As suppliers seek new ways to accelerate cash flow, supply chain finance has become an attractive early payment option.

Impact Of Covid19 Early Payment Important, Industry Today
As companies around the world feel the impacts of COVID-19, reliable early payment is more critical than ever.

By Nathan Feather, CFO, PrimeRevenue

As the pandemic continues to impact supply chains around the world, the deacceleration of cash flow has many companies on high alert. In this respect, the economic impacts have leveled the playing field for businesses of all sizes across the supply chain. Sectors hit hardest have had to weather sustained cuts to revenues, supply chain disruption and slow payment cycles. Meanwhile, other sectors continue to experience increased demand. That’s positive news from a revenue perspective, but meeting this sudden uptick in demand comes with its own cash flow challenges as buyers and suppliers struggle to scale accordingly.

As we set our sights on economic recovery, new financial pressures arise with compounding effect. The pandemic has hastened transformation in many sectors, uncovered new opportunities for efficiency and innovation, and – in some cases – prompted companies to rethink entire operation and production models.

The post-pandemic business landscape will be different for many businesses, and now is the time for companies to prepare their cash flow strategy to recover from today’s challenges while anticipating the risks and opportunities to come.

This confluence of factors has led to soaring demand for liquidity as businesses – particularly suppliers – seek new options to financially fuel the business. Cash reserves are running out. The protections of government-led stimulus packages offer less coverage. Many suppliers are hesitant or unable to take on additional debt. That’s led companies to explore new liquidity alternatives that provide material, fast access to working capital without negatively impacting financial health. One alternative that’s gained considerable momentum is early payment programs.

Choosing the Right Early Payment Option

According to our data, supplier demand for early payment is strong and growing amid the impact of COVID-19. PrimeRevenue accelerated $53 billion in supplier invoices during the first half of 2020, with $10 billion in March alone. Of those suppliers participating in early payment programs, suppliers accelerated payment on 80 percent of invoices during the first half of the year, and 93 percent during the peak in March.

Even as most sectors gain momentum, demand remains strong – an indicator that many suppliers remain exposed to the financial risks of the current economic climate. Between March 1 and June 30, customers introduced 25% more suppliers across 43 countries to PrimeRevenue’s early payment solution compared to 2019.

The primary advantage of early payment – typically delivered as a buyer-initiated program – is clear: suppliers get paid sooner and improve cash flow. Buyers looking to offer suppliers early payment as a way to fortify the supply chain typically encounter three options – traditional discounting, dynamic discounting and supply chain finance. Traditional and dynamic discounting are similar in that the buyer receives a discount on an invoice if it’s paid before the maturity date. With dynamic discounting, that discount is adjusted based on how soon the supplier gets paid.

The third option is supply chain finance. In this model, businesses optimize payment terms to improve cash flow while simultaneously providing suppliers the option to receive early payment as soon as invoices are approved in return for a nominal finance charge. This is achieved without negatively impacting the buyer’s or its suppliers’ balance sheets. As a result, both buyers and suppliers have access to liquidity that would otherwise be trapped in the supply chain.

Another advantage of supply chain finance is it helps suppliers immediately inject much-needed liquidity into their businesses to navigate uncertainty, fluctuations in demand and forward-looking transformation initiatives. It’s worth noting this liquidity has a trickle-down effect even deeper into the supply chain as suppliers can turn around and more quickly pay their own suppliers. And, while some early payment options are only available to investment-grade buyers and their largest suppliers, supply chain finance is available to a much broader pool of buyers and suppliers regardless of size and geography – including non-rated, non-investment-grade businesses. That means more buyers can unlock more cash and provide early payment to a larger number of suppliers, especially to those that need it most.

Early payment will continue to be a useful tool for businesses as they navigate economic recovery and position themselves for future growth opportunities post-pandemic. For those companies that need immediate access to material liquidity without taking on new debt, supply chain finance is an option well worth consideration.

Nathan Feather Primerevenue, Industry Today
Nathan Feather

Nathan Feather is the CFO for PrimeRevenue, the leading provider of working capital solutions. Prior to joining the company in January 2006, Nathan held financial management roles at Ariba, Freemarkets and PriceWaterhouseCoopers. Nathan graduated with a BS in Accounting from Pennsylvania State University.

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