When speaking with clients and vendors, we often encounter confusion when explaining what Supply Chain Finance (SCF) is, as several different vendor-finance solutions are offered today in the market:
B. 2–10-net30 (including variations such as 1–10-net30, 2–10-net60,…).
D. P-cards / V-cards
All of the above solutions, as well as SCF, allow vendors of a buyer to get paid (collect) quicker than the agreed payment terms. The main differences are around who pays the vendor early, discount rates to vendors, flexibility to the buyer and its vendors.
The purpose of this post is to highlight the key attributes of each solution and their relative advantages, in order to assist the decision making process to identify the solution(s) that would best fit his / her organization (as the buyer).
Process: buyer pays immediately in exchange for an agreed discount (typically, 1%-5%)
Impact on buyer: takes a working capital hit, as it has to pay out of its own pocket. However, no integration is needed (setup on the ERP).
Impact on vendors: Receive an inflexible ‘all-or-nothing’ and often costly proposition.
Process: Very similar to a cash discount arrangement.30 days invoices get paid by the buyer after 10 days, in exchange for a 2% discount. This solution has many variations (1–10-net30, 2–5-net60 etc.).
Impact on buyer / vendors: similar to cash discounts.
P-cards (purchasing cards) or V-cards (virtual cards) are two variations of a charge card (like a consumer credit card).
Process: Vendors get paid instantly by the card issuer, who charges the buyer once a month for all participating vendors’ invoices.
Impact on buyer:
· Pays on average in 15 days, in exchange for a rebate of 1%-2%.
· Heavy implementation, changing processes and policies.
· Used to buy goods / services outside of the traditional buying process, mostly applied for low volume, indirect spend (due to high cost to vendors).
Impact on vendors: similar to the previous solutions (costly, inflexible).
Dynamic Discounting (DD)
Process: Vendors may select which invoices (if at all) will be paid early. The shorter the time to maturity is, the smaller the discount.
Impact on buyer: here, too, buyer pays early out of its own pocket. DD implementation is invasive and requires changing processes and policies, as DD invoices change maturity date / amounts of discounted invoices.
Impact on vendors: DD is more flexible to vendors. However, discount rates are still typically high.
Supply Chain Finance (SCF)
The only solution that actually boosts a buyer’s working capital, SCF (aka ‘reverse factoring’) is an advanced version of DD, that’s friendlier to both parties.
Process: Vendors may select which invoices (if at all) will be paid early. Funds to pay vendors early do not come from the buyer, but rather from external (institutional) investors.
Impact on buyer:
· May negotiate longer payment terms at greater ease, boosting its working capital at no cost.
· Potentially gains a rebate income (“a cash discount, without paying cash!”).
· If you have a commercial (off the shelf) ERP system, SCF’s implementation is typically quick and frictionless .
Impact on vendors: similar to DD. Cost is often more affordable, as it’s not the buyer that pays early…
When reviewing vendor finance solutions, a buyer ought to factor in its cash position, vendor relationships and organizational goals.
Cash discounts / 2–10-net30 are easy to setup, but unless the buyer is cash rich, the bottom line impact is small.
Dynamic discounting is similar to cash discounts, provides more flexibility to vendors, but has implementation challenges.
P-cards are a good fit to buyers with a high volume of indirect spend from multiple small vendors.
SCF boosts both buyer’s working capital and ebitda, supports high vendor coverage (due to being vendor friendly), and easy to implementation, if a buyer has a commercial ERP system.