How Traditional Programs do a disservice to Buyers and Vendors due to a lack of flexibility
Mr. Sandeep Singh owns an auto parts manufacturing business based in Haryana, India, and supplies to other large parts manufacturers as well as auto OEMs directly.
Over the two decades running his company, Mr. Singh has mastered the working capital balancing act between receivables from his buyers, often on a 60+ day credit period, and payables to his vendors, all typically on a much shorter credit period.
So when his largest customer, with outstanding receivables in crores, announced an Early-Pay Vendor Financing program, he was delighted… at first.
He, however, backed out of the program after giving it due consideration. While getting his payments early was a blessing, the program was economically un-viable for him, as his fully loaded cost of receiving Early Payments would be over 300% higher than anticipated.
Mr. Singh was paying 9% interest on his entire annual receivables, when he only needed about 50% of that in working capital through the year. Additionally, his credit period increased from 45 days to 90 days, which meant he bore the 9% interest for twice as long as before.
Mr. Singh is not unique. Today, dozens of buyer corporates run such programs, and thousands of their vendors either participate and pass on the high costs to the buyer, or back out and make their own working capital arrangements.
This is a lose-lose situation, more so for the buyer corporate, as without at-scale adoption of vendor financing, the returns are sub-par and just not worth the energy expended in setup.
How CashFlo’s customers and vendors are achieving a win-win At-Scale through Dynamic Vendor Financing
CashFlo’s platform is geared to achieve scale in vendor financing programs. This is enabled through building significant vendor flexibility, especially in three key areas:
- Rate
On CashFlo, vendors can choose their own rate, with the AI-based pricing engine providing instant feedback and sanction on the requested rate.
Figure 1 below shows actual data from vendors of a CashFlo customer – a leading Industrial Goods manufacturer in the country. This is a sample set of data (suitably obfuscated) of rates of transactions by vendors. Note that these are rates entered by vendors themselves, with over 1.2% spread between the 25th and 75th percentile, for the discounting tenures of their choice.
We observed a 1.2% variance in vendor-requested rate from 25-75th percentile.
Figure 2 below shows actual data of transaction rates from another CashFlo customer – this time a logistics major.
Naturally, the vendor base is more concentrated into logistics, but nevertheless, we see the same behavior.
Vendors choose their own rates, with a 1.5% variance between 25th – 75th percentile.
2. Volume
On CashFlo, vendors are not constrained to discount all their available receivables. This actually is beneficial to all parties as it increases systemic participation, even if at an individual vendor level, discounting of receivables may be less than 100%.
Figure 3 below shows a simple snapshot of the volume of discounted invoices for the same industrial goods manufacturing customer discussed earlier.
Vendors choose to discount anywhere between 10% – 90% of available receivables to match working capital needs.
Looking at our other case study of the logistics anchor corporate, in figure 4 below, again we see a similar larger spread for the logistics-heavy vendor base, with volumes ranging from a mere 2% of available receivables to the entire 100%.
Vendors choose to discount anywhere between 2% – 100% of available receivables to match working capital needs.
3. Timing
Another under-considered parameter is the timing of the discount transaction. Vendors enjoy this flexibility as it allows them to sync transactions exactly with their working capital requirements.
The data bears this out, Figures 5 and 6 below, for both our companies in focus showing a wide spread in the timing of requests – some vendors discount immediately upon approval of invoices, others choose to discount later in the credit cycle, only when they need the money, thereby paying for only the limited period of days they advanced.
Vendors show a wide spread in timing of requests (from 5 days to 45 days), with very few vendors to discount for the entire period
Vendors show a wide spread in timing of requests (from 3 days to 45 days), with a few showing preference to discount the entire period
Outcome
The implication of all this – Any one, or even any two of these parameters, would not be sufficient to truly drive vendor adoption.
Vendors need all three.
In absence of the above flexibility, we see vendors either 1) opting out of the vendor financing program, or 2) Passing on the additional costs of vendor financing to the buyer. Both of these outcomes are significantly detrimental to any buyer and lead to a lose-lose situation for them and their vendors.
When given flexibility on all three axes – time, rate, and volume – we see many, many more vendors transacting, at a much higher frequency, and at an aggregate higher rate and volume compared to fixed programs, a true democratization of access to liquidity. On the platform, the smallest vendors have the opportunity to take early payments on their own terms without ever having to negotiate with their buyers, and the platform’s demand-supply matching algorithm ensures vendors get a fair rate based on their needs, while the price discovery ensures buyer returns are optimized as well.
In order to create a win-win scenario and a truly long-term relationship with their vendor base which prioritizes vendor growth, buyers need to think about how they provide this much-required flexibility to their vendors along the axes of rate, time, and volume delivered through a simple digital mechanism.
In conclusion, buyers need to re-think their vendor financing strategy keeping a win-win philosophy in mind. Dynamic vendor financing is here to stay and is fast replacing archaic models of vendor financing, and there’s no better time than the current pandemic to overhaul existing structures and digitize the supply chains.
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