|PAYABLES FINANCING - INCREASE DPO
How DPO can be extended using Premium Technology's Payables Financing Solution
Buyers will always try to pay its suppliers at a later date (increase buyer's
DPO) because they are trying to extend its access to its working
capital. The problem with extending Buyer's DPO is that it can put a huge burden on the suppliers. Premium Technology's
Payables Financing Solution will allow buyers various financing solutions
that will allow them to ease their payment terms, while the supplier could receive advanced payment at a discounted rate. This happens when a buyer goes to its bank (FI) and asks
them to finance its suppliers, but of course it's stipulated that the buyer promises to pay for the invoices (
Reverse Factoring / Supplier Finance). The rate the supplier receives will be much lower
than what they would get if they went for traditional financing, but because he is leveraging the credit of the buyer's payables, the lender is willing to give better rates.
Also by extending the buyer's DPO and its access to its working capital, it reduces the overall level of working capital the buyer is required to have on hand.
There is no financing extended to either party. The financial institution will just automatically debit the buyer's account on the scheduled and agreed on date (T&C payment
date) and pay off the supplier's invoices. Only the financial institution will make money through the transaction fee it will charge the buyer.
The financial institution offers Payables Financing to the buyer. With Payables Financing, it will allow the buyer to pay for the invoices later than the agreed on T&C payment
date, which will effectively extend the tenor date. The bank will promise to pay the supplier for invoices that have been guaranteed by the buyer on the original T&C payment date
(unless the bank offers the suppler early financing). The FI will charge the buyer fees or interest for the financing; in exchange, the buyer will extend its access to its working
capital. Through this scenario the buyer extends its DPO without negatively impacting its suppliers.
Supplier's can benefit from Payables Financing because the financial institution could offer to pay the invoices earlier than the original T&C payment date. The financial
institution is willing to do this because the buyer has already guaranteed payment for the invoices (see scenario #2), so the financial institution can further make money by charging the
supplier a fee or interest for the early payment. The early payment would give the supplier earlier access to working capital which would offset the cost of the transaction fee.
Another benefit to suppliers is that the bank guarantees payment on the T&C payment date. So the supplier does not have to worry about non-payment from the buyer or the buyer delaying
payment, which will unfortunately increase the supplier's DSO
(but increase buyer's DPO).