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Supply chains: solving payment delays and working capital woes

Nasir Zubairi Friday, 01 November 2013.

Cash flow problems account for a huge percentage of corporate bankruptcies and are a major cause of financial distress to UK businesses. £36 billion was owed to UK SMBs (small and medium sized businesses) at the end of 2012 due to unpaid and overdue invoices. 

131101cashflowMore than 124,000 businesses said they have come close to shutting their doors permanently as a result of cashflow problems resulting from extended invoicing terms and late payments from their buyers.

Cash flow worries have led to a surge in adoption of alternative financing services. Crowd funding, invoice financing, angel investors and even government grants have emerged as options for businesses struggling with cash flow concerns. However, though easier to access than traditional finance such as bank overdrafts and loans, these forms of credit are more often than not relatively more expensive for SMBs than for their larger customers.

Championed by the UK government, Supply Chain Financing (SCF) is quickly emerging as the best alternative solution for low cost working capital finance for businesses.

In many ways SCF is the same as Invoice Financing/Factoring - the practice of receiving short-term credit against the security of an invoice as yet unpaid.

The critical difference between SCF and Invoice Finance (IF) is that it is the customer not the supplier that works with the lender, historically a bank, to enable seamless early payment of the invoices to its suppliers. Suppliers are offered the opportunity to receive early payment and can choose to opt in to the scheme or not. The "credit" comes in the form of a discount on the value of the invoice. For example, if a customer typically pays on 60-day terms, a supplier could receive immediate/early payment if they accept a small discount on the face value of the invoice.

The benefits of SCF to both the customer and supplier far outweigh those of other working capital solutions.

Firstly, the credit risk and thus the cost of the financing are related to the customer, not the supplier. Due to the direct relationship with the customer, the lender's fraud risk is also reduced - there are no "ghost invoices" to worry about, no worry around disputes over payment or returned goods. These factors help make SCF the lowest cost option for working capital finance for a supplier. Suppliers can receive early payment on close to 100% of their invoice value. With IF, early payment is generally around 60%-80% of the invoice value.

Furthermore, SCF provides for total transparency in the use of the credit facility; the relationship between supplier and customer often becomes strained when a lender is chasing the customer for unpaid invoices in an IF solution. Invoices are pre-approved for financing as opposed to a supplier struggling to obtain the evidence they need for IF.

For the customer, SCF helps cement a robust supply chain and can actually make their cash work harder, enhancing their own working capital, and can potentially help generate a new and small income stream.

Win-Win for all involved.

SCF has traditionally been targeted at large corporates with a large supplier base. This is changing as technology and processes to assess risk are improving. New services, such Tradebridge, aim to facilitate SCF for medium sized businesses, helping them, and their suppliers, to access the benefits of SCF.

"Mark Coxhead, Managing Director of an innovative new SCF business called Tradebridge said to me, "We utilise proven technology to help us deliver a simple, easy to use solution designed for medium sized businesses, typically with between £20million and £100million in revenues.

Our goals are to allow these businesses to realise the benefits of SCF without adding any friction or cost to their existing processes and to help their suppliers overcome cash flow worries. Our service also gives more control to the supplier, allowing them to get cash early for their invoices when and as they need.

Our technology enables us to cut out a lot of the overhead that larger lenders/banks have to cover in their lending rates. As such, we are able to offer market leading finance that is lower cost than that of other providers."

supplychainVSinvoicesmallAutomation around invoicing is core to optimising the SCF process, and to invoicing in general. E-invoicing should, particularly in this age of technology, be the defacto method of billing between the supplier and customer; many solutions, such as Invoiceable, are free, others are in-built to common accounting packages.

Paper invoicing is the source of a great amount of confusion on invoice status. Paper invoices are difficult to track and thus create inefficiencies in the invoice approval process. PDF attachments to emails are not much better; they are invariably at risk of being ignored.

A clear, robust and automated process around invoice handling can even free up previously hidden cash within an organisation. For customers, greater clarity about what has been spent, what's outstanding and invoice status can lead to more rapid processing, helping them to avoid late payment. A transparent system also fosters greater collaboration between suppliers and customers, leading to new opportunities.

Invoicing terms are the main driver of cashflow issues facing SMBs in the UK today. The lack of cheap and accessible credit further exacerbates the issues SMBs face. Managing finances does not need to be so difficult; Supply Chain Finance offers a myriad of benefits to both suppliers and their buyers and is now accessible to a wider community of businesses. Technology has made SCF relatively pain free to implement and use and has helped to lower the financing costs. Implementing SCF should be a top priority for any Financial Director.

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Nasir Zubairi

Nasir Zubairi

Nasir Zubairi specialises in innovation, marketing and business growth within financial services. He is currently Principal at New Buckland, an advisory firm. He used to be Head of Product Marketing at The Currency Cloud, the FX payments automation service. Nasir was the founder of EuroTRX, an online exchange providing SMEs with simple, low cost and flexible access to capital. He is a non-executive director of Amusis, an equity investment firm, and advisor to the boards of, Kwanji and Advanced Global Capital.

Nasir has held senior roles at RBS and ICAP Plc, having started his career at Reuters. He is credited as the inventor on several patents for services that have helped evolve trading and distribution models within the finance industry.
Nasir is drawn to all things related to entrepreneurship and innovation, particularly in the Financial Technology sector. He advises and mentors several small businesses.

Nasir is a Sloan Fellow from the London Business School. He earned his B.Sc. in Management Sciences from the London School of Economics. Nasir was honoured as "Business Mentor of the Year - 2012" at the UCL hosted Awards for Enterprise. He is a tutor/mentor for the Goldman Sachs 10,000 Small Businesses Programme and also a mentor at Level 39, Europe's largest technology accelerator, based in Canary Wharf.

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