Invoice payment extensions
You are a CFO or corporate treasurer and you would like to have longer payment terms from your suppliers in order to generate better operating cash flows for your business. But your suppliers still need to be paid on time or even early, and perhaps you don't want to have to re-negotiate your underlying terms of trade.
What you need is an invoice payment extension:
Leave the invoice term with suppliers unchanged (eg: 30 or 60 days)
Suppliers will receive their cash either (a) early if they would like or (b) on time as the invoice falls due
You, the buyer, get an additional period to pay after the invoice due date
And this "payment extension" is still a current account payable in your books - and so boosts your operating cash flow
There are three solutions that buyers can use that achieve this result.
The PrimaTrade platform supports all of them, including combining payment extension for invoices (after due date) with instant / early payment to suppliers (at shipment).
Our recommendation, if a payment extension is of interest, is the electronic bill of exchange route - the first option mentioned below.
Sounds like magic? Read on - 4 more minutes!
Electronic bill of exchange (invoice payment extension by settlement)
The bill of exchange has been formally recognised as an established way for a company to settle a debt since the 19th century.
What's new is that there are now digital versions of the bill of exchange (the "eBoE") which financiers are comfortable relying upon. This is principally because new laws have been passed around the world based on MLETR, the UN "model law on electronic transferable records".
A good example would be the ETDA 2023 in the UK establishing eBoEs under English law.
A digital bill of exchange (eBoE) is a very convenient instrument. It is a promise to pay a sum of money on a specific future date and it can be created, sold, endorsed, and settled entirely digitally (so no paper).
Here are the mechanics to achieve a payment extension for invoices:
When the supplier wants to be paid:
the supplier sends a draft eBoE to the buyer;
the eBoE is just a digital agreement (eg: as a PDF) that is electronically sent by the supplier to the buyer, for example, over a platform like PrimaTrade which connects suppliers, buyers and financiers together; and
the due date on the eBoE can be later than the due date of the invoice.
The buyer:
signs the eBoE, which is called "accepting the bill of exchange", and
this process can be automated and done in bulk because it can be done fully digitally.
The financier:
receives the eBoE (which is endorsed to it),
this endorsement transfers the benefit of the eBoE and the future payment to the financier,
and the financier pays the supplier immediately.
On the later date stated in the eBoE, the buyer pays the financier.
What happens here is that the invoice is settled by the eBoE.
The buyer:
In the buyer's books, the invoice debt is gone and is replaced by the eBoE which has a later due date.
The eBoE, if created using the specific approach above, can likely be shown as a current account payable in the buyer's books, boosting the buyer's operating cash flow.
The supplier:
The supplier receives the cash on the invoice due date as expected.
The financier:
The financier purchases the eBoE from the supplier and relies on it to get repaid on the due date of the bill.
Step 1 above (supplier offers the eBoE to the buyer) can be executed before the invoice is due - for example, on the PrimaTrade platform, this can be done at shipment by the supplier.
This allows the supplier to access an instant payment at shipment; and
the term of the eBoE can still be longer than the term of the invoice that it settles, even if the invoice is settled instantly,
so the buyer benefits from a payment extension on top.
On the PrimaTrade platform, these arrangements are fully digital, and easy to organise and automate at scale.
Click here for a note from PwC that discusses electronic bills of exchange and the likely accounting treatment (they call them BexNotes). If you cannot access this note or would like a version in English, please email us here. There is also a webinar discussion of the Bexnote available here.
Electronic promissory note (invoice payment extension by settlement)
Everything said above about the bill of exchange also applies to the promissory note - and the electronic promissory note ("ePN").
The user journey is different, and the accounting treatment for the buyer may not be so clear (based on what we have seen in the market).
The opportunity for payment extension can be organised using ePNs as follows:
The buyer:
Either at shipment (if the supplier wants an early payment) or just before the maturity of date of the invoice, the buyer executes an ePN in favour of the supplier, and
based on an instruction from the supplier, the buyer discounts the ePN on the supplier's behalf with a financier to enable cash to flow to the supplier, and
this process can be automated and done in bulk because it is digital.
The financier:
purchases the ePN from the supplier, and
the financier pays the supplier immediately.
On the later date stated in the ePN, the buyer pays the financier.
What happens here is that the invoice is settled by the ePN.
As already mentioned above, the arguments to treat this arrangement as a current account payable rather than a financial debt are more difficult since the supplier's active role in the process is diminished.
It is also possible to combine the ePN with an instant payment process on the PrimaTrade platform similar to the eBoE, albeit with some adjustment to the process above.
Why would you use an ePN instead of an eBoE? This would likely be something driven by the financier, but the eBoE looks like the better option.
Payment agent (invoice payment extension by process)
This is the third option for buyers looking to implement payment extensions.
The solution is very simple:
The buyer engages a corporate payment processor to make payments to suppliers. This is an organisation that would normally be regulated as a payment processor and which phsyically makes the payments to suppliers (not just creating and processing payment instructions).
On the invoice due date, the payment processor pays the supplier based on an instruction from the buyer but also grants a grace period to the buyer allowing the buyer to pay later (eg: up to 60 days).
On the later date agreed with the payment processor, the buyer pays the processor the invoice amount plus any interest charge.
An advantage of this process is that, assuming no early payments are requested by suppliers, the suppliers are simply not involved. The whole arrangement can be implemented between the buyer and the payment processor.
Disadvantages are only minor:
suppliers will need to ensure they are able to receive payments from the payment processor in respect of invoices that they are owed, and
the amount of credit that can be offered after the invoice due dates can be limited to, we understand, up to 60 days as a result of regulations - although this may vary from one jurisdiction to another.
PrimaTrade's platform supports the use of payment processors to settle invoices to suppliers which can incorporate a payment extension. Moreover., this technology can be added easily on top of early / instant payment programs:
a financier is involved from shipment to due date, providing an instant payment to the supplier using a standard SCF model; and then
settlement at due date to the financier is carried out by the payment processor that, in turn, provides an additional credit period.
A point to note, which is that a payment extension versus settlement to a financier may have a different accounting treatment to a payment extension versus settlement to the supplier - but this is one part of a detailed discussion that corporates using this technology will have with their auditors.
Accounting treatments
Payment extensions are a valid route for companies to boost the operating cash flow that they show in their accounts and as a technique to boost working capital.
It is important to note that these are not yet mainstream techniques and not all auditors may be comfortable with the arrangements as set out above. Moreover companies should expect that auditors will likely not look kindly on structures which use payment extensions to achieve working capital outcomes that move away from market norms.
PrimaTrade provides a technology platform that can operationalize and automate these and other similar arrangements to enterpise scale. This can includes 1000s of vendors (suppliers), 1000000s of invoices and shipments, and global supply chains.
We deliver user-friendly environments that enable the excecution of transaction paperwork, invoice-by-invoice, with very high levels of automation and efficiency.
But it will be up to the corporate buyer client and their financiers to ensure that the arrangements put in place across our platform meet their accounting and financial objectives.