Empty store shelves, long lead times, and port congestion have moved global supply chain problems from the business section to the front page. To assure business continuity in an increasingly turbulent and uncertain world, companies need to pay closer attention to the critical supplier networks they rely on to provide the goods coming into their warehousing, manufacturing and distribution operations.
Supplier payment trends
During 2020, the first year of Covid-19 lockdowns, many companies — especially in fashion and retail — dramatically extended payment terms with their suppliers to protect their cash positions in the face of economic uncertainty. Analysis from the Infor Nexus supply chain management platform shows that in February 2020, over 70% of the global supplier invoices processed on the platform had less than 60-day payment terms. By October 2020, that situation had flipped, with over 75% of invoices showing payment terms of 60 days or more. While those figures have come down in the subsequent two years, they have not returned to pre-COVID levels.
With a global economic downturn looming due to inflationary pressures, fiscal policies, geopolitical strife and outright war, it is likely that many businesses will again choose to extend their supplier payment terms to preserve capital and support greater financial flexibility. This will stress already fragile import supply chain networks and overseas suppliers, further increasing total business risk for the enterprise. Adding to the financial strain of extended payment terms from major customers, the inflationary pressures on their own material costs, on labor, interest rates and the burgeoning US dollar puts further pressure on critical cashflow for suppliers.
Obviously, this one-two punch of longer terms and increased costs adversely impacts suppliers, who need access to capital to continue operations. In our globalized economy, supply chain finance programs have become a vital tool for buyers who want to maintain a healthy supply base while still protecting capital.
Financing global trade
Supply chain finance (SCF) programs allow suppliers to get paid for an invoice prior to the invoice due date, either by the actual buying party or by a third-party financial institution, in exchange for a payment discount. The discount amount is often based on the financial well-being and resources of the buyer, so that suppliers can benefit both from lower financing rates than they might find with their own banks, and from earlier access to capital. Buyers can offer an SCF program funded with their own cash — a tactic often called “dynamic discounting” — or with third-party programs offered through banks, factoring companies, and other financial institutions. These third-party services are becoming more popular as flexible financial tools to maximize working capital and protect supplier networks that can extend far across the globe.
The process for third-party financing is simple. Upon receiving the supplier (seller) invoice and supporting documentation, the buyer processes and approves payment, with a maturity date based on the payment terms agreed upon. The seller can then request payment for that invoice before the maturity date, and receives a discounted amount of the invoice’s full value. The discount amount is effectively an “interest payment” to the third-party financial institution for advancing money to the supplier ahead of the previously agreed-to payment schedule. The financial institution then takes payment of the full invoice amount from the original buying company at the formal maturity date.
The size of the payment discount required by the financing company can vary significantly, especially for suppliers overseas whose access to competitive credit markets is limited. For smaller suppliers working with North American or European buyers, the most favorable invoice financing options are often those based on the credit-worthiness and risk of the buying company.
Trade finance programs have long been used to support valuable supplier networks and reduce their costs of capital, which can also lower total procurement spend for the buying company.
In the past three years, greater attention to mitigating supply chain risks has resulted in more focus on supplier financial health. With the flow of essential parts and products across oceans frequently disrupted by regional lockdowns and inbound delivery times stretching to unpredictable lengths, businesses want to eliminate any additional sources of supplier shipping delays due to financial problems.
Successful SCF programs that can help protect your business in 2023 share these characteristics.
As more companies adopt SCF programs, many of those programs are being stretched to their limits by high usage, driven by longer payment terms. Sourcing problems have also caused businesses to add new suppliers in different countries or regions to build greater supply chain flexibility and assure essential goods and components keep flowing despite temporary regional challenges.
Supplier funding programs backed by a single bank may no longer meet the needs of a newly expanded supplier network. Some banks may not be able to service suppliers in a particular country, limiting the financial security net that a buyer has to mitigate some of the business risk with new suppliers.
Having multiple financial institutions involved in global supplier finance programs is always preferable, but integrating each bank’s systems and protocols with the buyer’s ERP or finance systems as well as diverse supplier needs is beyond most business capabilities.
This is where platform approaches to SCF make better sense. They provide the central data hub for buying companies to engage a number of banks with their global supplier network, automating and standardizing critical data flows for transactional efficiency and transparency, with flexibility to add other banks in the future, or provide hybrid programs involving self-funded (buyer-funded) early payment along with third-party options.
Integration with existing systems
Procurement teams already collaborate and share data with global suppliers through a variety of portals, trade management systems, and e-invoicing platforms. Adding yet another solution to the technology mix increases IT complexity for buyers and suppliers alike, often with the result that suppliers can’t or won’t take full advantage of the program, and supplier risk is not significantly reduced. When SCF programs are deployed through the same system already used by suppliers for submitting invoices and shipping documents to the buyer, there is added convenience and also incentive for suppliers to provide more accurate and timely information.
The humble packing list reaches a whole new level of value when it is generated and submitted on a network platform that uses the data to automate the creation and submission of a commercial invoice from the supplier, which can be automatically matched and approved on the buyer’s side and rapidly released for earlier financing, if required. Suppliers benefit with simplified access to earlier payment while buyers gain improved compliance and financial accuracy — a true win/win solution.
Automation and supply chain efficiency
Suppliers can realize maximum benefit from finance programs when invoice approvals happen quickly, and they can access funds much earlier than extended payment terms will allow. It is critical that buying companies also streamline and automate the supplier invoice approval process internally, or they significantly reduce the value of finance programs for suppliers, who may have to look elsewhere for their capital needs. Manual document matching and invoice approval processes that can take 20 to 25 days to finally approve a supplier invoice won’t help reduce your supply chain risk.
Automating and speeding your invoice approval process means that suppliers get valuable funding access sooner, but it also streamlines data processes in your own systems, increases financial data accuracy and provides earlier visibility to developing capital requirements.
Supply chain finance programs can directly reduce uncertainty and business risk in global supply chain operations, assuring the steady and reliable inbound flow of goods and components to your warehouses. By looking beyond single-bank funding solutions, and deploying financial services that are well integrated with current direct procurement operations and supplier networks, companies can better protect their business continuity. To improve global supplier compliance to quality, sustainability and other environmental, social, and governance (ESG) goals, supply chain finance platforms provide additional incentive and supplier convenience.
A financially sound supplier network is a healthier supplier network, and an essential component of the greater supply chain resilience needed to face the challenges certainly coming in 2023.