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During COVID-19, the Chinese government imposed strict lockdown measures, which required most businesses to halt their normal operations. With the interruption of production and operations, businesses struggled to fund everyday expenses such as rent, wages, utilities and more; a challenging situation for SMEs that have little to no cash.
Suppliers in the medical industry needed to increase their capacity to meet the rising demand for personal protective equipment (PPE). Applying for funding from the government or traditional financial institutions was time-consuming and required significant paperwork. Suppliers with urgent cash needs were not able to get the help they need in time from these conventional channels.
Philips China decided on an early payment programme which offers suppliers a cost-effective and flexible financing solution with a human touch. The programme streamlines the payment of account receivables that suppliers have with Philips China before the original payment due date. Suppliers can use the platform to choose the invoices they want to get paid early at the discount rate of their choice. The platform uses the dynamic discounting model to cater to suppliers with different financing costs, ensuring suppliers can obtain funding at a fair cost that is compatible or even lower than the cost with other financial institutions.
“The platform enables flexibility, transparency, and efficiency. It gives suppliers control over their working capital, including rate, duration, and frequency of invoice early payment and gives us control over the funding quota (maximum cash available for the programme) and desired return,” explains Zheng Yu, Treasury Leader, APAC.
Best practice and innovation
The following two examples demonstrate the solution in action.
Established in 2002, Shenyang SCIM Equipment Manufacturing Co. Ltd. needed funds to secure land and purchase equipment to build their new factory. For SCIM, it was a temporary and one-off funding need. The credit facility offered by the bank must be used in full and cannot be repaid early. On the other hand, traditional financing would not provide the funding in time due to complex document requirements and long approval time.
Philips China initiated quick internal collaboration with procurement, AP and treasury to ensure all eligible funds would be paid out to the supplier as fast as possible with a discount rate compatible with the market rate for early payment. SCIM accelerated US$10m in 2020 and continues to use the programme to obtain funding when the need arises.
Established in 2018, Shanghai Honeycomb is a SME and, as the pandemic entered its second year, it had become even tougher for SMEs to sustain sufficient cash flow to meet their expenses, especially for a newly established company like Shanghai Honeycomb. Lack of sufficient collateral or a poor credit score often excludes them from obtaining financing from banks or other funding providers.
The Philips early payment programme delivered a simple and sustainable funding solution for SME suppliers like Shanghai Honeycomb. After the company activated its account, all approved invoices by Philips China were automatically submitted for early payment application. The solution required no additional paperwork, there was no need for collateral and it is debt-free.
Shanghai Honeycomb can choose when to accelerate its ARs at the rate of its choice. For a SME like Shanghai Honeycomb, the programme is well-recognised and welcomed because of its accessibility and flexibility.
For Philips China
Improves supply chain’s health, diversity, and sustainability.
Improves supplier relationships.
Reasonable return on excess cash.