Trade & Supply Chain

An innovation in supplier finance

Published: Oct 2020

Dynamic Supplier Finance is a flexible funding option that allows corporates to fund early payment for their suppliers using their own capital and/or bank and non-bank sources of capital.

C2FO Article, an innovation in supplier finance

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Supply chain finance (SCF) has been around for more than four decades and continues to be a popular funding model for corporates and their strategic partners. A new form of supplier finance blends SCF capabilities with early payment options, creating a flexible, versatile funding source. Dynamic Supplier Finance (DSF) from C2FO enables suppliers of all sizes to easily accelerate invoices from their customers on demand.

The platform provides corporates with increased flexibility, with the ability to seamlessly toggle early payment between balance sheets and other funding sources, giving control over how and when they fund their suppliers’ invoices. By paying suppliers early — with their own funds or through a third party — corporates can provide critical liquidity to their supply chains while still preserving their cash. This enables more suppliers, from the largest to the smallest, to access early payment.

Flexibility and empowerment

Supply chain finance is an effective way for very large corporates to provide liquidity to suppliers, particularly a select number of their largest vendors. An SCF programme enables suppliers to accelerate invoices at a fixed rate determined by their customer. Also known as reverse factoring, SCF is typically initiated by the corporate customer in collaboration with a bank.

Like other traditional SCF programmes, the platform allows suppliers to select the customer invoices they wish to accelerate but it also enables them to determine the discount to offer on each one. The offers are approved automatically, based on parameters from the customer. This flexibility ensures that funding is always available, leading to greater participation among suppliers.

Additionally, SCF programmes can require extensive paperwork, burdensome set-ups and are often only available to select, tier-one vendors. In contrast, all transactions through DSF are digital, with zero paperwork, KYC verifications or other time-consuming documentation.

The platform differs from traditional bank financing by engaging suppliers of all sizes – from small and medium-sized enterprises (SMEs) to large companies, with competitive pricing while placing no restrictions on spending. That means more of the company’s suppliers (20 times, on average) can access early payment through the platform than through static SCF models. This eliminates the effort needed to segment suppliers, as this happens automatically when suppliers name their rates through the platform.

The benefits of early payment programmes

Today, many companies worldwide participate in early payment programmes which can add value through generating greater working capital. Here are a few examples of how early payment through DSF can add value:

Control

  • The platform puts corporates in the driver’s seat, enabling them to toggle between self-funding and funding from partners as their working capital needs change. The multi-bank finance model reduces risk and dependency, with no bank rules, mandates or funding disruptions. The supplier is never affected by the nuances of who pays and the programme evolves as the corporate sees fit.

Flexibility

  • Suppliers have an always-on funding option. That flexibility drives greater usage and provides a valuable benefit to suppliers’ financial health. C2FO also works with corporates to source funding for as little cost as possible, enabling them to leverage alternative banking groups or funding partners within a day if needed.

The supply chain as a strategic asset

The supply chain is the corporate’s most strategic asset. Ensuring always-on funding for suppliers means greater support and stability across all levels. For example, a major retailer with more than US$130bn in revenue and over 7,000 eligible suppliers, wants to enhance its well-established early payment programme with additional solutions.

The large retailer’s needs are addressed with a combination of dynamic discounting (DD) and DSF. This enables flat or dynamic pricing for suppliers that is funded from the company’s balance sheet or a funding partner, with the ability to turn funding on or off at any time. The flexibility of using its own balance sheet or a third-party funder enables the retailer to provide suppliers with working capital while also realising EBITDA and margin improvements from the programme. The retail company can leverage alternative banking groups or funding partners within a day if needed.

Funding for turbulent times

Corporates want to protect their business and their supply chain, regardless of what’s happening in the market. The platform provides companies with the flexibility to support suppliers through early payment, while staying mindful of their own liquidity and keeping their business well-capitalised, an important factor to consider in today’s economic environment.

DSF provides protection from economic volatility by keeping viable cash on the balance sheet and investing in suppliers. It’s an integrated and flexible funding option for companies that are eager to support suppliers through the early payment system, but may not want to tap into their own cash reserves.

Countless companies have faced financial pressure from the economic effects of COVID-19. For SMEs worldwide, cash flow has stagnated, illuminating the need for cohesive strategies that open up access to working capital. It’s important to remember that keeping suppliers’ liquidity flowing helps organisations to thrive. Capital is crucial for businesses of all sizes to emerge successfully when the storm has passed.

The rising importance of ESG

Most large corporates today have a focus on Environmental, Social and Governance (ESG) agendas. C2FO supports these initiatives, providing financial inclusion for all suppliers in the supply chain. Linking preferential funding rates with supplier performance against ESG initiatives provides strong motivation for suppliers and in turn it helps corporates to deliver against their own ESG goals.

In conclusion

The platform offers a flexible early payment programme for corporates and their suppliers. Unlike SCF programmes, the corporate is in complete control of managing working capital across their supply chain. From managing KPIs by funding only intra-quarter payables to utilising the programme to address shareholder interests, the technology combines the power of the corporate’s liquidity with funding from banks to help them pay on their terms while strengthening their supply chains.

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