The rate of adoption of e-invoicing by both payers and suppliers has failed to live up to the expectations of early proponents. Although the web-based technologies supporting e-invoicing have been available for a decade, more than 85 per cent of invoices are still printed on paper and distributed by post. While there are some notable exceptions, it is generally very hard for a buyer to impose on all its suppliers a single format electronic invoice, since each supplier will have its own way of processing its outbound invoices. A more practical approach is needed to resolve this roadblock on the migration to accounts payable (AP) automation.
Improving Paper Processing
Recognising the continuing prevalence of paper invoices, corporates are adopting a more evolutionary approach to invoice management as they migrate towards the fully-fledged forms of e-commerce. Under this pragmatic model, inbound paper invoices are scanned, data is extracted, validated and matched, and then routed electronically for approval in an efficient and timely manner. A solution like this can either be structured in-house or outsourced to a specialist provider.
Today, with efficient systems for handling paper invoices and resolving anomalies, processing times can be reduced from days to just a few hours. The solutions that stand out are those that successfully combine handling both paper and electronic invoices. The powerful barrier hindering the growth of the e-invoicing market is getting suppliers on board. With an experienced invoice management solution, however, getting suppliers onboard can be as simple as asking them to redirect their invoices (in any format, whether paper, PDF or e-invoice, etc) to the service provider who will take care of converting paper documents into electronic formats, capturing and normalising the data to suit the requirements of the payer.
Capturing Early Payment Discounts
Too many corporates are missing an opportunity to reduce their cost of goods due to their inability to capture early payment discounts on supplier invoices. This is because their AP process does not currently allow them to quickly identify those invoices where discounts are available and approve them in time to take the discount. For a small business with cash flow problems, an invoice issued to a large corporate payable in 30 or 60 days’ time can be like the smell of food to a starving man. That is why many businesses of all sizes offer early payment discounts to encourage customers to settle trade debts early.
In an open account relationship probably the most widely used trade term is ‘2/10 net 30’. This means that if a trade debtor pays an invoice within 10 days of issue date they can deduct a 2 per cent discount and pay just 98 per cent of the face value of the invoice, resulting in a reduction in cost of goods. This discount equates to a massive annualised interest rate of 36 per cent per annum, assuming these invoices are paid on the 10th day, but serves as a powerful reminder of the high value a business places on getting paid quickly and improving its cash flow.
There are few treasurers today who can find a safe investment offering a return of 36 per cent per annum, so it is easy to see that taking advantage of early payment discounts can be good use of a company’s valuable cash resources. The fact remains, however, that many AP departments are not structured to take advantage of these favourable terms, since it currently takes more than 10 days to process and approve an invoice for payment, hence the opportunity is missed.
An invoice management solution able to submit validated and matched invoice data to a corporate’s ERP within a few hours of receipt of paper invoices is of value to the payer and the supplier. The payer can capture early payment discounts and the supplier gets paid within 10 days, with significant cash flow benefits. Even in those situations where today suppliers are not offering early payment discounts, efficient invoice management capability positions a corporate to be able to negotiate dynamic discounting with its supply chain. In fact, Gartner predicts that by 2009 at least 30 per cent of the Global 2000 will have adopted dynamic early payment discounts as a standard practice in AP (source: Gartner, June 2005).
Collaborative Working Capital Management
Normally, the drawback of early payment discounts is that the corporate making the early payment has to use its own cash to capture this benefit. A collaborative enhancement of this model is to work with a financier who bridges the funding gap in order to solve that age-old timing conflict between buyer and supplier, whereby the buyer wishes to delay invoice payment as long as possible while the supplier wishes to get paid as soon as possible.
Specialist financiers have been among the first to participate in this structured financing opportunity. The combination of web-based technologies and supportive financiers now enables a supplier to get paid early without using the cash of the payer to make this early payment. At the maturity of the invoice, the payer reimburses the financier’s advance. There is a range of financing options, such as non-recourse finance, achieving a valuable off balance sheet source of funds for the supplier. This is possible, with the payer’s full agreement, where the invoice management solution has already achieved a successful match of the invoice against a purchase order (PO) and, ideally, a goods received note (GRN). The matching of these vital elements to a trade transaction enables a financier to reduce his risk in making an advance, since he has a high degree of confidence that the goods being financed have been ordered by the payer and have been received by the payer, which greatly increases the likelihood that the payer will in due course pay for the goods.
In the trade model where the supplier is a SME and the buyer is a large corporate with a high credit rating (for example, A-1/P-1 for commercial paper), there is an exciting opportunity for interest arbitrage between the credit quality of the payer and the supplier. Importantly, all parties to the transaction can benefit here. The financier, having reduced the risk of non-payment of the invoice through automated matching against a PO and GRN, can afford to offer competitive rates of interest to the supplier for early payment of the invoice. This would typically be finance at a rate of interest lower than the supplier might normally achieve on early payment discounts, factoring facilities or overdrafts. This structure therefore reduces the cost of funds for participating SMEs and enables them to free up working capital quicker.
This ‘belt and braces’ approach of using valuable trade data from both the buyer and the supplier enables the financier to minimise the risk of fraud, a longstanding problem in conventional factoring where more than one supplier has been known to present false invoices and request finance.
It will not have escaped the thinking of specialist trade financiers that under the new Basel II requirements, structured lending facilities which achieve a high degree of transactional control and make use of techniques, such as credit risk transfer, qualify for lower capital reserve requirements than unstructured credit facilities to lower credit quality borrowers, such as SMEs. As a result, by transferring risk to large payers with strong credit ratings at the top of supply chains, the financier can achieve a lower Basel II capital requirement.
Enabling the Payer to Extend Trade Credit Terms
In some cases, financiers are allowing payers to extend their trade credit terms. Under this model, the financier pays the supplier within a few days of invoice approval, but the payer is allowed to delay settlement of the invoice until a later date, thereby achieving, for example, 30 days additional credit. This is effectively a reward for giving the financier visibility to the approved invoices, so that the financier can offer early payment finance to suppliers, but the payer should expect to be charged interest for the additional days credit taken (albeit at a preferential rate reflecting the financing structure and his own credit worthiness).
Market Adoption Drivers
Given the availability of web-based technologies and invoice management services capable of processing these transactions on a large scale, the way is now open for commercial banks and trade finance banks to adopt this structured finance approach. This new source of revenue could prove particularly attractive to banks at a time when they are in search of value-added services to shore up their revenue streams from other more traditional areas. For example, the new regulations on EU payments and the infrastructure investment required to comply with SEPA (the Single Euro Payments Area) initiatives are resulting in significantly lower profitability forecasts for many EU banks in payments and cash management.
It may prove to be good timing that, just as forward-thinking banks are looking at combining their cash management and trade finance lines of business, they are now in a better position to exploit the arrival of purchase to pay solutions on a scalable basis, through white-labelling partnerships with service providers.
Conclusion
Eventually, end-to-end e-invoicing looks set to become widely adopted and we remain fully committed to this important market evolution. In the short and medium term, however, the successful invoice management solutions are proving to be those which handle both paper and electronic invoices, enabling the migration from paper to electronic, at a pace to suit each organisation.
In recent times, a handful of pilots have been launched using structured supply chain finance models. But, to date, these have generally failed to reach critical mass. They have typically been hindered by the shortage of electronic invoices in the scheme or by the difficulty of achieving an efficient process for approving matched invoices in a short enough timeframe to allow a sufficiently long credit period before the maturity date of the invoice. This conundrum can now be solved through the combination of an accurate and timely paper and electronic invoice management solution and innovative financiers ready to help buyers and suppliers extract maximum value from the financial supply chain.