Compare the payables.com
I have heard my first Christmas carol and seen my first Christmas TV advert. This must mean it’s time for the 2013 review post. Well, hold on, not just yet, but it does give me a hook into one of the emerging themes of 2013 and certainly a main theme of 2014—early payment.
This year, more than ever before, we have seen companies adopt electronic invoicing as they make their way into the networked economy. One of the items I, and many others, have talked about in the past is the perfect synergy between electronic invoicing and early payment. As invoices are received quicker and with fewer errors, they are processed faster—allowing companies to capture almost all existing standing discounts (invoices which already have discount proposals on them). With a bit of focus, companies can also look to extend discount terms to new suppliers and start to rationalise invoice terms, especially now that the EU payment legislation has come into effect.
In many respects, we are in a perfect storm for early payment. Large companies are holding, on average, three times more cash reserves than they were pre-recession and placing more than 90% of this capital in overnight funds with a low rate of return. Conversely, small and medium corporations are finding their traditional sources of capital, via banks, hard to get hold of. In fact, the need for capital is now so great that a number of specialist companies have emerged to fill the funding gap when corporate treasury departments and banks don’t wish to use their capital for such programs.
So we now enter a world where e-invoicing platforms are starting to merge with payment platforms and vice versa. New business models are emerging; and the once clean lines between supply chain financing and factoring are becoming blurred.
With that in mind, let’s review the classic approaches to early payment we see today:
- Standard Discounting – A company uses its own capital to pay an invoice early; traditional discounting at its best and known as 2-Party Financing as there are only two parties involved – the buyer and the supplier.
- Supply Chain Financing (also called Supply Chain Finance, Supplier Financing, or Reverse Factoring) – Banks put up the money for the early payment instead of the corporation in a
pre-arranged program. We would call this 3-Party Financing as there are three parties involved – the corporation, the bank, and the supplier. The financing risk is based on the buyer’s promise to pay.
- Factoring – A financial institution puts up the money, but the request or initiation for the early payment comes from the supplier as opposed to being pre-arranged by the corporation as in the previous two examples; for this, the corporation isn’t involved. In factoring, the financing risk is based on the recourse to the supplier in the event of
- Credit Card Facilitated Early Payment – Companies like Visa and MasterCard are the vehicle for the finance, however the funds still come from the bank in a pre-arranged program. In almost all respects this is Supply Chain Financing (SCF), however the payment is facilitated via the credit card company and leverages the established payment network. The difference here is it can be applied to many more suppliers than SCF which is typically reserved for the top tier of the supply chain. Credit card facilitated early payment could be seen as 4-Way Financing as it involves the corporation, the bank, credit card company, and the supplier.
While 2013 has seen growth in all early payment areas, most of the new entrants have been in the Factoring area. The factoring companies themselves are changing and evolving to be more than a standard factoring agent. Emerging entrants now offer a platform for a wide range of finance providers that are committed to “buying” invoices and bidding on them in an eBay-style auction; institutional investors, high net worth individuals, asset-based lenders, and cash-rich companies are all now funding programs.
Traditionally, factoring companies have partnered with e-invoicing providers to allow both the factoring company and the supplier to easily find each other and to provide the network with an added reason for suppliers to join. More and more networks are extending their platforms to accommodate this additional functionality either through partnership or acquisition.
What is new in 2014 is the addition of Big Data—i.e. the networks can provide the factoring companies with a trading history of both the corporation and the supplier. Factoring companies can use this to lower the risk associated with the early payment and therefore offer a lower APR. This is now getting to a point where factoring companies can offer an APR low enough to compete with a corporate-funded discount or a supply chain finance arrangement.
It would not be uncommon in late 2014 for a supplier to have a myriad of choices at their disposal for early payment—a corporate discount, a factoring platform, a credit card provider, or even a bank lead program like supply chain financing. One thing is clear, the network element levels the playing field for those wishing to offer funds for early payment. Very much like the UK car insurance comparison site comparethemarket.com who use meerkats to advertise their site, you put in your details and they list you the rates available sorted by the most attractive.
Will 2014 be the year of the early payment? When combined with e-invoicing, I see no reason why not.