Digitally enabled Early Payment Programs (EPP) for suppliers are now gaining momentum with enterprise clients in India and, like many innovations, came about as a simple and ingenious solution to address working capital challenges of SMEs during the 2008 economic crisis. The solution started out as a dynamic discounting model, allowing enterprises to finalize early payment transactions with thousands of suppliers at scale. This model then evolved to include participation from financial institutions, widening the universe of enterprise clients, which could participate in an EPP.
Challenges faced by suppliers entail large working capital gaps and inadequate growth capital. Business illiquidity is primarily on account of long receivables cycles, limited access to formal lending sources (due to credit quality limitations) and prohibitively expensive informal lending sources. To manage liquidity, suppliers rely on early payments in an ad-hoc manner in the absence of an organized program. The supplier early payment program is designed to create a “Win-Win” situation for all stakeholders involved. While benefits to the supplier may be obvious, benefits for the enterprise clients go beyond what meets the eye.
The primary and apparent benefits include: -
While early settlement to suppliers in exchange for discounts is an age-old practice, it requires several bilateral negotiations with thousands of vendors, all carried out offline. Technology has streamlined the process. The digitized early payment program is a function of bringing together technology, third-party capital providers and trade finance expertise to deliver large-scale supply chain funding programs efficiently.
Marketplace dynamic of the program leads to ‘best rate’ discovery on trade discounts; multi-funder model brings new banking partners to the enterprise client, ensuring a competitive program rate for the enterprise client.
Flexibility to maintain or extend days payable while suppliers receive early payments: Programs designed to leverage third-party capital allow enterprise clients to early-settle supplier invoices while maintaining or even extending their day’s payable Some of the more noteworthy benefits are listed below. While these may be less apparent, their impact is deep-rooted within the enterprise supply chain.
Existing payables processes within enterprises are outdated and lengthy. Time taken from invoice receipt to approval to payment is very drawn-out, resulting in exceeding the defined credit terms. An important benefit of the program is improvement to the existing payable process. As the program works on approved invoices only, enterprises are consciously reducing the time taken to approve invoices thereby maximizing acceleration period available to suppliers for early payment. This is a systemic reform that helps eliminate process inefficiencies at the enterprise level and simultaneously enables speedy invoicing on the part of the supplier.
Enterprises offering supplier early payment programs have the potential to be dubbed as “preferred buyers” thereby increasing supplier stickiness. The program helps strengthen supplier relations due to ease of doing business, improved and competent payable processes, and on-demand option of early for suppliers looking to scale efficiently and effectively –
Through machine learning and data analytics, the program will not only map supplier behavior but also enable predictive modelling. Enterprises will be educated on supplier cash cycles, volume trends, and potential offer rates. This data will assist enterprises in making tailored recommendations to its suppliers; it can also choose to set certain thresholds for vendors based on their past data and bankability status.
While there is a huge opportunity within the enterprise supply chain to monetize transactions with its suppliers, dealers and distributors, there lies an untapped financing opportunity at the pre-invoice stage.
The author is the Founder and CEO, CredAble India