Supplier Finance: Riding the Technology Wave

Before supplier financing, one of the few options open to the supplier to fund their business activity was factoring – a process that is often heavily paper-based, involves changes to the payment processes of the buyer, and is relatively expensive compared to other types of short-term financing.  Not many companies are willing to use factoring as it typically only funds 80% of the invoice with one of the biggest drawbacks being that if the buyer does not pay the invoice the supplier will have to refund any monies that have been advanced.

Although factoring does generate good returns for the institution providing the service, only a small number of corporates use it and those that do are usually corporates with a higher risk profile.  The benefits therefore of moving a supplier from factoring to supplier financing allows the institution to offer a much more streamlined and flexible solution and at a much more competitive rate.  The benefits to the supplier are clear and supplier financing offers critical changes to the options that were previously available to the supplier.

The back offices of many banks have had high levels of straight through processing (STP) for many years and there is a continual drive to improve these levels. This is the engine room of the bank and speed and cost efficiency can be and often are a competitive advantage.  In contrast the back office of a corporate is not the same engine room, investments have tended to be large and strategic but they have achieved very little STP in the financial supply chain.  When a corporate that has an efficient back office they can take full advantage of supplier financing but without effective STP the transition can be difficult.

Supplier financing is becoming the incentive for the corporate to drive for STP in the financial supply chain.  STP in the corporate back office can be increased by the adoption of tools such as e-Invoicing which enables the time lag from receipt and approval of invoices to be dramatically reduced.

Financial institutions that support the trading activity of the corporate with supplier financing and eInvoicing solutions through their e-banking applications will be directly supporting the corporate. Injecting cash directly where it is needed, supporting working capital optimisation programmes and assisting the corporate to reduce financial processing costs with the drive to STP – this is all part of the total solution.

e-Invoicing is only one process in the financial supply chain but it is a start that will support the move to the full digitalisation of the back office processes and the ability to fully integrate full financial supply chain STP.