It’s widely known that payments from large buyers can often be slow, and this can cause a significant pressure on SMBs’ working capital. Combining this with the challenge that many SMBs have raising financing (66 percent of small businesses say that they find it “difficult to raise new business financing,” according to a recent Pepperdine and D&B study)1.
Last Friday, the White House launched its SupplierPay2 initiative (modeled on its earlier QuickPay program), which urges large companies to speed up payments to their suppliers, who are often small businesses. The aim of the initiative is simple – large companies should either commit to paying their suppliers quicker, or otherwise give them access to lower cost capital. It will help to keep the supply chain moving steadily, while avoiding squeezing some suppliers out of the market due to their own lack of cash. In itself, this initiative is nothing new – the UK launched a similar program back in 20123. However, the potential scale of SupplierPay means that its impact could be significantly higher.
So far, 26 large companies, such as Apple, Coca-Cola and IBM, have signed up to the voluntary program4. Many of these companies are also viewed as leaders in supply chain management (there is a considerable amount of overlap between this list, and Gartner’s Supply Chain Top 255), so its unsurprising that the President called on them to lead the charge.
By speeding up payments, supply chain finance programs, if implemented correctly, will certainly benefit SMBs, and by extension will benefit the economy in general. However, can they be useful the large companies themselves, aside from a healthy dose of good PR?
Simply put, yes, very much so. Two of the most effective programs that large companies can implement to speed up supplier payments are dynamic discounting and reverse factoring. Traditional early payment discount programs – e.g. 1/10 net 30 – give an “all or nothing” discount, so if the buyer is unable to process payments in less than 10 days (which is frequently the case), it has no incentive to make payments any earlier than usual. Dynamic discounting offers greater flexibility, by providing a sliding scale discount which moves toward zero as the payment moves towards its due date. It’s also worth bearing in mind that if a buyer can make 1/10 net 30 payments, this is equivalent to an 18 percent – risk-free – return on corporate cash. This could lead to enormous returns for the companies who have signed up so far, who spend countless billions with their suppliers.
Another early-payment program that is beginning to gain traction is reverse factoring, Reverse factoring connects buyers, suppliers, and multiple banks through a software platform to support the early payment of invoices to a company’s suppliers. The solution provides visibility to invoices that the buyer approves for payment, enabling suppliers to opt for early payment of the approved invoices – at a favorable discount compared to financing they could receive on their own. Pre-arranged financing is provided by the banks that participate in the buyer’s supply chain finance program. As with dynamic discounting, this could provide huge returns for the participating banks, while helping suppliers get quicker access to cash.
So, while both of these programs certainly speed up the payment process and help keep working capital flowing at the often small suppliers, they can also have a significant benefit for the buyers, who can leverage their own cash reserves, to get a risk-free return that is many times greater than other vehicles.
These two programs can also be used interchangeably, depending on the buyer’s availability of cash at various points throughout the year. While it’s likely that the 26 companies who initially signed up are cash-rich throughout the year, others may have periods where they require external funding. If this is the case, they can then use their own high credit rating to secure low-cost financing for suppliers without the need to dig into their own funds. Corporates’ ability to optimize these programs is also connected on the quality of their cash forecasting, so they know how much cash is available for allocation to supplier financing.
While the President’s launch of SupplierPay is good news for vendors, it’s also sound business sense for the buyers, who can not only ensure the stability of their supply chain, but also make their own cash work harder. Hopefully the good example set by these initial 26 companies will encourage more large businesses to adopt supply chain finance programs, and give a boost to the economy as a whole.
1. Dun & Bradstreet Credibility Corp. and Pepperdine University Release Quarter 2 Survey Results – Yahoo! Finance, June 18, 2014
2. SupplierPay and QuickPay: Strengthening America’s Small Businesses – White House blog, July 11, 2014
3. Prime Minister announces Supply Chain Finance scheme – gov.uk, October 23, 2012
4. 26 companies join SupplierPay program to pay suppliers faster – The Paypers, July 15, 2014
5. Apple tops Gartner Supply Chain Top 25 for seventh year – Supply Management, May 22, 2014