International supply chain finance
Most supply chain finance programs (“SCF”) are largely domestic and target the biggest suppliers.
But SCF is most efficient and valuable when it operates internationally.
That’s because international suppliers, particularly of manufactured goods, highly value early payments and will offer discounts if they can be paid at shipment.
By offering early payments at shipment, our clients are earning significant discounts on the invoices.
Suppliers are happy to give discounts because their alternative is to try and factor cross-border invoices in the open market; specialist financiers typically charge high rates, often require credit insurance, and there is usually a significant fee and a lot of administrative work. The offer of early payment at shipment by the buyer is better deal - enabling the buyer to capture those charges for itself.
Why do international suppliers value early payments so highly?
All forms of trade involve trust – that is trust that the supplier will deliver on its promises, and trust that the buyer will pay its invoices in full and on time.
Trust is harder to develop when suppliers and buyers are far apart geographically.
There are many reasons. If buyers in another country do not pay, it can be hard to make them. There are many reasons for that:
Unfamiliar legal systems
The cost of legal advice
Language and cultural barriers
Banks and domestic factoring companies often do not accept international invoices as collateral for borrowing or they offer only low advance rates. That means even the professionals assume that international invoices can be hard to rely upon.
It can take a long time for goods to arrive and invoices to be approved – and that time delay is a period of risk and uncertainty for the supplier.
Paying suppliers at shipment is very valuable for them – and this can be reflected in significant discounts that suppliers will give on their invoices in return.
Discounts are significant because:
Suppliers are monetising an invoice that otherwise can be difficult to borrow against - or where the costs of using a specialist financier can be high (often 1% per month or more plus fees)
There is no need to buy credit insurance on the buyer.
As the goods leave, cash arrives - which means there is no collateral gap in the supplier's domestic balance sheet; in turn, this means local financing (including purchase order financing) is more available and lower cost.
Why is paying at shipment so difficult?
This is at the heart of the “trust” question. Most buyers take the view that they will not approve invoices for payment before goods are delivered and inspected.
But there are two other reasons to include:
Most buyer systems are also set up only to approve invoices for payment after delivery (via the "3-way match").
Most financiers have a preferred geographical footprint. Financing payments to suppliers in distant countries is often beyond the compliance appetite of the buyer’s banks.
Is there an easy fix?
There is.
The methodology involved ("cash against data") is set out here in a paper that we have published jointly with the ICC UK.
What’s needed is a solution that:
sits on top of the existing buyer processes and enables early payments to be approved at shipment (without touching the existing, post-delivery 3-way match)
and a system which enables financiers easily to make early payments to suppliers notwithstanding their compliance appetite
If these two things can be fixed, it becomes easy to extend supply chain finance programs to include international suppliers.
And PrimaTrade’s platform addresses these two requirements nicely.
How does PrimaTrade deliver international supply chain finance?
The solution is simple. There are two elements:
First, we create an easy way for suppliers to evidence what they have shipped by digitizing their shipping documents; we then use the data so provided to drive the early payment process (leaving the existing, post-delivery invoice approval arrangements un-touched)
Second, our SCF platform can take the compliance responsibility so that each financier involved is only working locally and within its specific compliance appetite
PrimaTrade achieves this without changes to the existing buyer operations and controls - which can continue as before. The early payment process is overlaid.
The early payment approval
That’s because the entire process can be driven by getting suppliers to do the work. Suppliers are motivated because they want the early payment – and the quicker suppliers can provide their documents, the quicker they can get paid.
Moreover, the work can be done by the supplier – the buyer’s team has almost nothing extra to manage for the process to operate.
Suppliers ship
Suppliers upload their paperwork converting it to data
The data is used automatically to cross-check the supply against purchase orders
An early payment approval can be given for some of the invoice (eg: 80%, 90%)
This approval is only used with the financier for an early payment
The buyer’s post-delivery processes continue as now unchanged.
In this way, the buyer’s team has little to do – and existing 3-way matches and financial control processes are un-touched. But, the magic is there – the supplier can be paid at shipment.
The compliance process
Most financiers in supply chain finance take the view that, if they are financing the supplier by paying them early, then the supplier is their client and has to be on-boarded. Inevitably this means that many banks will not onboard suppliers outside a comfortable geographical footprint - often excluding the countries where suppliers are located (eg: South Asia, China).
Our solution is simply to insert a captive factoring company that we run between the suppliers and the funders. This shifts the compliance responsibility from the funders to the platform.
There is no shortcut with compliance, but the use of a captive factoring company enables us to on-board suppliers quickly because our risk-based procedures are designed specifically to support the supply chain finance product and include an understanding of the local realities that many suppliers experience.
So how hard can it be?
By adopting a new "supplier-driven" approach as we have at PrimaTrade, it becomes surprisingly easy to add international suppliers into your supply chain finance framework.
The key is to integrate purchase order matching and shipping documents into the platform, getting suppliers to do the work.
This can be done by setting up a new program or using PrimaTrade to enhance an existing program (leaving the existing rails in place).
And PrimaTrade now works with major European banks that are specifically focussed on this proposition - for their existing clients and for new clients.
Ask us to introduce you.
Moreover, with significant discounts available from international suppliers for payments at shipment, international SCF programs pay for themselves from day one – delivering a profit, in fact.
Next steps
Give us a call or send us an email to discuss!