Payables Finance

Definition

Payables Finance is a form of Receivables Purchase. It is a buyer-led programme within which sellers in the buyer’s supply chain are able to access finance by means of Receivables Purchase.

Also denoted as Approved Payables Finance, Reverse Factoring, Confirming, Confirmed Payables, Supplier Payments, Vendor Pre-Pay, Trade Payables Management, Buyer-Led Supply Chain Finance, or Supplier Finance

Reverse Factoring

This term is also used to refer to a ‘softer’ variant of Payables Finance, whereby the buyer does not formalise its commitment to the finance provider to pay the invoices at maturity, but does provide information on which invoices it considers valid and correct. In this variant, the buyer may introduce its suppliers to the finance provider. The scheme is then managed as a series of factoring or receivables purchase agreements between the finance provider and each of the sellers and thus lacks the element of an unconditional and irrevocable payment undertaking that is given to finance provider in a standard Payables Finance setup. This is also referred to as import or post-shipment finance.

Business Model Description

The technique is ‘buyer-centric’ in that the buyer will typically arrange a payables finance programme with one or more finance providers in favour of its suppliers. The buyer encourages its suppliers to consider the use of this Payables Finance programme; the suppliers make an independent decision to utilise the programme.

The buyer identifies an invoice(s) or account(s) payable (on its books) for which it has given an unconditional, irrevocable commitment to pay, and the seller has the option to sell the receivable(s) (i.e. the counterpart of the buyer’s payable on its own books) and receive an early, discounted payment from the finance provider.

The finance provider relies on the creditworthiness of the buyer and typically grants the financing ‘without recourse’ to the seller. Such ‘without recourse’ relates to the credit risk or risk of non-payment by the buyer of the invoice or account payable. It is common that certain elements of recourse are retained against the seller, such as relates to breaches of representations and warranties.

The buyer will pay the principal amount owed at the invoice maturity/due date or at another agreed upon due date directly to the finance provider. If there are any dilutions between the buyer and seller, it would be resolved outside of this Payables Finance structure.

Value Proposition

The buyer receives the following benefits:

• Improved payment and commercial terms and liquidity optimisation
• Greater supply chain stability from the point of view of the buyer
• Benefit of improved operating processes through automation
• For the seller, finance raised against a strong credit rating with lower implied cost of funding than would have been obtained on its own
• Also for the seller, working capital optimisation and improved cash flow forecasting and flexibility, including the option to not finance and hold the receivable until maturity
• Provides alternative sources of funding with reduced use of credit availability from traditional banking sources
• For sellers, the ability to manage potentially significantly longer payment terms imposed by financially strong buyers
• For the finance provider offers high quality transaction-based short term finance based on the credit of a prime buyer and supporting the business objectives of both trading parties.

Customer Segments

The buyer will usually have established a Payables Finance programme with the finance provider(s) for the benefit of all or a sub-set of its suppliers acting as sellers to it

• Large Corporates as Buyers in the Physical Supply Chain. In particular buyers with below benchmark DPO. Reverse factoring allows these companies to improve their working capital efficiency by extending their DPO and improving their cash conversion cycle.

Distribution Channels

Distribution Channels are the means by which a company communicates with and reaches its Customer Segments to deliver its Value Proposition.

Customer Relationships

The parties to the financing are the seller and the finance provider.

The buyer, although it may be referred to as the ‘anchor party’ and facilitates/ helps to make available the financing for the benefit of its supply chain, is not a party to the financing. The buyer unconditionally approves the payment of the invoices or accounts payable at a maturity/due date that has been agreed upon with its seller. This approval will take the form of an undertaking to make payment of the invoice or accounts payable included in the programme.

Revenue Streams

• Fees
• Security Margin

Key Resources

• Personnel
• IT Systems

Key Activities

• The seller(s) and finance provider(s) interact in relation to the provision of finance and on-boarding procedures including KYC/AML
• The key ‘trigger’ for the provision of finance is the unconditional approval of the invoice or account payable for payment by the buyer; this may be initiated through the creation of an approved payment instruction, which is unconditional and irrevocable, from the buyer to the finance provider, or evidence of approval of the invoice
• ‘100%’ financing is the norm less a financing discount. The process may be manual, semi-manual or automated and a technology platform is often a central feature
• Electronic invoicing may play a vital role since it will usually accelerate invoice approval and the ability for the supplier to promptly discount the invoice/receivable
• The seller has the option to hold the receivable and receive full payment at maturity or offer the receivable for sale for early payment at a discount.

Risk Management

The risk management section focuses on the risks that must be managed by the business model. The risks to the business model itself can be identified with the Business Model Risk identification framework

• Default Event by the buyer, mitigated by careful risk assessment and monitoring
• Seller (Dilution Risk) handled by credit notes and offsets against invoices due for payment, mitigated by the ‘approved for payment’ undertaking given by the buyer
• General Operational Risk resulting from multiple operational requirements to perfect title to the receivables and undertake ongoing administration, mitigated by sound procedures, appropriate levels of automation and process controls
• Legal Risk from KYC/AML issues (both on the buyer and seller) handled during the on-boarding procedures and subsequent post-transaction reviews
• Double Financing, mitigated by KYC and perfection of ownership of the receivable or ensuring possession of a negotiable instrument as per the relevant jurisdictional requirements
• Pre-existing security arrangements, mitigated by waivers or their removal and completing perfection requirements or ensuring possession of a negotiable instrument
• Business Execution risk in case of lack of corporate or signing officer authority, mitigated by legal due diligence
• For such transactions or programmes it risk mitigation / risk management can also be achieved through funded or unfunded risk participations, trade receivable securitization, syndications, or by means of credit insurance.

Key Partnerships

Partnerships is the network of suppliers and partners that help make the business model work:

• Platform providers (B2B networks, e-invoicing solutions, software vendors)
• Bank or Non-Bank Funders providing funding for SCF programmes
• Credit Insurers
• Other risk management partners (FX/IR hedging)

Cost Structure

• Personnel Salaries
• Infrastructure Costs

Competitors

• Alternative Supply Chain Providers
• Alternative Forms of Financing