Over the last few years, there’s been a wave of smart solutions introduced to the market with the emergence of Fintechs that specialise in many different areas of corporate finance. One central area has been the digitisation and simplification of processes regarding the financial interaction and cooperation between buyers, suppliers and finance partners (supply chain finance).
Even now, companies still rely on negotiations between their procurement departments and their suppliers to expand payment terms and improve their working capital. Supply chain finance programs only support these negotiations by offering finance. However, these programs are often complex, have limited adaptability and do not deliver the planned effects. So is there a solution that can provide longer payment terms in full control of the finance department and without involving suppliers?
When working capital management was in its infancy, most of the solutions were provided by banks that offered their clients a way of gaining working capital effects through the optimisation of their receivables, mainly through factoring. Then banks and Fintechs focused on the accounts payables by introducing supply chain finance programs.
The idea is quite simple: buyers can negotiate longer payment terms because they provide financing for these payment terms to their suppliers based on their strong credit rating. The suppliers have the opportunity to request an early payment by offering a discount on the invoices to the financing bank. On the face of it, reverse factoring schemes are a great way of improving working capital. However, significant problems and barriers often arise during the implementation of a supply chain finance program.
To illustrate these problems, it is worth looking at a case study based on one of our recent clients – a multinational corporation in the food sector with an annual revenue of about €1.5 billion, profitable and with a solid credit rating. The top management and treasury department of this company are highly working capital oriented and were looking for an addition to their existing solutions.
The company uses a factoring program for the receivables side and a supply chain finance program to optimise the payables side. The supply chain finance program, however, was not living up to expectations and was not generating significant working capital effects. The reason is that most of the procurement is carried out with large suppliers that have a strong credit rating and are not interested in financing early payments of their invoices. Even smaller suppliers cannot be convinced to extend payment terms and use the program. Therefore, the realised volume of longer payment terms and the corresponding working capital effect has been significantly lower than the targets set by the CFO and treasury department.
As the company was considering the next steps in its working capital strategy, the management contacted cflox about its innovative payment service, ‘cflox pay’, which offers a payment with a payment term. cflox is a payment service provider that enables companies to pay their suppliers on the agreed payment date, but companies are charged 60 days later.
Those 60 days are refinanced by selected financing partners, thereby granting companies an additional payment term. This structure is treated as working capital under Local GAAP as well as IFRS. Since suppliers are paid in the name and from an account of the client, there is no need to integrate suppliers at all. In this case, the solution gave our client the possibility to integrate their existing finance partner and generate immediate working capital effects – and all completely within the control of the finance and treasury department. The implementation was established by opening and integrating a new cflox payment account in the treasury management software. The full program was established in less than six weeks.
Today, cflox pay is an integral part of the company’s active working capital management. With every payment, an additional payment term of 60 days is realised. In total the company realised a positive effect on its working capital of around €50 million. It has now added another finance partner to the program, thereby shifting even more finance from financial debt to trade debt and further evolving its working capital strategy.
Ralf Kesten is sales director at cflox
