B2B Marketplace Trade Finance: Dynamic Discounting & Supply Chain Finance

Adding trade finance to the B2B marketplace can bring substantial benefits: it builds customer loyalty, strengthens supplier relationships, and bolster the health of the supply chain. In case you decide to support your suppliers with early payment solutions, you need to make other choices along the way, such as which type of funding model to use. What if you want to allow your suppliers the benefit of multiple options? What’s the best way to move forward?

Because there’s always a working capital need, B2B ecommerce platforms that integrate trade finance solutions solve multiple finance issues on many levels for both suppliers and buyers. Suppliers spend time and money creating products for shipment, whereas buyers spend time waiting for those products to arrive to convert them into cash for their business. The waiting time on average is six months, meaning that parties, while expecting cash flow, can miss on opportunities that could have otherwise contributed to their growth and development. However, supporting suppliers with early payment solutions can help address those issues, thus reducing the likelihood of disruption to your business. The trade finance options that we’ll discuss in this article are not exclusive to B2B marketplaces, so you can incorporate them into any B2B ecommerce platform.

Types of Early-Pay Solutions

There are several types of early payment solutions that you can offer your suppliers: virtual cards, dynamic discounting programs, and supply chain finance. We’ll go through each in more detail below.

Virtual Cards

Virtual cards, or v-cards, although a relatively new phenomenon, have been growing across many industry verticals, including manufacturing, government, healthcare, insurance, and so on. Despite card payments being predominantly a feature of B2C commerce, B2B card solutions have been continuously getting traction.

A virtual card is typically assigned with a unique card number that is generated on-demand online and can be used for virtually any category of expenditure with multiple possibilities of controlling a transaction and its automation. Because virtual cards can be easily integrated with any third-party business tools, such as “Procure-to-Pay” systems, buyers benefit from the transparency of their spending: they can efficiently and effortlessly track payment flows and other related data like invoice numbers, cost centers, and so on. Such visibility greatly facilitates the accounting reconciliation of payments. Moreover, virtual cards are often accompanied by deferred payment, which helps both parties to avoid resorting to the alternative financing solutions such as factoring. This way, buyers have an opportunity to reduce their need for working capital, whereas suppliers are guaranteed to be paid earlier.

Dynamic Discounting

Some accounts payable automation vendors offer dynamic discounting as part of their platform suite. Dynamic discounting is a collection of methods that gives the supplier the flexibility to collect payments from buyers earlier than the due date in exchange for a discount. The discount rate is typically a sliding-scale annual percentage rate (APR), which varies based on the payment date. Otherwise, the supplier can define discount tiers based on when the buyer chooses to pay. For example, if the first tier is a term of 3% 10 Net 30, it means that if the buyer pays the invoice by day 10, they can deduct 3% from the invoice price. Similarly, if the second tier is 4% 20 Net 30, it means that if the invoice is paid by day 20, the buyer can deduct 4%, and so on.

Unlike supply chain finance (which we’ll discuss in more detail later in this article), in dynamic discounting, the buyers finance the suppliers by enabling them to receive funds early on their terms: the suppliers choose the invoices they want to accelerate and how early they wish to be paid.

Some source-to-pay vendors, such as Taulia and Basware, among others, extend their trade finance options to include third-party funding solutions, commonly referred to as supply chain finance.

Supply Chain Finance

Supply chain finance represents the bank-funded early payment solutions, where buyers pay the invoice at maturity into the bank’s remit-to account. Supply chain finance is typically accompanied by a terms extension program, which allows buyers to enhance their working capital by improving Days Payable Outstanding and suppliers by accelerating their receivables at a much lower cost of capital.

The supply chain finance solutions aim at minimizing financing expenditure and improving the efficiency of business processes. Such solutions connect various parties involved in a transaction, such as buyers, suppliers, and financial institutions.

The typical supply chain finance workflow includes the following stages:

  1. The supplier initiates the invoice of provided goods/services for the buyer and sends it to the financial institution’s supply chain finance platform
  2. The buyer approves the invoice using the same platform
  3. The financing institution releases the payment against the received and approved invoice
  4. On invoice maturity, the financial institution debits the payment from the buyer’s account

Financial institutions can leverage the supply chain finance platform to quote their bids on the factoring units and allow sellers to choose the best suitable bid.

Which Model to Choose?

Choosing between the two is not necessarily the only option. Conversely, you might opt for using and taking advantage of both models for your B2B marketplace. One way to go about it is to work with two different providers, each offering either dynamic discounting or supply chain finance solutions; however, that’s not always efficient -- it requires separate provider agreements, which might result in a disjointed user experience. The other option is to work with a single provider that offers both third-party and buyer-funded solutions. This way, suppliers can access both types of finance within a single platform without having to toggle between the solutions.

The benefits of using two models are plenty:

  • For buyers with seasonal demand fluctuations, taking advantage of dynamic discounting programs during demand peaks is essential because this way, they can employ the loose cash and improve gross profit margins; at other times, during the troughs, buyers might prefer to deploy cash elsewhere and switch to third-party funding instead.
  • Using two models can help streamline the onboarding process for suppliers of all sizes, thus enabling them to have a simple cash-collection experience with relatively predictable cash flows.

Conclusion

Making use of both supply chain finance and dynamic discounting will ensure your supply chain’s health across different economic cycles. Fortunately, there are solution providers that can guarantee the seamless employment of both models. The only thing you need to ensure is the flexibility of your marketplace B2B ecommerce platform and its ability to easily integrate with different third-party solutions.

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Marina Vorontsova
Technical author and eCommerce advocate