In our last post, we focused on how banks were looking to grow and achieve their goals in 2019 and beyond. We looked at how fintech firms were driving change — sometimes on their own, sometimes through partnerships with traditional institutions and sometimes just through their influence on the market itself.

In this post we’re going to look at how corporates can leverage their relationships with fintech firms to thrive in the current market.

On the corporate side, business growth and finance are becoming inextricably linked. As many large companies look to optimize the cash conversion cycle, they have begun implementing lengthier payment terms for their suppliers-extending their Days Payable Outstanding (DPO). For many companies, a higher DPO is generally advantageous for the company, as it offers the chance to hold onto their cash longer for use in short term: decreases debt on the balance sheet, improves rating with financial analysts measuring DPO against their peers and gives an opportunity to invest in other areas of the business. However, this means that suppliers must wait extended periods of time for payment. Suppliers risk losing their business relationships with their customers if they do not accept these longer payment terms.  Additionally, with bank’s low rate of lending to small and medium sized enterprises (SME’s), opportunities to acquire capital are scarce. Instead, many SME suppliers are forced to cut costs and limit their growth in order to make ends meet. According to the 2016 European Payment Report published by Justitia, 41% of SME respondents indicated that late payments from their customers prohibited their growth. Furthermore, 35% of SMEs said that not getting paid in time threatened the very the survival of their company.

Percentage of SME respondents indicated that late payments from buyers prohibits their growth

– 2016 European Payment Report, published by Justitia

%

How Can Corporates Compete and Grow in 2019

One solution to aid in both the growth of corporates and their suppliers is the leveraging of alternative finance. The use of fintechs by corporates enables the extension of payment terms while facilitating early payment to their suppliers.

As noted in a 2016 Harvard Business Review article, Fortune 100 companies like Apple, P&G, Siemens and Colgate “are using these ‘FinTech’ companies to tap previously inaccessible capital in their supply chains to help finance growth in new and emerging markets, develop and support new products, strengthen their financial positions, and increase the capital available to the whole supplier ecosystem.” The piece goes on to note that by working with a fintech firm, these large corporations are able to extend out their payment terms to their suppliers to up to 120 days. With this extra cash on hand, they can use it to finance any number of corporate goals, including expansion.

Improving working capital can boost a company’s capital investment by 55%  without needing access to additional funding or put their cash flow under pressure

– Recent report by PwC

%

Why Fintech vs Traditional Corporate Financing Program? 

Corporate’s Own Cash

Card Program

  • High cost to the supplier
  • Merchant acquirer may further reduce payment received by the supplier
  • Program often classified as debt for the corporate

Discount Programs

2 Part Payment Terms

  • High cost to the suppliers
  • Shortens DPO and removes cash from the Corporate
  • Time and effort to negotiate early payment discounts with each supplier
  • Actual return is after subtracting their weighted average cost of capital – often leading to a lower net benefit

Traditional SCF*

  • Typically limited to the top 100-200 suppliers (short tail)
  • If bank sponsored, utilizes valuable bank credit lines
  • Changes are required to the corporate’s ERP system to make date certain amount – certain payments

Fintech Benefits 

  • Can address 100% of the supplier base (long tail)
  • Users 3rd party capital, eliminating the constraints of using the corporates own cash
  • Non debt for the customer and the supplier
  • Compatible with existing corporate programs – so not an either or
  • No system or process changes
  • Competitive rates
  • Suppliers can easily accept longer payment terms

For large corporations, unlocking the cash value of working capital can have a significant impact on their business. According to a recent report by PwC, improving working capital “would be enough for global companies to boost their capital investment by 55% – without needing to access additional funding or put their cash flows under pressure.” With the cost of cash increasing (and the likelihood of this trend continuing), this is all the more reason for large enterprises to consider employing alternative finance solutions.

Corporates employing alternative finance solutions can effectively boosts their financial position while securing their supply chain. This means greater opportunity for growth in 2019 and beyond.

In our final post in this series, we’re going to look at how suppliers can benefit from alternative finance solutions.

* (SCF: Supply Chain Finance)

Sources: https://cloudblogs.microsoft.com/dynamics365/2018/10/19/6-trends-that-will-redefine-finance-in-2019/
https://hbr.org/2016/06/the-rise-of-fintech-in-supply-chains
https://www.pwc.com/gx/en/working-capital-management-services/assets/pwc-working-capital-survey-2018-2019.pdf
https://www.windesheim.nl/~/media/files/windesheim/research-publications/thepowerofsupplychainfinance.pdf
Supply Chain Finance Technology Solutions, Strategic Treasurer, Consultants in Treasury, 2017