When faced with the choice of cash to fund a corporate finance strategy or cash to meet a 30-day supplier schedule, the revenue-generating activity will obviously be more alluring. However, while extending payment terms makes it possible to grow cash mountains, what happens if the supplier goes out of business while they wait?
Enter payables finance – a buyer-led supply chain finance technique through which sellers in a buyer’s supply chain can receive the discounted value of its receivables (represented by outstanding invoices) before the due date, and typically at a more attractive rate than it could normally obtain (the financing cost is aligned with the higher credit rating of the buyer).
Two decades since the birth of the payables finance business, the market has grown rapidly – both in terms of size and scope. At Deutsche Bank, payables finance has become the fastest growing business line within the trade finance product family. Moreover, while, dominance still resides largely with five or six global banks, a new generation of non-bank platform providers have also significantly increased their share of the market – advertising enhanced digital interfaces, simplified implementation processes, and new business models (such as those focusing on smaller suppliers, offering auction based solutions, and those incorporating dynamic discounting).
Deutsche Bank’s new publication, “Payables Finance: A guide to working capital optimisation”, which brings together experts from across the supply chain landscape, sets out to explain the progress of this remarkable business to its current position as a core supply chain management and working capital tool – and to address its potential going forward.
Significantly, the publication defines exactly what makes a successful payables finance programme in an increasingly complex ecosystem of buyers, providers, and financiers and explains how payables finance is helping to bridge the US$1.5trn shortfall in global trade finance (as reported by the Asian Development Bank).
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