Many companies are looking for ways to make their supply chains more resilient whilst saving costs.
A popular strategy is to pay suppliers early
Improved relationships: Early payment demonstrates a level of trust and reliability that helps to build stronger partnerships over time. By paying suppliers early, buyers can differentiate themselves from their competitors and suppliers are more likely to prioritize buyers who pay early, resulting in better service, faster delivery times, and higher quality products.
Working capital for the supplier: Most suppliers cannot afford to wait long before being paid. For suppliers, early payment means that they receive cash sooner, which helps to improve their financial stability and reduces the need for expensive financing options. In turn, this improves their margins and ability to meet the price points that buyers might be looking for.
Early payment discounts for the buyer: If buyers can pay early at shipment instead of after delivery, many suppliers will agree to additional discounts on the cost of their goods. This enables buyers to save money and improve their financial position.
Did we say "payment at shipment"?
Most buyers are only willing to pay suppliers after they have had a chance to inspect the goods and match them against the specifications on the purchase order – and this is how traditional supply chain finance programs or dynamic discounting programs deliver their early payment.
Cash is only available to pay suppliers once buyers have approved the invoice for payment. But if that is after delivery, then it is not really an early payment. This is especially true if an SCF program is launched at the same as the buyer negotiates longer payment terms. Traditional SCF programs are good for the buyer but do very little to help suppliers.
There is a better way
Most buyers are not in a position to approve an invoice for payment before they see the goods. There are three reasons:
It is hard to get visibility on whether the goods have been shipped
There is often no visibility on whether the supplier is actually shipping what has been ordered and
Invoice approvals are usually all-or-nothing – so all the risk is on the buyer.
But imagine a buyer could get real-time, data-driven visibility on what is being shipped and then be able to manage the risk of early approval by approving only part of the invoice for early payment (eg: 90%). The percentage to be approved would be dynamic and reflect the buyer’s risk appetite.
With this approach, many buyers should be prepared to approve invoices from suppliers at shipment, especially if this strengthens the supplier relationship, earns money via additional discounts and benefits the supplier.
This approach (payment at shipment) is also known as “cash against documents” or “CAD”.
It is a payment term that has been used for many years in international trade.
The buyer pays cash against documents that the supplier provides as evidence of what is shipped. In international trade, this often involves banks as intermediaries. CAD is often considered expensive and slow, mostly as it relies on original paperwork that is couriered between suppliers, buyers and their banks.
PrimaTrade delivers real-time CAD.
PrimaTrade has now digitised this process and made it available via a real-time connection between suppliers and buyers which can be switched on without the need for a heavy IT project.
PrimaTrade’s solution delivers CAD in real-time and creates a win-win for both buyers and suppliers.
It combines the tried-and-tested principles of CAD with traditional SCF.
suppliers upload scanned copies of invoices and shipping documents,
which are then digitised by the supplier via a powerful OCR engine.
Suppliers match the shipped goods against their list of open purchase orders presented on the platform.
PrimaTrade then performs an automated 3-way match of data from invoices, shipping documents and purchase orders to verify if the shipment is in line with the buyer’s expectations and
the invoice (or part of the invoice) can be automatically for early payment, the percentage being approved depending on the buyer's risk appetite.
This enables the buyers to approve invoices for payment at shipment, which can be weeks before goods arrive at the buyer’s warehouse. This is a smart strategy for buyers who want to improve supplier relationships, take advantage of early payment discounts, improve cash flow, reduce risk, and gain a competitive advantage.
Moreover, the cash flowing to suppliers can come from third party funders combined with the buyer's own excess liquidity.
To find out more, including how PrimaTrade is already helping large retail brands to achieve supply chain visibility and strengthen supplier relationships via early payment, please visit www.prima.trade to sign up for our company updates or book a call with one of our representatives here.
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