What is Payables Finance?

Payables finance solutions help CFOs and senior strategic leaders boost free cash flow and improve EBITDA by extending payment terms. There are typically 2 types of payables finance programs: supply chain finance and dynamic discounting.

Both of these programs create win-win scenarios for buyers and suppliers, while also enabling better working capital management to increase the health of organizational supply chains.

Payables Finance Diagram

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Supply Chain Finance

Supply chain finance is a working capital credit facility that gives suppliers the flexibility to “sell” approved invoices to financial institutions for a discount that is dependent on the credit risk of the buyers. This allows suppliers the ability to receive early payment of the receivable(s) owed and enables buyers to optimize their payment terms, all while strengthening their supply chain.

These types of programs are funded by a financier and are ideal for organizations looking for term extensions on their payables to improve cash flow performance.

Supply Chain Finance Diagram

Dynamic Discounting

Dynamic discounting is an early payment scheme that allows buyers to offer suppliers the ability to receive early payment in exchange for a discount or financing fee at a lower cost of funding than they can achieve on their own. This enables buyers to generate high returns on free cash, reduce cost of goods sold (COGS), and grow profit and EBITDA margins.

Dynamic discounting programs are best suited for companies with excess cash and liquidity that are looking for an alternative to low-yield, short-term investments in order to earn risk-free returns on cash. In utilizing a dynamic discounting working capital solution, suppliers can improve their own working capital to increase production efficiencies and drive growth.

Traditional Early Payment Discounting vs Dynamic Discounting Diagram

A Sustainable Supply Chain

The need for a code of ethics and responsible sourcing continues to grow as the global supply chain expands. In response to this growth, as well as consumer demands and investor preferences to do business with sustainable companies, an increasing number of companies are instating environment and social governance (ESG) or corporate social responsibility committees in place.

And while many consumers and investors see sustainable businesses as being less risky, it can be difficult to implement and maintain these standards. In addition, there are a lack of incentives – both tangible and financial – for suppliers and as a result they may be non-compliant. In being non-compliant, the suppliers, who are the ones providing the resources to meet the standards, disrupt the standards set forth by the company.

To remedy this, organizations can use supply chain finance as green finance through the association of the financing rate with ESG parameters.

The Benefits of a Payables Finance Solution

For buyers, utilizing a payables finance solution provides:

  • Enhanced cash visibility & predictability
  • Reduced account payable inquiries
  • Improved critical supplier relationships
  • Financial incentive for sustainability and responsible sourcing

For suppliers, a payables finance solution delivers:

  • Remittance information at no cost with reduced account receivable queries
  • Financial incentives for sustainable and responsible sourcing

To learn more about how your organization can benefit from a payables finance solution, check out this page.