Supply chain finance and the EU Late Payment Directive

Potentially coming soon to a balance sheet near you – a 30 day limit on invoice terms.

Surely not – but this is exactly what the latest draft amendment to the 2011 EU Late Payment Directive proposes – affecting every company doing business out of the EU, and potentially their supply chains.

See here for the draft amendments and see here for the current 2011 directive.

Supply chain finance and the EU late payment directive – impact?

There is good news and bad news.

Good news:

• The 30 day limit on payment terms also refers to delivery having occurred. So supply chains with long transport times may get a better (and more reasonable) treatment.

• EU directives can take a long time to arrive.

Bad news:

• If invoices cannot be approved more quickly, this will substantially limit or remove the effective benefit of supply chain finance. The average time to approve an invoice is conventionally understood to be around 16 days.

• Supply chain finance providers (eg: large banks) may withdraw from this business if program returns shrink relative to the cost and effort of on-boarding suppliers and making payments.

• There are precedents already that would support the planned directive – eg: France, Spain, Germany who have implemented their own tougher regimes following the 2011 EU directive (see here for discussion) and recent developments in Australia (see here for more details).

Will the EU late payment directive kill dynamic discounting and supply chain finance?

No, even if the rest of the world follows on and implements similar restrictions.

But only if platform providers up their game.

Supply chain finance and dynamic discounting can provide many benefits to everyone involved, especially if:

• payments can be made to suppliers before delivery of goods

• buyers can automate invoice approvals and make them happen more quickly, and

• if finance can be provided to the long tail of suppliers who truly need it, maximising the discounts for early payment that buyers can earn.

This will maximise program sizes even within a 30 day limit. This will keep funders engaged and minimise the effort for buyers to roll out programs at enterprise level to all their suppliers.

What do buyers need to do?

Buyers need to be ready to manage the disclosure and liquidity impact of limiting invoice payment terms to 30 days.

Buyer supply chain finance programs can be tweaked to minimise the impact:

• Extend your supply chain finance programs so that liquidity flows to the suppliers who most need it, typically the long tail of suppliers in distant locations.

• Expand your programs to the enterprise level. This will help to preserve the size and utilisation level of your SCF programs.

• Automate your approvals to get them working better – invoice approvals could be given automatically given before delivery of goods. This will allow you to maintain the returns available from your dynamic discounting and supply chain finance programs.

What do SCF platforms need to do?

As invoice terms reduce, platforms need to add more value to the buyer at the top of the supply chain.

Prima is here to help you.

We can help your buyer customers to improve the efficiency of their supply chain finance and dynamic discounting programs without changing funders, funding documentation or changing the role your platform performs.

With Prima, buyers can extend and automate their existing programs using their existing SCF and DD platforms:

• Extend: Invoice approvals on Prima do not need to use ERP data as our platform runs on supplier data; programs can be extended easily to the enterprise level, rolling out without initial IT projects.

• Automate: invoice approvals are generated automatically (at shipment) with built-in management of debit notes and operating dynamic advance rates to manage risk.

This allows SCF and dynamic discounting programs to capture all billing entities, all suppliers, and to deliver benefits across the whole customer enterprise.

So should we be worrying?

I guess we should.

The EU amendments to the 2011 Late Payment Directive are high on its agenda.

Corporate buyers should take this seriously.

On the other hand, there are steps that can be taken in advance so that new legislation delivers a soft landing.

Automating and extending existing programs can mean that the impact of 30 day payment terms is positively managed.