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Supply chain invoicing sees some revolutionary changes

When exporters hear the word, FinTech – tech-based financial services – they dismiss it as just another digital tool that might one day make their jobs easier.
That day has now arrived. FinTech solutions have revolutionized supply chain financing by converting long-dated invoices into cash faster. The breakthrough enables executives to manage their accounts receivable more adroitly. Most firms, especially smaller ones, live or die by their cash flows. But until recently, many finance folks were left waiting for corporate customers to pay their bills which were being stretched out well beyond 60 days.
According to Priyamvada Singh, New York-based head of product management, GTRF HSBC Bank USA, supply chain finance (SCF – AKA approved payables finance or reverse factoring) emerged after the financial crisis. Lack of credit availability created an incentive for buyers to support suppliers by establishing SCF programs.
The era of “reverse factoring” began when financial institutions changed the global payment system by introducing new rules. They gave birth to buyer-led or buyer-initiated programs, under which suppliers can access finance and receive early payment for receivables at a discount. Early payment is possible since it is based on the buyer’s irrevocable commitment to pay, since the financing cost is now based on the buyer’s, not the seller’s, credit risk.
That occurred after invoice issuers agreed to add a “commitment to pay” notice to invoices. The greater difference between the buyer’s credit rating compared to that of the supplier reduced the financing cost of the SCF transaction. Before, without such an issuer’s irrevocable commitment to pay, when sellers holding the invoice approached a bank or factor, the finance provider calculated their risk on the seller’s creditworthiness which would often be much lower than the buyer’s, resulting in higher risk premiums.
A recent Harvard Business Review article explains how the process works: “Financial technology companies … act as intermediaries in facilitating transactions between a company and its suppliers.
“They enable both the buyer and supplier to improve their working capital by making it possible for the former to extend its payables and at the same time accelerate payment to the latter. This provides both sides with benefits, including greater liquidity and less variability in the timing of payments.”
Driving the new services are cloud-based software platforms linking both purchasing management and accounts payable functions into tighter “procure-to-pay” systems. Closing that loop simplifies and eliminates past processes that in turn speed up invoice payments.
Many of these new-breed financial intermediaries are Silicon Valley startups. The HBR article also states, “They are internet companies that streamline financial systems and make funding the supply chain more efficient. These include new enterprises such as Orbian, Prime Revenue, C2FO, Taulia, and Ariba. As well, traditional players such as Citi Group, HSBC, BNP Paribas, Deutsche Bank and others also offer similar services.
According to Tom Roberts, PrimeRevenue senior vice-president of Global Marketing, such supply-chain financing (SCF) or invoice financing services opened the door to “reverse factoring”. In essence, it was a short-term loan from the borrower who charged fees based on current interest rates and the risk related to the borrower’s credit rating.
PrimeRevenue’s SCF transactions are conducted on its OpenSCi platform that includes analytical and onboarding tools. Serving as a hub for both invoice sellers and buyers, it enables suppliers to trade their receivables for advance payment without changing their existing invoicing processes. Suppliers can receive payment within days in exchange for the receivable and paying relevant interest charges and fees until it is processed.
Roberts says, “The service we offer is cheaper than traditional sources because we can leverage the lower cost of capital that global multinational corporations enjoy. Such financial strength reduces the risk of non-payment. And the faster cash flow enables exporters to manage their finances more effectively.”
“The system is very easy to use,” says Pieter Dorsman, CFO of Atima Software Inc. “It may take a few days to set up the necessary documentation to use the system or much faster if you use the cell phone app. Depending on the payment period, the cost of the service can be less than one percent of the receivable’s value. The system helps us manage our cash flow better.”
Fundthrough, a Toronto-based start-up, has been offering such services since 2014. Says CEO and co-founder Steven Uster “About 60 percent of our customers offer services and 40 percent sell products.
The Fundthrough application gives new meaning to the term, “click & collect”. Users simply click on the invoice or invoices listed on their online accounting software system such as QuickBooks they want to negotiate and link them into the Fundthrough platform. After accepting the invoice, Fundthrough typically charges the seller a fee of $5 per $1,000 per week until the invoice is paid.
Exporters can also participate since Fundthrough accepts foreign currency invoices covered by Export Development Corp. (EDC) Accounts Receivable Insurance.
In fact, EDC should be every Canadian exporter’s first stop. It is a government agency whose mandate is to boost the overseas sales of Canadian goods and services. It offers a wide range of financial and insurance products and services that assist Canadian firms in winning overseas contracts and mitigate the risks involved in dealing with foreign customers. These include accounts receivable insurance that makes sure that exporters get paid for the products and services they sell. Says Shawn Cusick, Director, Financial Institutions and Political Risk Insurance,EDC, “This not just for overseas buyers in obscure markets. The greatest number of defaults involved U.S. buyers. That’s because of sheer volume. Almost 75 percent of Canadian exports are sold there.”
As well, for major Canadian capital goods producers EDC will also arrange financing and possibly credit facilities for buyers and insurance in case a foreign firm fails to deliver or pay as a result of bankruptcy, natural disasters or nationalization of private-sector firms by the local government.
In addition, EDC also offers foreign buyer financing assistance options which may also eliminate the need for letters of credits (LCs). Says the HSBC’s Priyamvada Singh, “Although volumes for documentary letters of credit (L/Cs), continue dropping, they are still necessary, especially in emerging markets.
“Sellers, especially MSMEs (micro, small and medium enterprises) may still rely on letters of credit as collateral for pre-shipment financing needs since SCF enables access to finance only at the post-shipment stage and post-acceptance of an invoice by the buyer. Banks in such countries will not accept electronic notices of payment as collateral for pre-production loans for exporters to buy raw materials, etc.”
Foreign exchange (FX) hedging is another tool that can make life easier for exporters. Today’s political and economic uncertainties can suddenly rattle currency exchange rates which can reduce the number of Canadian dollars they receive when they convert invoices denominated in a foreign currency, i.e. U.S. dollars, pounds sterling, euros etc. Before, in more settled times, most of them did not consider FX hedging overseas invoices but simply let FX markets decide how many Canadian dollars they would bank after converting their foreign-currency invoices.
Says Dev Dabas, Winnipeg-based senior vice-president, EncoreFX Inc. “Exporters should not try to outguess FX markets. They should simply try to lock in the value of their contract when it is signed and eliminate the guesswork and other risks.”
That approach makes sense to EncoreFX client, Peter Boda, president of Bodefide Auto Ltd. in Headingly, Manitoba. He says,” We sell about 100 used cars per month to the U.S.. Our U.S. dollar-Canadian dollar receivables take about 90 days to clear. Before, we used to hedge about 50 percent of them. Now, it is closer to 75 percent.
“Hedging gives us more control over our receivables by locking in our revenues, margins, and profits. I sleep better at night knowing how much I take home in Canadian dollars is not left to chance.”
Exporters may also need to be aware of other financial risks to their overseas receivables. Says David Butler, business development executive at AFEX, a multi-service cross-border payment advisory firm, “We try to find out as much as possible about each of our customers’ needs and objectives – they are all different and most deals are not the same.”
Through its experience and connections, AFEX has been able to help clients avoid disaster by suggesting they denominate contracts in a different currency. “We told one exporter to denominate an invoice with a Chinese client in its local currency, renminbi (RMB), not U.S. dollars because the firm had a reputation for padding its U.S.-dollar invoices to cover potential swings in FX rates. We saved our client between five percent to 10 percent of the contract’s value.
“For another client that was importing sophisticated drones into Canada, we proposed that the contract be denominated in Euros rather than U.S dollars. That increased his margin on the basic seven-figure deal by about four percent.
The HSBC’s Priyamvada Singh concludes, “Many ‘FinTech’ platforms have entered the market offering improved digital tools, simple integration with buyers ERP systems with easy access to multiple liquidity providers compared to the limitations of individual banks.”