Head of Product

Xelix’s dynamic discounting technology is easy to adopt for both buyers and suppliers, works with existing enterprise resource planning (ERP) systems and can be up and running in a matter of days.

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How to achieve double-digit APRs on your cash by paying invoices early

A double-digit APR on your cash balance looks like a thing of the dim-and-distant past before the financial crisis laid waste to the banking system and delivered a decade of near-zero interest rates. But a simple technological solution to this corporate treasury headache exists that can solve all sorts of working capital problems for you and your suppliers. Counter-intuitively, it just means paying your invoices early in exchange for modest discounts rather than allowing cash to accumulate in deposit accounts or money market instruments.

Xelix’s dynamic discounting technology is easy to adopt for both buyers and suppliers, works with existing enterprise resource planning (ERP) systems and can be up and running in a matter of days.

The impact of 2007-8 is not going away soon

The financial crisis of 2007-8 is now receding into the past. But its legacy remains, even as yield curves are steepening slightly from the flatness that characterized the post-crisis period. Whilst some economies – such as the EU – are showing signs of growth, or as the UK is seeing an uptick in inflation due to the effects of Brexit on the sterling exchange rate, a return to more normative interest rates still seems a long way off. Deflationary pressures around the world remain, and recent history has shown how expectations of a rise in short-term interest rates can all too quickly fade as fast as they appeared.

This massive, historical, secular change in the interest rate environment has impacted different industries and corporations paradoxically. Large companies have hoarded cash absent attractive opportunities to invest; smaller companies have found it difficult to secure finance, either to stay afloat or to fund growth. Hoarding cash creates an investment dilemma and may create pressure from shareholders to use it or redistribute it.

New awareness of economic fragilities

While banks' capital ratios have been rebuilt, capital still does not flow as freely to where it is most needed as it once did. And the overarching lesson for financial directors is that risk now looks very different from before. There is a greater awareness of hidden fragilities in the system, so it pays to keep looking for ways that remove unnecessary counterparties.

The impact on supply chains has been keenly felt. But Xelix’s approach to dynamic discounting allows buyers and their suppliers to meet in the middle for mutual benefit. In particular, buyers who are running a cash surplus – whether continuous or seasonal – are provided with a risk-free mechanism to invest in their supply chain and generate a yield on excess funds that is not available either from bank deposits or money market funds.

Dynamic discounting beats chasing yield

For the treasury function in the buying organisation holding surplus cash, dynamic discounting offers a much more efficient way of improving returns by removing some of the need to keep chasing yield for very small marginal gains, and possibly an increase in hidden counterparty risk. It checks three key boxes for treasurers. First, it is in effect a short-term investment: you’re not locked in. Second, it’s risk-free: the invoices must be paid in any event. And third, it’s high-yield: in some cases, APRs can exceed 10% when compared with less than 1% available on most short-term savings mechanisms.

Dynamic discount reduces cost of goods sold

One way companies have sought to increase cash balances has been to lengthen payment terms, further putting the squeeze on their suppliers’ working capital for only nominal benefit. Suppliers then may need to resort to supply chain finance mechanisms like factoring, which can involve the seller taking a big haircut on the invoice value in return for early access to funds. The costs of this will ultimately be passed onto buyers through higher prices. What goes around comes around.

Dynamic discounting therefore is a way for the buyer to invest funds for better returns but in a way that enables the supplier’s working capital management. It reduces the cost of goods sold (COGS) for the buyer as the supplier’s funding situation is eased. The banks and supply chain financiers are disintermediated, and the margins that they would have extracted remain ‘invested’ in the supply chain. And the financial director at the supplier firm retains a huge amount of control over cash flows.

Suppliers gain unprecedented flexibility

The supplier’s flexibility grows dramatically, allowing them to respond in real-time to their own cash needs with only a limited impact on margins but which has no negative impact on their balance sheet. Compared with static discounts of the 2/10 net 30 variety, the window for the discount doesn’t suddenly close on the suppliers, and there is more time and leeway for the buyer to get the invoice approved so as to unlock the discount potential.

So, dynamic discounting leverages the buyer’s balance sheet and invests money back in the supply chain. By reducing the banking relationship on both sides of the supply chain, buyer and supplier are drawn closer together both literally and psychologically, creating a mutually beneficial dependency that strengthens the commercial relationship.

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