Giving Buyers More Options With Third-Party Financing

That late payments are a problem is a non-controversial issue. The Obama administration has launched the Supplier Pay initiative in the U.S., to address the problem,  while in the U.K. parliament has spent a large chunk of the summer of 2014 debating how it is British suppliers—particularly small suppliers—can get paid.

The question is one of survival—businesses, particularly small-ones and start-ups, need cash flow, but B2B payments as they have been are not set-up to maximize it.  The difficulties this causes on the supplier side: waiting 30-90 days for payments on invoices slows expansion at best and strangles some businesses.

Because the supplier side issues are pronounced and literally a matter of corporate life and death, the $2 trillion dollar annual problem of late payments tends to be defined in terms of the supplier side of the transaction, as are the products.

Considered from the position of a supplier, particularly one that is not well established, dynamic (invoice) discounting represents the strong contender, as it is the strategy that helps smaller business leverage electronic invoicing into faster payments.  Although there are many variations on dynamic discounting, it allows two businesses transacting over a digital invoicing platform to negotiate the rate and timing of a payment once an invoice has been approved.  There are variations on this—SAP’s Ariba is known for being more buyer focused, whereas rapidly expanding up and comer Tradeshift is credited with being a more supplier friendly—but the essential idea is always that the supplier accepts a somewhat reduced rate (usually 10 percent to 20 percent) and the buyers pays faster.

The supplier takes a lower payment, but that lower payment is still likely better than what they would pay on borrowing money to manage cash flow.  Taking a 20 percent reduction may be sub-ideal, but it is better than the 25 percent rates that small suppliers borrowing against the values of their invoices can face.

The buyer also benefits because they are getting a better return on their money than they theoretically would by holding on to the case and investing it

However, from a buyer perspective, particularly a small or medium sized buyer, the dynamic discounting does not solve the cash flow problem that B2B payments unearths. It merely shifts it to the other side of the buying relationship.

“The concern a corporate treasurer has is that once a supplier uses the service, they would like it to be there consistently. As these programs grow, they can potentially require substantial amounts of a company’s short term cash to fund,” said David Gusten in a Trade Financing Matters Report.

Larger companies can afford to take a hit to short-term cash and there are often strategic reasons to do so.

If that strain is to pressing, companies are increasingly turning to platforms such has Nipendo, which allow hybrid invoice pay systems as part of the standar package of options for buyer-side businesses.

For example, third-party financing arrangements can be created within a dynamic discounting, wherein the buyer can borrow the cost of the invoice, generally at a lower interest rate than the supplier can offer.  Financing is built in to the platform via an agreement with Integrate Financial. Through that agreement, supplier invoices can be paid via funds deployed through non-bank capital (hedge funds, sovereigns, family offices).

Although third-party financing is available, the nature of the built-in platform using non-bank capital allows for customizable loan standards.