Commercial cards offer supply chain finance solution
Commercial cards are providing an alternative source of supply chain finance and offer attractive extended payment dates.
Commercial cards have long been used for internal travel and entertainment functions within a company. However, cards are now being utilized as part of supply chain financing.
Suppliers can receive commercial card payments within two or three days
The inherent benefit to using cards comes from the extended payment dates. A corporate can pay its supplier within a couple of days, yet still have several weeks left before the transaction has to be settled with the bank.
Mel Gargagliano, head of commercial cards for GTS EMEA, Bank of America Merrill Lynch (BAML), says: "Suppliers can receive commercial card payments within two or three days, so they receive their money quickly. The buyer then could either have up to 55 days to pay the bank, depending on where it falls in the payment cycle, or extended payment terms beyond 55 days to enable them to maximise their working capital for a longer duration."
American Express provides the commercial cards for Deutsche Bank. When a payment is made by the corporate, American Express does not require the transaction to be settled for up to 58 days.
Björn Hoffmeyer, country manager for Germany and Austria at American Express, notes this ensures that the buyer gets paid promptly, while improving the client’s liquidity as they receive 58 days of interest-free credit.
The shift towards cards is creating new streams of liquidity for smaller businesses, as it cuts the cost of processing payments compared with the systems the corporate is currently implementing.
By switching from existing payment methods, such as cash and cheques, to commercial cards, the cost of internal processes can be substantially reduced, with one corporate seeing a $50 fall in the cost of processing each transaction. The savings are particularly significant on high-volume, low-value payments. The savings can in itself create a new source of liquidity.
Having accurate information management systems and forecasting in place ultimately leads to tighter financial control
A further benefit beyond reduced costs to the treasurer comes from the ability to look into the data that have been gathered, which cannot be collated through cash or cheque payments.
The data obtained from cards can highlight issues in the chain that could be made more efficient.
Hoffmeyer says: “As well as giving insights to help long-term forecasting, the data from these expense management systems can be invaluable for managing cash-flow issues in the short term by flagging any areas where costs are too high or inconsistent.”
This data can provide in-depth analysis on where spending is being made away from favourable suppliers, or identify trends in developing spending patterns.
BAML's Gargagliano says: “There are working-capital benefits through the levels of control and the visibility of data.”
In this respect, the buyer’s procurement team might be able to negotiate favourable terms with the most-used suppliers, enabling further cost savings.
Banks can work closely with the corporate to ascertain if the shift will work with their supply chain by looking through their existing supplier base, and identifying which are accepting cards for payments.
Irfan Butt, head of trade product and structuring for GTS EMEA, BAML, says: “We analyse the supplier spend data and propose an appropriate solution. The treasurer would know what they want to do but may be unsure of whether their suppliers will join the supply chain finance programme.
"In truth, depending on the supplier’s profile, they could even prefer to receive a payment by card.”
In truth, depending on the supplier’s profile, they could even prefer to receive a payment by card
American Express's Hoffmeyer says: “By improving visibility of outgoings, businesses can gain a better overview of all expenditure, as well as a greater understanding of potential cash pressures in the future.
"Expense management tools ensure that businesses can track trends, such as potential over-expenditure or excessive ordering. Having accurate information management systems and forecasting in place ultimately leads to tighter financial control resulting, hopefully, in more opportunities for investment and growth.”
Despite the benefits, the banks are finding that they still need to explain to corporate treasures from companies of all sizes how commercial cards could be a favourable solution to paying in cash.
“There is growing mid-market interest,” Gargagliano says. “Some corporates are learning of the benefits and want to adopt a commercial cards programme. Others need some education around how it can be advantageous to them.”
The experience across the corporates varies, as some might already be taking cards and others might be on-boarded at a later date. There are also corporates that are resistant to a change in payments being introduced.
It requires the approval across a number of businesses within the company beyond just the treasury. The procurement, accounts payable and the IT teams will have to be involved with various elements of the process, which can slow adoption or create difficulties if there are deficiencies in some internal processes.