A Quick Guide to SupplierPay: How to Implement a Mutually Beneficial Financing Solution for Buyers and their Small Business Suppliers

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July 13, 2021
10:12 am

What is SupplierPay?

In July 2014, the White House announced the SupplierPay initiative. Twenty-six private sector companies have already signed the pledge and committed to speed payments to their small business suppliers. Faster payments will help small business owners reduce the cost of capital, grow their operations and create jobs. Launched by President Barack Obama, Senior Advisor Valerie Jarrett, National Economic Council Director Jeff Zients, and Small Business Administrator Maria Contreras-Sweet, SupplierPay is modeled on the Federal Government’s QuickPay initiative that requires federal departments to pay small-business contractors within 15 days. Participating companies have committed to helping their small suppliers by either paying them faster or by facilitating access to lower cost sources of working capital. The voluntary program has already attracted some big name players: technology giants Apple and IBM are among the companies that have already signed on to the initiative.

Why is SupplierPay important for the health of the U.S. economy?

For small business owners who have seen their companies struggle under the weight of late invoicing, the announcement comes as a sign of relief. Lack of access to timely and affordable financing can prove highly detrimental for suppliers that cannot accurately predict their cash flow when being asked by their customers to extend payment terms. As a recent Wall Street Journal article points out, when a small company is waiting 60 to 90 days to get paid, replenishing inventory and making payroll becomes very challenging. Furthermore, while large companies can typically borrow money at low interest rates averaging 3% per annum, small suppliers are often forced into expensive factoring agreements with annualized percentage rates up to 30%, a situation that many find simply untenable. Statistics confirm that smaller companies are getting the short end of the stick when it comes to larger enterprises’ working capital decisions and reveal the punishing impact of late invoice payment on the SME sector. There are over $2 trillion tied up in the U.S. economy, which could be freed up through better management of invoice payments (Accounts Receivable). Furthermore, according to the Federation of Small Businesses (FSB), a whopping 43% of business loans were rejected by banks in 2013. In this context, the SupplierPay initiative allows small business to secure the financing they need to grow their business while allowing buying organizations to optimize their working capital and strengthen their financial supply chain. For the larger companies, joining SupplierPay demonstrates a recognition that a healthy supply chain is good for business, the White House stated in a press release.

I am ready to take the SupplierPay pledge. What is the best solution for managing my early payment program?

The past few years have seen unprecedented economic challenges for corporations and have fundamentally altered the state of the financial market. This has resulted in a demonstrable tightening of credit and a significant reduction in liquidity, particularly for small and medium-sized enterprises (SMEs) with limited access to capital. Therefore, organizations are placing an increased focus on improving working capital in order to decrease dependency on debt and improve the stability of their trading partners to ensure the strength and longevity of their supply chain. The increased corporate need for additional sources of liquidity following the financial crisis has put the potential of supply chain finance programs into the spotlight. Supply chain finance is a set of solutions that optimizes cash flow and working capital by allowing buying organizations to lengthen their payment terms to their suppliers, while also providing an alternative option to their suppliers to get paid early. This results in optimized working capital for the buyer and enhanced cash flow for the supplier, while minimizing risk throughout the supply chain.

So, is supply chain finance the ideal solution for your early payment program?

Yes. And so much more. Supply chain finance is more than just a solution for managing working capital. It is a unified approach to increase the efficiency in liquidity in supply chains by dramatically improving visibility, flexibility, and control. Successful supply chain finance implementations combine a broad range of complimentary components dictated by the diversity of supply chain participants and the complexity of modern supply chains including multiple buyers, suppliers, and financial institutions. Three distinctive supply chain finance structures have crystallized:

BUYER-MANAGED PLATFORMS: In this structure the buyer owns and runs the supply chain finance platform. Some large retailers such as Carrefour or Metro Group are using this structure and managing the finance program, supplier onboarding and liquidity themselves.

BANK PROPRIETARY PLATFORMS: The supply chain finance structure is managed by large commercial banks providing the technology platform, services and funding. This structure is used by several large organizations such as Carlsberg, Marks & Spencer and Proctor & Gamble.

MULTIBANK PLATFORMS: The structure exhibiting the strongest growth rate is independent third-party supply chain finance providers offering mult-bank platforms. This structure separates the entity that manages the platform such as PrimeRevenue and the funders, which provides liquidity and takes the credit risk. Due to general limitations in credit risk appetite, companies such as Volvo, Lowes, KPN and other leading organizations have chosen this structure.

What are the Benefits of Choosing a Multibank Structure to Manage my SupplierPay Program?

Multibank platforms provide the best option in terms of flexibility and control for the participants to the SupplierPay initiative. Similar to a revolver, a buyer is not dependent on a single bank’s ability to syndicate the entire supply chain finance program. Using this model, funders can connect directly with PrimeRevenue to fund on the platform and solve the financing of their clients’ liquidity needs between different banks. A supply chain finance deployment will last many years. While banking relationships can last a long time they will often change, adapt and mature, which may affect the supplier finance program. The recent financial crisis has proven to be a reminder of the importance of ensuring multiple sources of liquidity and avoiding over-reliance on any single bank for funding. Corporates are increasingly recognizing the value of multi-funding platforms such as PrimeRevenue and the centralized coordination of liquidity within a supply chain finance program. This solution also allows buyers to fund some or all of the financing program themselves and provide a better user experience to the supplier.

‘KEY BENEFITS: SCALABILITY: Technology is crucial. Whether it is Procurement, Finance or another department tasked with managing the program internally, scalable technology enables the productivity and connectivity to allow a small team to manage the requirements of a growing program.

MULTI-FUNDING : Buyers need the flexibility to work with multiple funders or to use their own balance sheet (self-funding), without adding complexity or significant workload to the team. The platform should make it as easy to connect to multiple funders.

How will the SupplierPay program help my suppliers?