Treasury Today Country Profiles in association with Citi

Supply chain finance is failing smaller companies

Jenga tower falling

Existing supply chain finance programmes only benefit large suppliers, and only after the buyer has approved the invoice. This company wants to change that.

Small and medium sized businesses (SMEs) around the world are struggling because of cash flow issues created by poor corporate payment practices. It is a problem that is stopping SME growth and, in some cases, causing them to fail.

The problem has been amplified in recent years as large corporate buyers continue to push out payment terms. This leaves smaller suppliers facing increasingly regular cash flow shortfalls. To plug these shortfalls, many must take out expensive credit – sometimes at interest rates as high as 30%. All the while they are funding their large buyers’ working capital.

Nobody wins from this. Yes, the corporate buyer may drive short-term working capital improvements but it will force up the cost of goods in the long-term, cancelling out any benefit. If the supplier also fails as a result of cash flow problems, sourcing new suppliers at short notice could halt production for the buyer.

It is a situation that clearly needs addressing. And to some degree, supply chain finance (SCF) programmes have looked to do this by accelerating payments upon invoice approval. However, SCF has its flaws. Many of these solutions only benefit a small percentage of suppliers (who are often large corporates) due to complex onboarding requirements. Also, the release of payment only occurs upon approval of the invoice, which in a large corporate can take considerable time.

Instant payment protocol

UK fintech, Previse, says it is on the way to solving this issue. Its data-driven solution promises to take financing flow deeper into the supply chain and with greater speed.

Previse does this by using millions of data points, algorithms and machine learning tools to score an invoice based on the probability that it will be approved as soon as the buyer receives it. If this score is within the risk parameters of the SCF funder (typically a bank) then the supplier will instantly receive payment. Suppliers offer a small discount on the invoice for early payment.

“We are the first company to tackle this problem using data,” says Paul Christensen, CEO at Previse. “This has allowed us to speed up supplier payments. Now they can be paid as soon as the corporate buyer receives the invoice, rather than having to wait 30, 60 or 120 days for payment. It even has the power to enable payment of suppliers upon the submission of a Purchase Order from the buyer, which would help even more.”

Previse has done this without forcing any changes by the buyer, supplier or funder. Christensen explains that all Previse requires is the buyer’s historical payment data and a daily upload of all subsequent payment data from its ERP system. “The solution will do the rest,” he says. “It picks out all the key items on the invoice such as spend category, currency, frequency and location, and runs this through all the modern established binary classification models. These models leverage the historical data of the buyer/supplier relationship to ascertain what features lead to an invoice being approved or not and creates a score for the latest invoice based on this.”

The use of machine learning means that the solution will become more accurate the more invoices its processes. This will give the funders more certainty and enable more invoices to be accelerated.

Previse’s solution sits alongside funders’ existing payment technology and an innovative legal structure. This enables Previse to reach deeper into the supply chain and avoid the hurdles that typically prevent smaller suppliers being onboarded onto the programme. “This is crucial to our business model,” says Christensen. “We want to reach all suppliers and to do so without changing any processes to encourage more buyers to use the solution.”

Extended benefits

The solution is clearly exciting for suppliers, who will be able to receive accelerated payments from their buyers. Facilitating early supplier payments also benefits the buyer as it will keep the cost of goods down and help safeguard the health of their supply chain. In return for instant payment, suppliers offer a small discount on their invoice. This enables the buyers to participate in the economic benefits of faster and better invoice financing offered to suppliers, and to earn a stable, recurring and meaningful revenue stream from a data licensing fee.

At the same time, it will also help corporate buyers improve their corporate social responsibility (CSR) profile. “Corporates have a bad reputation for pushing out payment terms,” says Christensen. “And those with poor payment practices are increasingly under the spotlight and being looked unfavourably on by governments and investors. Saying that you pay suppliers on day zero, or even earlier, that can prove a big CSR boost. This is a driver for many of the companies we are speaking with.”

Christensen also notes that the solution can improve back office efficiency and reduce risk. “Many corporates run huge shared service centres (SSCs) that process thousands of invoices daily,” he says. “This solution enables the SSC to easily understand which invoices are the riskiest, based on the score they have been given. The SSC can then spend their time focusing on these and less on those that are less risky. Not only can this help further mitigate the risk of fraud, it can also drive down headcount and thus costs.”

Road to release

Currently, Previse is in go-to-market mode and has completed several proofs of concept (POC) experiments with some high-profile corporates. It is now building out the platform and, says Christensen, is in talks with “some household names” to go-live in Q3 this year.

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