Banks and corporations are increasingly interested in tapping opportunities linked to supply chain transactions as credit availability continues to remain tight after the financial crisis of 2008, according to a report by global transaction banking solutions provider, Fundtech. The US-headquartered firm says that electronic invoice presentment and payment systems can magnify benefits associated with supply chain finance by automating a process that has traditionally been heavily reliant on paper-based and manual practices.
While banks have always been involved in providing letters of credit (LC), acting as third parties throughout trade transactions between buyers and suppliers, open account trade is becoming increasingly popular. The demise of LCs has opened the door to alternative trade financing mechanisms based on the invoice and on the electronic invoice in particular, says Fundtech.
“The twin pressures of scarce traditional bank credit and concern for supplier health are leading banks and corporations alike to explore financing options that revolve around trading and transaction activity,” said the report. “While traditional lending requires the knowledge and expertise of highly paid loan officers, transaction-based lending or supply chain finance relies on the invoice as a key document in enabling lending.”
Banks especially are in a prime position to take advantage of a growing supply chain finance market. A bank only has a relationship with suppliers in supplier-driven finance, but in the more attractive buyer-driven financing, a bank will have relationships with both suppliers and buyers. Buyer-driven finance appeals greater to banks because buyers tend to be better credit risks than suppliers and they are also responsible for managing the suppliers and resolving issues which leads to less funding risk.
So where does electronic invoicing (e-invoicing) come in?
E-invoicing benefits both buyers and suppliers and the financial institution in between. Legal and compliance issues have been a major hindrance to document automation in the past but e-invoicing networks have largely addressed this issue by ensuring that services offered in countries that are involved are fully compliant with local requirements.
Early payment discounts can be fully taken advantage of with the automation of e-invoicing as these rely on the fast and efficient processing of trade documents. To be able to approve multiple invoices for payment within a short timeframe, usually a few days, will require an automated accounts payables process based on electronic transactions.
With an e-invoicing service, a more effective dynamic payables discounting solution can be implemented. A simple discount solution, where a discount is offered if an invoice is paid within a certain number of days, tiered discount solution, where several cut-off dates can be defined or even scaled discount solution, where discounts are available on a continuous sliding scale proportional to the number of days since invoice issuance, can be effectively negotiated between buyers and suppliers through e-invoicing.
“Dynamic payables discounting is virtually impossible without an e-invoicing system to support the process,” the report explained. “That is because, in a paper world, invoices often do not even get to the accounts payable department until they are already past due, putting discounts out of reach.”
