Construction Client Ethically Uses Payables Finance To Improve Supplier Terms
Facility Details/Solution Used To Achieve Results
Supply Chain Finance
Solving Suppliers Liquidity Needs
Many suppliers and subbies in the construction industry are feeling the pressures of constrained cashflow, our client recognised this issue and explored various options to try to establish a way of helping their supply chain, without putting additional stress on their own working capital.
The approach the client used was to survey their suppliers and subbies to establish actual needs within their supply chain and if there was significant demand for earlier payment.
A large portion of their subbies were keen to have access to earlier payment, but wanted the option to pick and choose when.
On the other hand, suppliers were typically happy with their terms, but would accept a discount if the client paid invoices immediately, these discounts ranged from 2% – 5%.
While the client was able to establish which suppliers would repeatedly give discounts for early payment, they were unable to identify a consistency when it came to their subbies early payment requirements.
We wanted to first understand if there was a need for early payments, our accounts payable team had been previously noticing an increased number of requests from subbies for early payment, and research led us to to believe that across our supply chain there was a need for early payment, and that a number of suppliers were using other financial solutions to support their cashflows
Fifo Capital provided the client a $2m Supply Chain Finance facility that could support both the suppliers and subbies requirements. They used our priority cloud-based platform to manage early payments, and used the supply chain finance facility to make the early payments.
- The client’s procurement team introduced a simple discount program with suppliers, whereby suppliers would give a “pay me now” price as well as a normal-terms price. Then, if the client wished to have the discount, they uploaded the invoice on to our platform for funding.
- The supplier discount is significantly more than our cost of finance, meaning a portion of the benefits from the discount is offset against the cost of using the finance.
- With subbies, the client uses our platform to notify the subbie their invoices are approved giving the subbie the option to be paid on normal terms (100% of what they were expecting) or earlier for a small discount.
- While the discount is small for the subbie it typically covers our cost of finance, meaning the subbies could remove the portion of debt they currently used to fund their invoices to this client.
Innovation Leads to Added Benefits
Over 30% of suppliers joined the engaged with the program, seeing it as a positive initiative. All the subbies where added to the program, and where given then ability to select which invoices they wanted early payment for on an ad-hoc basis.
- Through our platform, the client is able to also extend their terms back to us, they pay a small interest charge each time they do. This helps them better manage capital expenses and manage cash flows with more certainty.
- Suppliers and subbie discounts are considerably more than our costs, therefore the client can choose to forgo the discount to us in return for a free extension of payment terms.
- Client has a working capital solution for their business, has built a better reputation with suppliers as a ‘great’ payer, and subbies feel better appreciated, meaning the client has the best trades people on their jobs.
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