gain information about when their invoice has been reviewed, when the invoice is approved and when it will be paid. Additionally, our clients can elect to take early payments at an attractive price point and receive cash when it’s needed. Our clients can now know with greater certainty when their invoices will be paid, providing the ability for increased accuracy of cash flow projections.
The benefits to the buyer include efficiency gains and reduced supplier risk. As suppliers become more confident in the payment cycles, the suppliers stop calling to check on payments. Call centers or finance teams handling questions about claims are not inexpensive. When buyers lose a key supplier, they disrupt their own opportunity to grow.
Technology has accelerated real access to working capital, and is improving the bank, buyer and supplier ecosystem. While extending DPO continues to be the crutch on which corporate buyers manage their working capital, this process does not have to be a zero-sum game. Buyers can achieve their cashflow goals AND provide support to their suppliers at the same time. This win-win approach is what is exciting about the innovation in technology that is driving the growth and opportunities that Innervation Finance and Kyriba are helping to bring to the marketplace.
Mark Ferguson is the Founder and Chief Executive Officer of Innervation Finance Group LLC. Mr. Ferguson is an investment banking and structured products professional with 30 years of experience in the financial services industry.