Overcoming the Absurdity: Aligning Payment Term Extension with Trade Financing
On the one hand, there are countless programs attempting to unify and extend payment terms to suppliers, to the greatest degree possible. Such activity can have a negative procurement interest on supplier relationships while increasing supply risk, especially with lower tier suppliers, where visibility into financial health and stability is often lacking but where the trickle down effect from payment term extension ultimately comes home most to roost.
Yet on the other hand, we have access to a truly amazing array of new technologies that accelerate and provide visibility into approvals and trade documentation, combined with what appears to be a near limitless supply of third-party capital, which is willing to invest in and fund both receivables and payables financing programs. Collectively, the combination should drive down the cost of capital for early payment programs, accelerating the flow of cash in the supply chain.
But all too often in practice, procurement and finance are not aligned. Finance gets on-board with a program to push out payment terms or play around with them – e.g., having the payment clock start on invoice receipt – and procurement pushes its own pet programs around supplier management and supply chain risk.
When will the two meet and connect? It’s like two people meeting at a get together with the potential to fall madly in love but speaking entirely different languages so that a fleeting conversation remains just that – and is quickly forgotten.
I’ve consulted, lectured and written on this topic for years, primarily around the technology that can enable trade financing to happen more efficiently while aligning the interests of all parties. But a recent article in Banking Technology, authored by Deutsche Bank’s James Binns, does one of the best jobs I’ve seen at capturing the spirit of this needed coming together.
To summarize just some of his ideas, he writes:
Want to learn more about how companies are accelerating cash in their supply chains? Check out David Gustin’s recent paper, Accelerating Early Payment: Techniques and Approaches for Accelerating Cash in the Supply Chain.