The Difference: SCF Vs Other Vendor-Finance Solutions

SCF? Cash-discounts? P-cards? 2–10-net60? What’s the difference?

Clients that look at the vendor early payment solutions space today see three main "AP-side" solutions or arrangements that dominate the market:

1. Cash-discounts or 2/10/net30 arrangements (including variations such as 1–10-net30, 2–10-net60 etc).

2. Dynamic-discounting

3. P-cards / V-cards

These solutions are very similar in nature - the vendors collect early in exchange for a significant discount, the client pays early and captures (some of) that discount.

Quartix brings to the market a forth option - one that doesn't require the client to pay early. By sourcing the funds from an external funder, tremendous value is unlocked to both the client and its vendors.

This blog post briefly describes these four different solutions and their similarities and differences to assist the decision-making process in identifying the solution(s) that would best fit his / her organization (as the client).

Lastly, we'll discuss whether these solutions conflict with each other, or perhaps complement each other.

Cash Discounts or 2/10/net30 arrangements

Process: buyer pays immediately in exchange for an agreed discount (typically, 1%-3%)

Impact on buyer: takes a working capital hit, as it has to pay out of its own pocket. However, no integration is needed (setup on the ERP).

Impact on vendors: Receive an inflexible ‘all-or-nothing’ and often costly proposition.

Dynamic Discounting (DD)

Dynamic discounting is an automated version of cash discounts.

Process: Vendors may select which invoices (if at all) will be paid early. The shorter the time to maturity is, the smaller the discount.

Impact on buyer: here, too, buyer pays early out of its own pocket. DD implementation is invasive and requires changing processes and policies, as DD invoices change maturity date / amounts of discounted invoices.

Impact on vendors: DD is more flexible to vendors. However, discount rates are still typically high.

P-cards

P-cards (purchasing cards) or V-cards (virtual cards) are two variations of a charge card (similar to a consumer credit card).

Process: Vendors get paid instantly by the card issuer, who charges the buyer once a month for all participating vendors’ invoices.

Impact on buyer:

  • Pays on average in 15 days, in exchange for a rebate of 1%-2%.
  • High friction implementation, changing processes and policies.
  • Used to buy goods / services outside of the traditional buying process, mostly applied for low volume, indirect spend (due to high cost to vendors).

Impact on vendors: similar to the previous solutions (costly, inflexible).

Supply Chain Finance (SCF)

SCF is the only solution that does not require the client to pay early. In fact, one of its main client benefits is the ability to extend vendor payment terms to permanently pay them later (net 30 --> net 60, net 60 --> net 90, etc), improving cash flow and working capital at no cost to the client.

SCF (aka ‘reverse factoring’) is an advanced version of Dynamic Discounting that’s friendlier to both parties.

Process: Vendors may select which invoices (if at all) will be paid early. Funds to pay vendors early do not come from the buyer but rather from external (institutional) investors.

Impact on buyer:

  • May negotiate longer payment terms at greater ease, boosting its working capital at no cost.
  • Potentially gains a rebate income (“a cash discount, without paying cash!”).
  • Implementation is typically quick and frictionless.

Impact on vendors: similar to DD. Cost is often more affordable, as it’s not the buyer that pays early.

Benchmark

Comparison: Vendor Finance Solutions

When reviewing vendor finance solutions, a buyer ought to factor in its cash position, vendor relationships and organizational goals.

Cash discounts / 2–10-net30 are easy to setup, but unless the buyer is cash-rich, the bottom-line impact is small.

Dynamic discounting is similar to cash discounts, provides more flexibility to vendors, but has implementation challenges.

P-cards are a good fit for buyers with a high volume of indirect spend from multiple small vendors.

SCF boosts both buyer’s working capital and Ebitda, supports high vendor coverage (due to being vendor friendly), and easy to implement if a buyer has a commercial ERP system.

Do you have to choose?

No! Many clients use two or more AP-side solutions, targeting a different vendor segment with each solution and weighing in their own liquidity situation.

Small vendors with a low spend volume are often on cash discounts or p-cards. Although the client needs to pay early with its own cash, the volumes aren't meaningful and the client gains a nice return in exchange for paying its vendors early.

Larger vendors with higher spend volumes are typically assigned to an SCF program. This way, the client does not need to pay large amounts of cash early - it can actually negotiate to pay those vendors later - while the vendors benefit from flexible, affordable options to collect early on-demand.

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