Pcards as a cash flow alternative

Drew Hofler at Ariba looks at how Pcards could benefit the complete financial supply chain by improving working capital.

 

Small to mid-sized suppliers (SME) and those with longer cash conversion cycles - the lifeblood of many supply chains - cashflow is the most immediate risk to an otherwise healthy business model in the current environment. A recent credit-crisis survey by the Association for Financial Professionals reveals that up to 63% of companies with under $1bn in revenues depend on secured and unsecured lines of credit for their short-term cash needs. Unfortunately, as we have seen over the past year, and especially the past few weeks, this is exactly the type of credit that is becoming less and less available.

So what is a supplier to do? Know your options. Traditional bank offerings of secured and unsecured lines of credit and other such sources of short-term cash are drying up or becoming more expensive.

Suppliers who can no longer access what used to be relatively cheap sources of capital can often increase their cashflow by accepting Pcards (as well as the more traditional forms of financing such as factoring companies).

With Pcards, or purchasing cards for instance, a company will issue cards to employees through say Mastercard, Visa or Amex that have pre-set limits and specifications around what can and can't be charged on them. The bill is automatically sent to the company and the company can customise the level of detail they see for charges.

So on your monthly credit card bill, you see the name of the company you charged and the amount. Companies can see level 2 or 3 data if they want , meaning if an employee stayed at a hotel, they could see the breakout of room charges, meals, tax, etc. If they took a customer to dinner, they could see what they had and if they had alcohol - many companies won't pay for this.

But such cashflow does not come without a price. Pcards generally charge a 2%-2.5% fee, which can amount to a 24%-36% annualised cost of capital (a primary reason why Pcards have traditionally not been used for higher spend in better times). Factoring also enables suppliers to access the value of their receivables, but depending on the particular 'factors', this too can come at a high price.

Buyers with strong cash positions have an opportunity to utilise their cash lucratively and become 'the bank' for their supply chain. Giants like GE and Dell have been doing this for years, using their own cash to finance suppliers early payment at rates that are far less expensive to suppliers than alternative forms of financing, but at the same time are far more profitable to themselves than alternative short-term cash investments.

If a buyer has the cash sitting somewhere earning 0.5% (treasuries) or 2%-3% (money markets), why wouldn't they offer early payment to a supplier in exchange for a discount equalling 10-16% APR? For a supplier paying 20% or more, and in vital need of cashflow, that's a bargain.

And it's a win-win for both parties... particularly when such collaboration is facilitated by network technology which allows the thousands of individual suppliers early payment ‘conversations' to scale for the buyer and gives the supplier the ability to access early payment at the click of a button.

If buyers and suppliers fail to get this situation under control, the crumbling of supply chains - and their repercussions in employment, tax revenues and GDP - could be the next shoe to fall in the ever widening financial meltdown.

Drew Hofler is the senior manager responsible for Ariba's Financial Solutions suite of products. In addition to extensive experience in banking and financial services, Drew is ACH accredited and holds Series 7 & 63 NASD certifications.