Supply chain finance without IPUs
At PrimaTrade we have launched a new capability: SCF without IPUs.
On our platform, companies can run supply chain finance programs at scale that do not need irrecovable payment undertakings from the corporate buyer (an "IPU") for invoices that are financed.
Without the IPU, there's minimal or zero accounting disclosure for the buyer.
Supply chain finance without IPUs - a breakthrough for treasurers and CFOs
How does it work?
Suppliers upload shipping and other documents to the PrimaTrade platform.
Suppliers match invoices to buyer purchase orders on the platform.
Buyers confirm on the platform, based on the data, that the invoice is valid (no more).
Financiers pay the supplier upfront and the buyer pays later.
There is no buyer "irrevocable payment undertaking".
It does mean that financiers are taking "dilution risk". Dilution risk is the risk that the buyer makes valid deductions from their invoice payment reflecting a failure by the supplier to perform its obligations in full.
But using the unique capabilities of the PrimaTrade platform, this risk is substantially mitigated.
Do financiers need to underwrite suppliers?
The beauty of the PrimaTrade approach is that financiers do not need to underwrite individual suppliers.
Risks on suppliers are mitigated at scale via the operation of the platform.
Not all suppliers will be eligible for SCF without IPUs, but the population of eligible suppliers can be determined algorithmically at scale, without needing individual suppliers to be reviewed.
Supply chain finance without IPUs: a powerful innovation
At PrimaTrade we are in regular touch with hundreds of CFOs and corporate treasurers.
Corporate buyers want to be confident that they can show financed invoices as trade credit in their books. See background about the accounting debate here.
Indeed, in some jurisdictions, local GAAP simply does not support a trade credit treatment for financed invoices because of the IPU; that's despite the clear provisions of IAS and US GAAP that allow this.
If supply chain finance is going to grow beyond a niche solution for larger suppliers only where utilisation is patchy - we need to innovate.
Delivered by the unique PrimaTrade process
Supply chain finance without IPUs at scale is only possible because of the unique way that PrimaTrade's platform works.
The PrimaTrade platform is supplier-driven. We don't take a feed of approved invoices from the buyer ERP.
At shipment, suppliers log into the PrimaTrade platform and upload invoices, shipping documents, inspection reports, and any certificates from their side. These are all automatically converted into useful structured data and the data is legally-warranted by the supplier.
Suppliers also match their invoices to open purchase orders from the buyer, confirming shipped quantities and unit prices so that the buyer knows what has happened and any shortages / overages are already visible.
And this means that, when we ask the buyer to confirm the shipment, the buyer's confirmation can be informed by the warranted data already provided by the supplier.
The buyer confirms that the invoice is valid, enforceable and binding. The buyer payment will remain subject to deductions if the products supplied are found to be deficient.
And then:
The financier's payment to the supplier can be less than 100% (eg: 80% or 90%) to provide a buffer for valid dilutions that might happen later. This percentage can be varied programmatically by supplier to protect the financier.
Administration of the program is still automated
As a result of this unique approach, the financier's risks can be managed through the structure. An irrecoverable loss versus an invoice because of dilutions becomes very unlikely.
And the PrimaTrade platform automatically manages the process of making two payments to suppliers - since there is an initial payment (say 80%) and a final payment (say 20% less charges less dilutions).
And the recovery of dilutions for financiers is also fully automated on the platform (with set off against all current and future invoices from the supplier, whether or not an early payment is made).
What about early payment discounts?
Of course, all the usual benefits of a PrimaTrade SCF program remain in place for the corporate buyer:
Discounts: Early payment discounts can still be earned and booked through to the buyer P&L, typically saving 1-2% on the cost of goods.
Truly early payments: Utilisation is high because early payments are truly early - coming shortly after shipment or goods handover and before delivery.
Include smaller suppliers: The program can scale across the supplier base because of the high levels of automation on the platform, driven by supplier data and not by approved invoices in the buyer ERP.
SCF without IPUs at scale - a breakthrough
This is a major innovation for the supply chain finance market.
Buyers can now support their suppliers and ensure that there is liquidity available in their supply chains - being confident that financed invoices can remain booked as trade payables.
If you would like to know more about the details of this product and the legal, accounting and risk analysis - please get in touch: