In today’s economic environment of uncertainty, supply chain woes, and rising interest rates, maximizing working capital and shortening the cash conversion cycle is more important than ever for buyer enterprises.
Even in the best of times, a working capital lift is vital and has been a key driver for companies adopting supply chain finance (SCF) programs. With SCF, the working capital lift is typically attained by implementing a terms extension for suppliers (i.e. paying in 60 days vs. 30 days; allowing the buyer to hang on to their cash for an additional month). To offset the negative impact on the suppliers, early payments are offered through a third-party funder. However, if the supplier doesn’t choose to pay the small fee for the early payment, they will be paid full freight at 60 days instead of 30; not a great situation with an already strained supply chain.
The result of all this is the eschewing of attempts to implement formal terms extensions by buyers.
And it leads to an important question: how, then, do buyers achieve a working capital lift? Even if they have an early-payment program for suppliers (funded by a third party), under traditional SCF programs they still have to pay the financier at maturation of terms.
Up until now, there have been no good answers. The original terms have been the terms; the supplier was getting paid when the invoice said it was time to get paid.
But that’s not the case any more.
LSQ recently introduced FlexTerm as part of our SCF offerings. With FlexTerm, buyers have the flexibility and control to choose how long they want to hold onto their cash, while suppliers are still getting paid at terms or earlier (remember, suppliers still have the option to use the early-pay option on any or all of their approved invoices). The buyer simply chooses which supplier invoices they want to pay beyond original terms and LSQ takes care of the rest. This creates a working-capital lift without a terms extension and eases any strain on the buyer/supplier relationship.
By allowing buyers to choose which invoices are included in the FlexTerm option, they have the flexibility to better control their working capital. That is, when they need the working-capital lift, they can pay beyond the terms, and when they don’t, they pay at terms.
For example, if a company has 30-day terms with a supplier, FlexTerm allows the buyer to pay LSQ up to 60 days after the invoice date, if they choose.
As FlexTerm is used with Total Payments Management within LSQ FastTrack®, LSQ will direct all funds to where they need to go – either to LSQ or the supplier (if early payment isn’t taken). So not only do buyers improve cash flow, but they also gain efficiencies in their AP processes and save valuable time and resources.
Managing working capital while keeping a healthy, viable supply chain is hard. And the current economic climate makes it even harder. What’s good for one isn’t traditionally good for the other. With LSQ FlexTerm, we’ve changed that calculus. Now you can have control over your working capital while fostering a healthy supply chain.
Learn more about LSQ FlexTerm.