RISK MANAGEMENT | 20 June 2023

Closing the Payment
Gap in Supply Chain
Finance

Absa-CIB-Author

Ovizikhungo Sicwetsha

Pan Africa Head: Short-term
Finance, Absa CIB

SHARE
Facebook
Twitter

Time is money for suppliers – which is why Absa’s Supply Chain Program has streamlined their Supply Chain Financing solution to enable same-day payments.

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.

Same-day Payments for SMEs

“In many instances, the supplier actually needs the cash on the same day,” Sicwetsha says. “Our Supply Chain Programme bridges that gap, ensuring that the supplier gets their cash on the same day that they submit their invoice.”

That’s a significant change, and a first in South Africa and the Africa region. “The market will typically take two to three days – or, if it’s a manual system, as long as five days,” says Sicwetsha. “That’s too long. As Absa, we wanted to make sure that the supplier – which is often a small business or SME – gets their money as quickly as possible.”

The SME angle is important, he says. “Cash is king for small enterprises,” he says. “We knew that if we could get suppliers paid as quickly as possible, we would be breathing life into their businesses. That’s very important for Absa, especially when it comes to the ‘S’ in our ESG (environmental, social and governance) equilibrium.”

By putting the focus on the buyer in these programs, Sicwetsha says Absa is helping SMEs get access to better funding at a cost that is far cheaper than they would otherwise be getting on their own.

“This is not only a win for them, but it also ensures that we keep these smaller business in business,” he says. “This angle to our programs fits the ESG strategy that Absa Bank is driving: that of ensuring that smaller businesses continue being an integral of the South African and African economy. Our Supply Chain Programme aims to help our clients – both the buyer and supplier – optimise their working capital, as they both benefit by extending (in the buyer’s case) cash outflow or shortening (in the supplier’s case) their cash collection period.”

Innovation in Supply Chain Finance

The Supply Chain Finance team collaborated with vendors to understand their systems’ capabilities see where they could support us. “And it just so happened that the functionality for same-day payments was already there, but nobody was brave enough to do it!” says Sicwetsha.

“We then worked with our tech team to find efficiencies on our workflows and changed some of our internal processes to accommodate the needed changes. A lot of that had to do with the heavy lifting in our operations environment automating manual processes and finding efficiencies in some of the existing processes. That’s how we got things moving. Our whole Supply Chain Program is now automated.”

The solution does not require both parties to bank with Absa. “We obviously encourage all participants to be in the Absa ecosystem – purely so that we can solution for them appropriately and holistically – but we know that in the world of supply chain finance the buyer does not have control over who their suppliers bank with,” Sicwetsha explains. “So we solved for that, too. As Absa CIB our clients are typically the larger of the parties, but we made sure that even if their supplier is with another bank, they’ll still get their cash on the same day.”

For Sicwetsha, the innovation process was about challenging the status quo. Why should suppliers wait five days for payment? Why couldn’t they get same-day settlements? Which of the bank’s traditionally manual processes could be automated? All these questions had to be answered by the team in order to challenge the status quo and find ways to deliver on this innovation.

“At Absa we say that we are empowering Africa’s tomorrow, together, one story at a time,” he concludes. “This supply chain solution came out of a conversation with one client, where we asked them: ‘What are you trying to solve for?’ They spoke, we listened, and we decided to challenge ourselves to and make same-day payments possible. And that’s what happened.”

Should you require further information on our Supply Chain Finance offering, please:

Absa-CIB-Author
Ovizikhungo Sicwetsha

Pan Africa Head: Short-term Finance, Absa CIB

Related Articles

RISK MANAGEMENT

Why are 2 countries are taking 95% of Africa’s blockchain funding?

Blockchain technology is revolutionising industries across the globe, driving financial inclusion, enhancing transparency, and fostering economic growth.

RISK MANAGEMENT

How to unlock next-generation talent in financial services

We often hear that there is a “war for talent” – particularly in emerging markets where the changing world of work has meant that the best and brightest now have the opportunity to move not only into exciting new types of work in technology-driven businesses, but also into businesses in places like the US, UK and China.

Podcasts

Doctor Copper’s Foreign Exchange Prognosis

The copper price is one of the best predictors of global economic and foreign exchange (forex, or FX) trends. In this episode of Coffee Break Commerce we explain why rand investors should pay closer attention to Doctor Copper.