Frequently asked questions about working capital finance
This section is designed to answer questions about working capital finance and PrimeRevenue’s global supply chain finance solution that companies and suppliers may have.
What is supply chain finance?
Supply chain finance, also known as supplier finance or reverse factoring, improves cash flow by allowing businesses to optimize their payment terms to their suppliers while providing the option for their large and SME suppliers to get paid early. This results in a win-win situation for the buyer and supplier. The buyer optimizes working capital and the supplier generates additional operating cash flow, thus minimizing risk across the supply chain.
How does supply chain finance work?
Supply chain finance offers suppliers a way to accelerate their own cash flow. Suppliers participating in a supply chain finance program have the option to get paid early – typically as soon as an invoice has been approved by a buyer. The supplier can accelerate payment on some, all or none of their receivables, depending on their financial position and funding requirements. For those receivables that are paid early, the supplier will pay a small finance charge or discount. Since the buyer is the obligated party, financing is offered to the supplier at rates that are typically more favorable because they are based on the buyer’s credit history and rating. For many suppliers, this access to a lower cost of funding is exceptionally important.
All of this occurs without negatively impacting either companies’ balance sheets. Accounting treatment for supply chain finance, when done properly, does not count as additional debt for a buyer or supplier.
- Supplier sends their invoice to the buyer following normal protocol.
- Buyer approves the supplier’s invoice and it is uploaded to the PrimeRevenue cloud-enabled platform via ERP integration.
- Supplier has full visibility of approved invoices and is notified when invoices are eligible for early payment.
- Supplier has the flexibility on whether they trade an invoice for early payment and when they do so. This can be immediately after the invoice has been approved or any day leading up to maturity. Or the supplier can simply wait until the invoice has matured to receive payment.
- When an invoice is traded for early payment, the funder receives and processes the early payment request and pays the supplier based on the agreed-upon discount rate. The funds are transmitted directly to the supplier’s bank account.
- At invoice maturity, PrimeRevenue uses the buyer’s bank account to pay the funder.
- If the supplier has chosen not to trade the invoice, PrimeRevenue will facilitate payment from the buyer’s bank account to the supplier on the due date.
How does supply chain finance link with e-invoicing systems?
PrimeRevenue’s supply chain finance platform is designed to integrate with e-invoicing systems. When combining the supply chain finance and e-invoicing processes, buyers can significantly accelerate the payment approval cycle.
Is PrimeRevenue associated with a major bank?
No, PrimeRevenue is an independent software provider, operated by finance and trade professionals with decades of experience in the Americas, Europe, and Asia-Pacific. PrimeRevenue does partner with more than 60 funding institutions, including banks, non-banks, and capital markets investors.
How quickly can I start selling my invoices?
The registration process is designed to be quick and easy. On average, companies need 48 hours to register to a supply chain finance program and start selling their invoices for early payment.
Why is a multi-funder network important?
Banks make decisions to cap funding, exit jurisdictions, raise their rates or exit lines of business based on factors outside of your control. Relying on a single bank for a supply chain finance program injects substantial risk into a program and limits the sustainability of a program.
Furthermore, most supply chain finance programs span several currencies and geographies, as well as size and types of suppliers. No single bank can support all requirements of a global supply chain finance program.
Is syndication the same as multi-funder?
No. While banks may claim to have a multi-funder solution, it is most likely a form of syndication. This is when a lead bank spreads liquidity requirements and risk across multiple lenders (banks, investors, hedge funds, etc.)
What are the issues with syndication?
Syndication presents three primary issues. First, there is pricing. With the need for coordinating and reporting among multiple funders, which all have various rate requirements, fees can be higher. Second, is the issue of transparency. There is no consent required by the buyer in a syndicated process, so the lead lender doesn’t have to disclose which other funders are involved in the program nor how much of the buyer’s funding requirements are being syndicated to other funders. Thirdly, the sustainability of the supply chain finance program still resides with a single financial institution. If the lead lender exits the funding structure for any reason, the program will collapse.
How quickly can I start selling my invoices?
The registration process is quick and easy. On average, companies only need 48 hours to register to a supply chain finance program and start selling invoices for early payment.
Do I have to change the way I invoice today?
No change is required. The existing process a supplier performs to invoice the buyer remains in place.
As a supplier, how quickly do I get paid?
The funds will be electronically transferred to the supplier’s bank account in as quickly as 24 hours after approval.
Do I need additional software or equipment to use supply chain finance?
No. PrimeRevenue’s technology-enabled solutions operate in the cloud and are available 24/7 online. Software installation is not required.
How secure is the working capital finance platform?
PrimeRevenue has made security a primary operational focus. The technology solutions are based on many layers of security, each with its own policies, controls, and monitoring. We apply the strongest security and encryption protocols on all data, activity, and transmissions across the platform. Our technology solutions are used by 60 leading financial institutions, including the largest commercial banks.
Once enrolled, can a supplier decide not to trade on the program?
Yes. The supplier is not required to trade or request early payment on any of its invoices.
How is the discount determined in supply chain finance?
Generally, the overall fee is approximately 10 times lower than similar financing solutions, such as factoring or asset-based lending.
The supply chain finance pricing or discount is based on three variables:
- Base rate, such as the LIBOR (the London Interbank Offered Rate)
- Financing spread, as determined by the funder and based on the creditworthiness of the buyer
- Servicing fee, as determined by PrimeRevenue for the setup (e.g., legal agreements, ERP connection) and ongoing management of the supply chain finance program (e.g., platform, supplier onboarding, reporting)
What is LIBOR?
LIBOR stands for London Interbank Offer Rate. It is the interest rate that banks charge one another for loans. This rate is applicable to the international interbank market and is officially fixed once a day by a small group of banks. Most methods of external funding are subject to changes in LIBOR rates – including supply chain finance.
What is EURIBOR?
EURIBOR stands for The Euro Interbank Offered Rate. It is the interest rate that Eurozone banks charge one another for unsecured loans. The rates are updated daily by 20-panel banks.
How often does LIBOR or EURIBOR change?
LIBOR and EURIBOR change daily.
What are the benefits for a buyer to set up a supply chain finance program?
By using PrimeRevenue’s supply chain finance platform (i.e., SCiSupplier), buyers are able to achieve continuous benefits, including the following:
- Gain significant and ongoing working capital improvement
- Generate free operating cash flow
- Standardize and harmonize payment terms
- Improve accounts payable efficiency and reduce administrative costs
- Reduce supplier payment inquiries through supplier reporting platform
- Reduce risk of supply chain disruptions
- Support low-cost country sourcing
- Use excess cash profitably through self-funding option for your supply chain finance program
What are the benefits for a supplier to join a supply chain finance program?
PrimeRevenue’s SCiSupplier platform provides suppliers with the following benefits:
- Early payment of outstanding receivables
- Compelling alternative to expensive factoring or bank loans
- No debt, resulting in better balance sheet metrics
- Full transparency and visibility of all approved invoices
- Reduced disputes and collection costs
- Payment visibility and certainty regarding approved receivables from specific buyers
- Non-recourse financing
What are the benefits for a funder to finance a supplier finance program?
The benefits of funding supply chain finance programs include the following:
- Having a direct relationship with the supplier/seller and buyer/obligor
- Money flows do not go through PrimeRevenue.
- Supply chain finance platform runs on highly-secured systems and is tested and approved by over 60 funding sources, including some of the largest global banks, and industry-standard audits.
- Offering a fast go-to-market strategy for banks
- Allowing banks to market supply chain finance independently based on PrimeRevenue’s platform.
- Full assistance and support to manage financing programs is given
How long does it take on average to set up a supply chain finance program?
On average, it takes 90 days for companies to implement a program. However, this varies depending on the alignment and resources of the buyer implementing the program.
Why are KYC requirements important in trade finance?
Following a supplier education session, our web-based enablement tool, SCiEnable, collects the necessary Know Your Customer (KYC) information from the supplier for the respective funder. A 24/7 PrimeRevenue support team based in the United States, Europe, and Asia is dedicated to answering all questions and providing ongoing support to all suppliers in local languages. The KYC information is required by the funder because of financial regulations and is a company identification process, including the collection, verification, and maintenance of records, such as information to prevent money laundering and fraud. Some financial institutions have different KYC requirements for different jurisdictions.
Are there countries or currencies that are restricted for supplier finance on the PrimeRevenue platform?
The platform managed by PrimeRevenue has no limitations in terms of country or currency coverage. With virtually unlimited funding capacity with more than 60 financial institutions, we allow working capital finance programs to be deployed in any jurisdiction and currency.
What is a letter of credit?
A letter of credit is a letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. PrimeRevenue’s working capital finance solutions do not require letters of credit.
What is working capital?
Working capital is defined as the net liquid assets available to an organization to meet liquidity needs in day-to-day operations. This is calculated as the current assets minus current liabilities.
What is working capital finance?
Working capital finance helps companies maximize the efficiency of their capital used in day-to-day trading operations, allowing them to extend payment terms on the buyer side and/or reduce collection times on the supplier side through third-party financing or self-funding sources.
A simple way to improve working capital relates to the timing of invoice payments and collections by companies. It is straightforward: buying organizations are focusing on increasing their payment terms or Days Payable Outstanding (DPO) to their suppliers while suppliers are looking to collect payments earlier and reduce Days Sales Outstanding (DSO). For more information about working capital finance, check out this blog post.
Why do companies typically consider supply chain finance or working capital finance?
CFOs and treasury consider this type of finance for a variety of reasons. Often, it is out of the need for improved cash flow. Either free cash flow is needed to fund a strategic initiative, such as R&D, M&A or new product innovation, or simply to improve working capital to increase enterprise value. There are several ways to free up cash for an organization. This includes issuing debt, raising equity, staff cuts, selling assets or divesting, all of which can be expensive, disruptive, temporary and time-consuming ways to raise capital. Supply chain finance allows a company to access cash trapped in its own supply chain over the long-term.
What is DSO?
Days Sales Outstanding. A high DSO number shows that a firm is selling its products or services on credit and is taking more time to collect the payments from its customers.
Formula: Days Sales Outstanding: (A /R / Sales) * 365
What is DPO?
Days Payable Outstanding. It represents a company’s average payable period and how long it takes a company to pay its invoices from trade creditors, such as suppliers.
Formula: Days Payable Outstanding: (A / P / COGS) * 365
What does PrimeRevenue do?
PrimeRevenue is a global technology and solutions provider operating the largest supply chain finance programs in the world.
PrimeRevenue’s is revolutionizing financial supply chain management by providing tools and solutions that allow companies to optimize working capital and strengthen their supply chain.
Our cloud-enabled technology solutions provide working capital finance solutions to thousands of trading partners across the globe, in over 70 countries and in 30 different currencies. More than 20,000 clients and more than 60 funders, including major financial institutions, use the product suite daily.
Our solutions encompass four different products with a wide range of functionalities. The SCiMap product analyzes a company’s spend and supply chain’s cash flow potential. SCiEnable is our enablement platform, which supports supplier education, registration, document exchange, and funder approval. SCiSupplier is a global, cloud-enabled platform that knits together a buying organization, its suppliers and funders to create easy, automated and intuitive working capital optimization. SCiCustomer is our supplier-driven, accounts receivable finance platform allowing companies to reduce their collection time by getting paid earlier.
Interested to learn more?
To obtain more information as either a client or a partner, please contact us today. A PrimeRevenue representative will answer all your questions.