Financing B2B Trade At The Point Of Production

From trade credit to external trade financing facilities, there are myriad ways buyers and sellers can inject capital into their B2B trade workflows in an effort to support the financial health of either side. But assessing the right way to finance business trade can be a complex matter, and it isn’t always free from controversy.

Among the most divisive topics of the trade finance arena is whether initiatives like suppliers selling on trade credit or buyers’ initiating external financing programs actually promote large corporates’ continued habit of delaying payment to small suppliers. While proponents say the financing can help alleviate suppliers’ cash flow pressures, some critics argue it always comes at a cost to the vendor and perpetuates less-than-ideal payment habits among corporate buyers.

Sandra Nolasco, co-founder and CEO of Twinco Capital, a supply chain financing FinTech, surprisingly said she agrees with the latter side of the debate.

In an interview with PYMNTS, she, alongside fellow Co-Founder and Chief Operating Officer Carmen Marin, discussed the opportunity for supply chain financing solutions to tackle the financing opportunity much earlier in the B2B trade process and explored how the offering can present a value proposition for both buyers and suppliers without reinforcing negative habits.

An Earlier Financing Opportunity

While traditional supply chain and other trade financing efforts target the invoice, Twinco Capital, which recently announced a funding round, is offering a solution that steps into the picture earlier along the trade workflow. The company works with corporate buyers that wish to initiate a financing program with their vendors and offers those suppliers to access financing on their purchase orders, not their invoices.

“Traditional supply chain finance methods are to fund the invoice, and therefore, only the payment terms,” explained Nolasco. “Funding the purchase order means reducing the financing costs imbedded within the whole chain, not just shifting the burden from the buyer to the supplier.”

By financing at the point of purchase order, she argued, small vendors can access the financing they need to procure raw materials and actually produce the goods to fulfill the order. Tackling working capital pressure from the beginning of the production cycle can strengthen their financial position before a business sends out an order and exposes itself to the risk of delayed payment.

This kind of financing can work in harmony with other financing methods in place, added Nolasco, but smaller businesses, especially those in emerging markets, are often left without many options to finance their production when traditional banks are unable to underwrite small-scale borrowers. As Marin explained, purchase order financing can be used as an ongoing financing method throughout the trading process, and it can indeed be used to finance invoices as well. Or it can be used in tandem with existing, external financing solutions, although businesses may find value in being able to consolidate their trade financing providers.

Buyer-Supplier Benefits

Among the biggest criticisms of certain financing models is that they may sometimes benefit only one side of the B2B equation — more often than not, it’s the large corporate buyer.

According to Marin, purchase order financing presents significant value to both buyer and supplier, and it can strengthen the overall B2B relationship as well.

“Businesses can have the best of both worlds,” she said. “The buyer is the one actually launching the finance program, offering it to their suppliers whether they want to finance their purchase order or their entire supply chain. They’re decreasing financing costs and driving the conversation to get more supplier reliability.”

Because Twinco Capital is directly financing the purchase order, those corporate buyers do not have to take on the risk of paying a vendor that fails to deliver goods as agreed. Instead, by financing production, they’re promoting the financial well-being of their vendors, while also strengthening overall production of their supply chains.

Any financing tool bares risk, and while purchase order financing may not promote late payment habits, it may not promote more responsible supplier payment habits, either. Still, expanding the opportunity to access working capital at various points along the B2B trade cycle is an important part of promoting healthy supply chains. By injecting funds earlier in that flow, said Nolasco, the supply chain finance market has an opportunity to diversify.

“There are a lot of supply chain finance solutions out in the market, but most address the tail-end of supply chain finance, once the invoice is issued,” she said. “There is not a lot of option on the production side of the supply chain.”