Should Procurement Organizations Prioritize Invoice Discounting Over Other Trade Financing Approaches?
Invoice discounting programs that rely on underlying e-invoicing capabilities make perfect sense on paper. But to date, the vast majority of organizations implement e-invoicing programs to meet regulatory requirements or drive operational efficiencies before scaling discounting components of a program. Even those organizations that engage with an e-invoicing provider or supplier network vendor offering discounting capabilities often consider these programs as part of a second phase roll-up rather than an initial priority.
There are practical reasons for this, given the relative immaturity of many accounts payable organizations combined with questions that treasury may raise in the process of considering invoice discounting initiatives that are internally funded. But in reality, with the right strategy defined and set in motion, there is no reason not to prioritize invoice discounting as the centerpiece of a buyer-led trade financing program.
Here are some tips for getting started:
There are practical reasons for this, given the relative immaturity of many accounts payable organizations combined with questions that treasury may raise in the process of considering invoice discounting initiatives that are internally funded. But in reality, with the right strategy defined and set in motion, there is no reason not to prioritize invoice discounting as the centerpiece of a buyer-led trade financing program.
Here are some tips for getting started:
- E-invoicing can be a useful foundation for trade financing, especially to improve the number of potential days of finance and to get cash in the hands of suppliers more quickly, but is not necessary for invoice discounting. C2FO and creative upstarts like Remitia are beginning to separate out invoice discounting programs from e-invoicing. (Note: The 2 areas can and should work together, but e-invoicing is not a requisite for invoice discounting-centered solutions anymore.)
- Engage treasury from the very first discussions in programs – and at the same time, build a case not just around putting working capital to work but also with supply chain and operations, to reduce supply risk by segmenting the supply base and getting cash in the hands of strategic suppliers early.
- Decide (ideally early on) whether you want to self-fund programs and to what level and scale. This will likely dictate a particular path – as well as overall solution approach and selection. The vast majority of invoice discounting programs today are funded via a corporate’s own balance sheet, although once programs hit a certain scale level, the combination of internal and third-party financing can become quite interesting.
- Tier programs – and constantly reevaluate tiers. Offers should not just be made on size and spend but also the supplier’s strategic value to the business (e.g., diversity suppliers) and potential supply risk reduction.
- Do not engage with card providers and issuing banks on a strategic level in terms of input unless they can offer a portfolio of solutions. Card programs tend to be misused with confusion over what is ideal for invoice discounting vs. card spend in the “middle tail,” and most banks have incomplete solution portfolios when it comes to invoice discounting and trade financing solutions overall.
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