When Alain Karyo applied for a Small Business Administration loan, the process was so time-consuming and inflexible that it soured him on traditional financing.
That was in 1998, and Karyo, president of Catamount Glassware in Bennington, Vt., has gradually expanded the company without the burdens -- and, he admits, the opportunities -- of debt. But last year he found an agreeable option in The Receivables Exchange, an online marketplace for auctioning accounts receivable to investors who get a markup in exchange for providing the cash for early payments. “It turns our cash faster,” Karyo said.
Other manufacturers and suppliers are likewise turning to cloud-based supply chain finance platforms that provide visibility into invoices that have been approved for payment, which can then be self-financed by the buyer, or by the platform provider or participating banks.
Catamount, a maker of heat-resistant cookware and bottles, financed its invoices to a major customer, Magic Hat Brewing Company -- an estimated $500,000 a year. It used that financing to pre-buy discounted raw materials it needed for another customer, retailer Williams Sonoma. Karyo figures he more than covered his costs with the pre-payment discount and by slotting materials into his regular production schedule instead of paying overtime when deliveries arrived.
The faster, easier financing helps Catamount weather seasonal ups and downs. “Usually, our receivables turn around in 55 days,” Karyo said. “By using this method, we are able to take our cash flow down to an average of five to six days.”
Cash crunch boosts interest in supply chain finance
Analysts say the continuing recession and credit crunch have driven manufacturers to find ways to free up working capital for themselves and key suppliers, whose financial fate can have a direct impact on their own. In a June survey of 161 companies, half of which were manufacturers, Tempe, Ariz.-based CAPS Research found that 93% monitor the financial health of suppliers as part of their supplier risk management strategy. Several companies said they respond with financial assistance, such as paying invoices earlier, lending money for materials, providing letters of credit, and modifying payment terms in the supplier’s favor.
“Very often, buyers and suppliers will agree to early payment discounts,” said Peter Lugli, senior director of working capital management at Ariba, a provider of Software as a Service (SaaS) commerce technology. “We’re seeing a significant uptick in interest from customers.”
Ariba offers an early payment application called Discount Professional and receivables financing through a partnership with The Receivables Exchange.
For example, two Ariba customers turned to receivables financing when bank loans became unavailable, Lugli said. One manufacturer of medical models used an advance on receivables that had been approved for payment by a major pharmaceutical maker to buy molds from a Chinese supplier. Another company financed an invoice that would otherwise have been paid in mid-January to give its employees Christmas bonuses.
“We’re seeing some significant orders from Fortune 500 companies,” Lugli said. “They are looking at these solutions as a way to reduce supply chain risk.”
A few commercial banks have long offered similar financing called reverse factoring, according to Duncan Jones, principal analyst at Forrester Research.
Jones explained how it works. A supplier asks a bank to factor its accounts receivable. The supplier receives, say, 97% of the value immediately, while its customer gets a payment extension. If all the invoices aren’t paid within, for example, 90 days, the bank can keep its 3% markup and make the supplier pay back the entire balance. Jones likens the setup to credit cards, where a merchant gets paid up front, the creditor subtracts its fee from the payment, and the buyer pays later. “The buyer lines up the financial institution and the financing is really based on the buyer’s credit rating,” Jones said.
Some banks own or partner with online providers. J.P. Morgan has its own business settlement network, online at Xign.net, which offers suppliers a Pay Me ASAP option for early payments. Santander Group’s Abbey U.K. Corporate Banking subsidiary partners with OB10, an e-invoicing network that in turn has partnerships with PrimeRevenue and Taulia, both of which sell supply chain finance platforms that buyers can use to offer early payment discounts to their suppliers. Taulia and another competitor, Orbian, say their platforms don’t require direct involvement from banks, while PrimeRevenue allows multiple banks to participate.
Pay as you go
Karyo said he rejected bank receivables financing because it required a yearlong contract that would tie up all of Catamount’s receivables, rather than letting him finance a fraction whenever he wanted. The Receivables Exchange does require applicants to submit financial information in its online approval process, but Karyo said it was “pretty easy,” and a decision came in two weeks.
Most of the work is in preparing the documents required to set up each auction. “I wouldn’t put all my receivables in there because it would be too expensive,” Karyo said. He estimates that all of last year’s auctions cost around $7,000.
There is a bit of an art to running a profitable auction. Karyo said the best candidates are slow-paying but reliable customers, and only large invoices are worth the time and expense. If the user auctions the receivables of a customer that turns out to be unreliable, it might have to buy back the assets, and its reputation with bidders -- which are anonymous but are typically financial institutions -- could suffer. Karyo said he has cut his financing costs half a percent to 1.5% as investors have come to trust the reliability of Catamount’s customers.