Closing the Payment
Gap in Supply Chain
Finance

In the global economy, where commercial agreements are hotly contested, payment terms have a significant impact on supply chain stability and sustainability. “Balancing the needs of buyer and suppliers is critical, and it generally involves trade-offs between profitability on the one end and capital investments in working capital on the other,” says Ovizikhungo Sicwetsha, Pan Africa Head of Short-term Finance at Absa CIB. “Optimising payment terms and fast-tracking cashflows is key on both ends. This is where Supply Chain Financing solutions bridge the gap.”

Supplier financing solutions enable customers to offer their suppliers faster payments terms. “Broadly speaking, the supplier will offer their invoices to the funder (the bank) for settlement within two to three days, and the bank will be settled by the buyer at the agreed term,” Sicwetsha explains. “This helps the supplier to unlock the cash for the continuity of their business.”

From a supplier’s point of view, the sooner the cash flows, the better. Suppliers tend to be smaller, less funded businesses, while the anchor (or buyer) tends to be a bigger, well-funded entity. The timing of this cash flow is sometimes a matter of survival to the suppliers or a matter of getting to their next order. And because of their size, it can be difficult to generate the required funding on favourable terms.

“What generally happens in a one-on-one deal is that the supplier provides the goods to the anchor, which is the larger of the two parties,” says Sicwetsha. “Under the terms of the deal, the supplier delivers the goods and the anchor typically pays them within 30 or 60 days, depending on the terms. But you often have a situation where the smaller (the supplier) has provided the ordered goods to the bigger guy (the anchor), and the smaller guy sits waiting for the invoice to be paid. During that time, they’ll also have other orders that need be to fulfilled, so there’s a significant cashflow gap between delivering the goods and getting the money.”

Supplier Finance bridges that gap for the suppliers. It enables them to get to their cash quicker, and at a reasonably cheaper rate than their own credit score would allow.

Absa launched its Supplier Finance program more than five years ago. Since then, other local and global banks have also made the solution available in South Africa and other African markets.  “By and large, these programs have a T+1 to T+3 time lag to the cashflow after the offer has been made and accepted,” Sicwetsha says.

But while that’s better than having to wait 30 or so days for payment, it’s still not fast enough in the modern economy.

Absa’s Supply Chain Finance team has plugged that gap with an innovative new trade and working capital solution that allows suppliers to accelerate the collection of their trade receivables through a fully automated system.