Treasury Today Country Profiles in association with Citi

What am I bid for this invoice?

Avalanche on snowy mountain

With underworked stockpiles of cash and struggling suppliers, large corporate buyers can achieve interesting results with supplier finance. But the one-size-fits-all static pricing model leaves many suppliers out in the cold – here’s a marketplace system that can work for many more.

Most suppliers would prefer that they have reasonable payment terms and that their buyers settle invoices on time. Indeed, so would the European Union which established Directive 2011/7/EU to try to prevent deliberate late payments by large buyers. But how much power does a small supplier have over a large buyer when it comes to setting payment terms? It’s a harsh commercial reality, but very little in most cases; well-meaning EU directives or equivalent domestic rulings offer little comfort for the majority of hard-pressed suppliers.

That large corporates seek to hold on to their cash is, however, understandable. With banking uncertainty post-financial crisis, reducing working capital requirements as far as possible has been the order of the day. Many large businesses have been extending payment terms, accelerating collections and stockpiling cash, fearful that their banks may suddenly pull liquidity.

The problem is that not only have some gone too far in the eyes of the public (and popular media) by extending payment terms to unsustainable levels, but also they are putting all the pressure and risk back into the supply chain. Here, a large percentage of small to medium-sized suppliers either can’t borrow working capital from their banks or can only do so at punitive rates (this in itself perhaps as an unintended consequence of yet more well-meaning but poorly thought-out regulation, notably Basel III).

Funding gap

With PwC quoting in the order $23 trillion of stockpiled cash sitting in corporate coffers earning very little or even negative interest, the entire liquidity problem of every small business in the world could be solved if the two sides were able to meet. “But the world’s working capital markets are broken,” states Chris Dark, President International of financial technology firm, C2FO. “They are broken because banks have never had true information symmetry between accounts payable and accounts receivable; they have been in the middle and have had to make a judgement call for each supplier about whether to fund them or not.” Whilst ‘traditional’ supply chain solutions have been available for many years, Dark believes that in many cases the providers do not know if an invoice is approved or not which he says can lead to higher costs.

Around $40 trillion is owed by businesses at any given time, a figure that turns over about five times a year giving an annual AP value of approximately $200 trillion. This makes it the second biggest market in the world, beaten only by FX derivatives. Dark reports that of the $40 trillion owed, around $2 trillion is financed by working capital loans, leaving a major gap. Of course, many of the businesses do not need finance for their receivables, says Dark, but even a conservative estimate of the shortfall puts it at “multiple trillions of dollars”.

Keeping both sides happy

A system that enables suppliers to accelerate payment of their receivables but at a level of discount they feel comfortable paying, whilst in turn providing gainful employment for the stockpiled corporate buyer’s cash, is perhaps the solution. Such a system exists in C2FO, claims Dark.

As a working capital exchange platform based on a unique bid/ask environment, C2FO (Collaborative Cash Flow Optimisation) is in essence a marketplace in which buyers can offer early settlement to suppliers who bid for that early cash by offering the percentage rate of discount that suits them. In doing so, it gives suppliers easier access to working capital, and offers large corporate buyers a healthier return (currently an average of 6.8%) on their otherwise moribund piles of cash.

The rates take their cues from (but are not set by) market rates, but even when market interest rates rise, Dark says that the achievable rates for both sides on this platform will remain more or less in parallel; in theory it is a sustainable solution with benefits for all parties. “It’s also risk-free because the cash comes from its own payables; it’s not a matter of if the company pays, but when.”

The cash generative aspect, when considering that the corporate buyer already has stockpiles, is not an issue because that cash can be used to generate margin; the buyer is effectively getting a discount on the goods, explains Dark. This, he adds, leads to accounting advantages. The average discount in the market is 0.5% (giving the absolute discount of 6.8% APR). This is treated as a reduction in cost of goods or operating expenses, not as an interest income. “It impacts the company’s P&L in a positive way, increasing EBITDA and directly influencing EPS.”

How it works

In practical terms, the C2FO platform connects with the buyer’s ERP (it works with all the main systems, says Dark). Once the buyer has sent an electronic file of its approved invoices to the platform, suppliers will log into the system and can bid to be paid early (which is usually on the next payment run). Suppliers are not bidding against each other but offering buyers their best percentage rate for early settlement of their invoices.

Most suppliers will have previously set their preferred rate and will automatically participate as approved invoices are loaded but can change the rate or opt out as required. The buyer sets the overall figure it wants to attain across all of its on-boarded suppliers (and may even set a different rate per currency). C2FO uses proprietary algorithms to blend and guide the available rates for each supplier at any given time. Buyers pay their suppliers directly, not through the platform, so C2FO sends the necessary instructions to the buyer’s ERP to make supplier payments.

C2FO currently has a roster of global clients, including some highly recognisable names. Toys R Us was the first to sign up in 2010 with US chain stores, Costco and Walgreens following. A number of other big names have also joined such as Amazon, Pfizer, Sharp, TechData and Elizabeth Arden. The platform has facilitated more than $13 billion in early cash flow to the supplier community so far. It is now offered in many countries around the world with participants able to set market returns and offers using any one of the current 13 currencies used (this will increase as required). C2FO has also recently announced partnerships with KPMG and US regional bank, Fifth Third, both based on client sharing.

Whilst other supply chain finance solutions exist – such as those offered by the banks as well as independent players such as Orbian, Demica, Ariba and GT Nexus – the market seems more than big enough for every player and approach. As a means of democratising the buyer/supplier relationship, Dark is certain that C2FO is carving a niche that can go a long way to filling the vast gap in the world’s working capital markets whilst providing the kind of yields that usually only exist towards the scarier end of the market.