Recent research into the views of mid-market suppliers in North America sought to answer the question, how important are early payment programmes to them? The answer, reported on, appeared to be, not very. But there are bigger lessons for the supply chain finance market behind those headline findings.

The research, conducted by Global Business Intelligence (GBI) and sponsored by Basware, was discussed by GBI founder and president David Gustin in a recent webinar. It found that around half of mid-market companies don’t use early payment facilities. Of those that do, most use it to cover a very small percentage of their revenue.

Andrew Jesse, vice president, Basware Financing Services, believes that what these headline findings reveal is that the supply chain finance industry as a whole – suppliers, buyers, and even finance providers and technology vendors – must dedicate itself more to communicating about the options available but also to finding out more about what each party actually needs.

“There is a lot of education that still needs to be done in the market,” Jesse says, “around what the different early payment options are, to show people that it’s easy to access, there’s a lot of good process automation technologies, and the cost of funding is potentially quite a reasonable option.”

On the cost side, Jesse believes that for the North American mid-market – especially at the upper end – early payment finance costs need to be below 10%. “With interest rates so low these days and credit facilities readily available there is a distinct segment within that [research] group that can easily do without early payment finance,” he says.

Some forms of early payment finance such as dynamic discounting and purchasing cards can, he says, seem quite expensive sources of funding when there are cheaper, traditional sources readily available.

Cost of finance, cost of transactions

The finance cost is just part of the equation, however. What also has to be taken into consideration is the role that some types of early payment facilities can play in reducing transaction processing costs. For high-volume, low-value transactions where purchase order and invoicing processes are an expensive burden, facilities such as procurement cards or so-called virtual cards can take cost out of the process. “It almost costs more to process the transaction than to take the [merchant fee] off the top of the transaction itself,” Jesse says. “I can see P-cards and V-cards starting to drive really efficient processes.”

Generally, in fact, SCF platforms have benefits even if suppliers don’t take advantage of the finance. “Buyers and suppliers need to look at it not only from a cost of finance and working capital optimisation perspective,” says Jesse, “but also, how am I saving on my cash flow forecasting? How am I saving on my dunning credit collections processes? How, from a buyer perspective, am I saving from process automation and reduced supplier enquiries?”

The payment terms driver

While the research may suggest a relatively low rate of uptake of SCF in the middle market, it’s important to examine the detail further. The research suggested that a lot of mid-market companies are, in fact, trading with other mid-market companies, and so they are not putting pressure on each other to extended payment terms, which would otherwise likely increase both the demand for and supply of SCF facilities.

There is no doubt, however, that many large corporates are engaged in working capital benchmarking and optimisation, “so you do see terms extension taking place,” Jesse says. But he adds: “On the flip side you see government regulation driving shorter payment terms for smaller suppliers – so we do see opposing forces, there.”

Different companies, different requirements

There are companies that have a particular focus on working capital metrics and cash-generation – not least private equity-backed firms, says Jesse – while others want to reduce their credit exposure to lower-grade customers or “window dress” their balance sheet at a quarter-end or year-end.

“We see that quite a bit both in large corporates and with companies that are positioning to grow and looking to gain access to additional external funding or to IPO. That’s definitely a trend,” he says. The key point, therefore, is to understand the particular needs of particular suppliers. The more you drill down and look at more tightly-defined market segments then the better the dynamics are understood and the more opportunities for SCF are found.

Getting onboard

Onboarding and portals are issues, too. The research suggested that technology vendors typically see the onboarding process simply as an ease-of-use issue, whereas in fact suppliers may have other finance providers’ loan covenants that they need to deal with every time they join a customer early payment programme, making it more difficult to sign up for an SCF programme than their customer may have been led to believe.

“Onboarding is one of the biggest impediments to a lot of SCF programmes that are out there,” Jesse says. “But at the same time there needs to be a much greater understanding of the suppliers’ situation and their ability to accept and utilise these solutions.”

The fact that, from a supplier’s perspective, different customers have different portals, doesn’t seem to have been a concern raised by many respondents to the survey. Jesse believes that multiple portals are only a problem if those portals require suppliers to use them on a day-to-day basis. “You might have to go to a portal to sign up and opt in, or to check on transactions should you want to. But they should be able to transact via a fully-automated process,” he says. “If it’s not automated, it’s not right.”

Education, education, education

The bottom line is, the research highlights the need for education across the whole industry, Jesse believes. “It is about finding the win-win for all of the trading parties as well. It’s not purely around credit rating arbitrage. In other cases it’s about process automation and risk reduction or window dressing or how funding is optimised. It comes back to education and awareness of where are the benefits actually come from for all the trading parties, then identifying the right value proposition for different suppliers’ scenarios.”