Supply Chain Finance is more than improving Cash Flow

The goal of working capital management is to ensure that the firm is able to continue its operations and has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses, but Banks present Supply Chain Financing just as a tool for improving cash flow. Supply Chain Finance (SCF) is much more. SCF means:

  • Risk mitigation. Supply Chain Finance is a tool for minimizing the risk of supply chain disruption, which is one of corporates’ biggest risks and not only for improving cash flow. Supply Chain Management solutions providers can add a lot of value if they include innovative SCF tools to minimize the risk of supply chain disruption.
  • Business Process Alignment. In the physical supply chain, risks change rapidly from the order stage to the final delivery and from one tier level to another. SCF solutions can offer services that optimize the allocation of financial resources according to the different needs, and enable the proper alignment of the financing and cash management activities with the rest of the business processes along the whole physical supply chain.
  • Collaboration. Corporations have implemented business network applications to leverage the trust between buyers and sellers. Companies that collaborate effectively across the supply chain enjoy dramatic reductions in inventories and costs, together with improvements in speed, service levels and customer satisfaction.

Supply Chain Finance adoption

Currently, only a small percentage of companies are using SCF techniques, but more than half have plans or are investigating options to improve supply chain finance techniques. Slow adoption of SCF programs does not depend on lack of demand from businesses but on the resistance of the Banking System to change the way it operates. However, some banks are putting their factoring business under the wider Supply Chain Finance “umbrella”, trying to move from a traditional product-centric approach to a client-centric strategy. But client-centricity is not about naming but about solving the customer problem.

Banks’ reluctance to adapt their services to the new needs is causing the rise of solutions that promote the investment of available liquidity in one’s own supply chain, accelerating payments and cash collections, so that early payment discounts are seen as an asset allocation alternative with higher profitability and less risk than those offered by banks. This collaboration creates a win-win relationship for members of the chain, increasing their combined financial strength.

These solutions, although very interesting, do not meet the characteristics defined above. Can we say that a company has an integrated physical supply chain if it has only optimized its relationship with its direct suppliers? What happens if there is a stock issue further down the supply chain? As the integration of the physical supply chain has advanced incorporating a greater number of tiers of suppliers, SCF solutions should do so also.

LICUOS and the new SCF

LICUOS differentiates itself from other payment platforms, banks or SCF solutions as it goes one step further, leveraging not only the supply chain itself but also the network that each individual company creates from its own daily operations in order to find potential netting cycles that can compensate commercial debts.

Through this process, companies are able to minimize the number and volume of cash transactions, and hence, the banking fees associated with the same transactions. The solution allows businesses to reduce their dependence on the traditional banking system alternatives and at the same time significantly improve their working capital and cash flow management. By applying these techniques, businesses achieve an important reduction in their funding needs and credit risk exposure.

As Enrico Camerinelli, Senior Analyst at Aite Group, said in an interview conducted by Chris Davis at TreasuryToday, “if you look at what LICUOS are offering, that is exactly the sort of direction that I think SCF should be moving in”. In B2B networks companies are buyers and suppliers at the same time.  “Since you already have B2B networks allowing companies to transmit sales orders and other types of documents between one another, why not use those networks to carry out the task of matching payments? Then companies can benefit by being given opportunities for companies to use these balancing payments and debits as collateral to receive payments on time, for instance,” says Camerinelli.

More than a SCF solution

LICUOS is much more than a SCF solution. LICUOS is the first payment platform that helps businesses reduce their debts instead of just paying them. Winner of the Innotribe start-up disrupt, LICUOS is a global B2B payment platform where businesses, including public administration and nonprofit, can compensate and pay their commercial debts, allowing them to reduce their dependence on the traditional banking system alternatives.

LICUOS´ patent-pending technology generates the most convenient and efficient A/R and A/P netting, payment and funding proposals for businesses, significantly improving their working capital financing and cash flow management activities and reducing their credit risk exposure.

LICUOS, as the first Innotribe start-up disrupt winner, will be presenting at the Innotribe tunnel on Wednesday, 18 September at SIBOS in Dubai. The aim of the Innotribe Start-up Disrupt competition is to encourage and recognize financial technology firms that have the capacity to transform the Financial Services industry. The first Startup Disrupt was organized on 25 June 2013 at Next Bank Madrid.

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LICUOS selected as Semi-Finalist for Innotribe Startup Challenge

LICUOS is pleased to announce that we have been selected as a semi-finalist of the Innotribe Startup Challenge, honouring the company as one of the most promising financial technology and financial services startups. On 13th June 2013, LICUOS will compete against 14 other startups and innovators at Innotribe Startup Challenge Showcase in New York to secure a place as a finalist for the $50,000 grand prize and continuous exposure to investors and financial institutions via the SWIFT global community.

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Innotribe, SWIFT’s initiative to enable collaborative innovation in financial services, and a panel of industry experts selected 15 semi-finalists from hundreds of applications to enter the Challenge. LICUOS will pitch its solution to a panel of the financial industry’s leading angels, VC’s and decision makers. Innotribe brings together strategists, business and technology leaders, trend-setters and trend-watchers, and thinkers interested in taking action and shaping the future.

LICUOS is a global business-to-business payment platform where businesses can compensate and pay their commercial debts. The platform provides netting, payment and funding services for accounts receivable and payable for businesses, allowing them to reduce their dependence on the traditional banking system alternatives so that they can significantly improve their working capital and cash flow management. By applying our solution, businesses from all economic sectors and sizes, including public administration and nonprofit, will achieve an important reduction in their funding needs and credit risk exposure.

Iker de los Ríos, CEO at LICUOS said “we’re proud to be recognized as one of the leading financial technology innovators by Innotribe, and believe this award will help us extend the reach and value of our community and become the de-facto industry standard for business-to-business netting and payment services”.

The winners of the Innotribe Startup Challenge Showcase in New York will receive the opportunity to attend SIBOS in Dubai where they will compete against other finalists from the London and Singapore Challenge Showcases.

Matteo Rizzi, Co-founder of Innotribe, says “I’m delighted to announce LICUOS as a semi-finalist and look forward to discovering more about the business. This year’s semi-finalists have assessed the developments and trends in the region and have identified opportunities in the market. The entrants have each demonstrated a forward-thinking and innovative approach to the financial sector and have developed start-up businesses which could have profound impacts on the future of the industry. I’m extremely excited to give LICUOS the opportunity to pitch its ideas to some of the top decision makers in the industry”.

We’d like to thank SWIFT Innotribe, Invest NI, HP, Level39, Sberbank and the other Innotribe Challenge Partners for making the Innotribe Startup Challenge possible.

For further information about the Innotribe Startup Challenge, please visit: http://innotribestartup.com/ or follow @innotribe on Twitter.

About Innotribe

Launched in 2009, Innotribe is SWIFT’s initiative to enable collaborative innovation in financial services.  Innotribe presents an energising mix of education, new perspectives, collaboration, facilitation and incubation to professionals and entrepreneurs who are willing to drive change within their industry. It fosters creative thinking in financial services, through debating the options (at Innotribe events) and supporting the creation of innovative new solutions (through the Incubator, Startup Challenge and Proof of Concepts (POCs). It is through this approach, the Innotribe team at SWIFT is able to generate a platform that enables innovation across SWIFT and the financial community. For more information, please visit http://www.innotribe.com/.

About SWIFT

SWIFT is a member-owned cooperative that provides the communications platform, products and services to connect more than 10,000 financial institutions and corporations in 210 countries. SWIFT enables its users to exchange automated, standardised financial information securely and reliably, thereby lowering costs, reducing operational risk and eliminating operational inefficiencies. SWIFT also brings the financial community together to work collaboratively to shape market practice, define standards and debate issues of mutual interest.

For more information, please visit www.swift.com or follow us on Twitter: @swiftcommunity and Linkedin: SWIFT.

FinovateSpring 2013 demo video

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We’re excited to announce that LICUOS’ demo from FinovateSpring 2013 is now live!

LICUOS was chosen as one of the 72 companies to showcase the newest and most innovative financial and banking technologies. We were given 7 minutes to give a live, real-time demo to represent our core technology.

Watch LICUOS’ CEO, Iker de los Rios, and Co-founder and Board Member, Lander Gonzalez, demonstrating the features and benefits of LICUOS´ services for businesses: Netting, Payments and Funding.

http://www.finovate.com/spring13vid/videos/LICUOS.mov

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Changing the Supply Chain Finance paradigm

Supply Chain Finance (SCF) refers to the set of solutions for financing specific goods as they move from origin to destination along the supply chain. SCF is one of the different methods used by companies to manage their working capital. In general, we can find three principal groups of solutions:

  • Negotiation of payment conditions
  • Financial institution services
  • Collaborative solutions

Inside each group, there are several specific methods but this range of solutions tries to give an answer to one of the troublesome areas explained in one of our previous post, the financing of working capital. As the access to banking credit is tighter than ever before and financing costs are rising, companies have begun to look towards other alternatives where the Supply Chain is a key element. In fact, the problem of working capital financing is not unique to crisis periods, but during these tough times companies have focused more than ever on managing their working capital needs.

One of the results of this focus has been the emergence of SCF solutions, with the overall goal of optimizing the working capital along the whole of the value chain, making it stronger and providing an alternative source of liquidity to all its members.

The first solution to address the issue of working capital funding was negotiation among different parties, with methods, such as deferred payment strategies, where the only goal was to advance receivables and delay payments. Overall payment due date negotiation between businesses is a zero sum game. Nevertheless, due to power and strength differences, the negotiations resulted always in favor of one of them, which impaired the smaller members of the chain with unfavorable payment conditions.

As a result of these problems, the solutions of intermediation proposed by Financial Institutions emerged. Factoring and Reverse factoring are just some examples. Both partially solve the problem of bargaining strength but add high costs in terms of discounting fees and interest rates. Traditionally, these solutions have been used by small and medium size enterprises to try to solve the consequences of the payment conditions imposed by larger players but, nowadays even high-rated companies are making use of them.

Exhibit 1. Financial institution services: factoring description.factoring

Nevertheless, these intermediation solutions create a huge dependency on the banking system. This has then turned into a significant area of concern for both Governments and large buyers, above all, among those belonging to sectors where the guaranteed smooth operation of the whole of the supply chain is essential, such as the food, automobile or chemical industries.

In this environment, highly characterized by the integration of the supply chains, collaborative solutions have started to grow in order to enhance the negotiation and collaboration between suppliers and buyers. Currently, only a small percentage of companies are using SCF techniques, but more than half have plans or are investigating options to improve supply chain finance techniques. Slow adoption of SCF programs does not depend on lack of demand from businesses but on the resistance of the Banking System to change the way it operates.

However, some banks are putting their factoring business under the wider Supply Chain Finance “umbrella”, trying to move from a traditional product-centric approach to a client-centric strategy but client-centricity is not about naming but about solving the customer problem. Banks reluctance to adapt their services to the new needs and offerings is causing the rise of solutions that promote the investment of available liquidity in one’s own supply chain, accelerating payments and cash collections, so that early payment discounts are seen as an asset allocation alternative with higher profitability and less risk than those offered by banks. This collaboration creates a win-win relationship for members of the chain, increasing their combined financial strength.

Given the complexities of modern financing and business to business payment techniques, invoicing including invoice automation and discount management initiatives need a framework to ensure that programs are approached on a strategic basis which bridges the supply chain, purchasing, accounts payable and finance organizations. These are some of the challenges that solution providers offering SCF and dynamic payables discounting solutions should face.

Exhibit 2. Early payment platform (example) description.dynamic_disc

In addition to this, there are other alternatives that go one step further, leveraging not only the supply chain itself but also the network that each individual company creates from its own daily operations in order to find potential netting cycles that can compensate commercial debts.

Through this process, companies are able to minimize the number and volume of cash transactions, and hence, the banking fees associated with the same transactions. These solutions allow businesses to reduce their dependence on the traditional banking system alternatives and at the same time significantly improve their working capital and cash flow management. By applying these techniques, businesses achieve an important reduction in their funding needs and credit risk exposure.

LICUOS is one of the few companies capable of offering this degree of innovative and disruptive processing. Throughout its innovative patent pending technology solution, LICUOS enables an efficient and highly secure processing of accounts payable and receivable transactions, 24/7 and in real-time, to deliver the best possible financial optimization and user experience. Furthermore, LICUOS gives businesses full control and visibility into the payment process and allows them to easily communicate and negotiate with their business partners.

The huge impact of multilateral netting on the credit risk and working capital management

Credit risk exposure and working capital financing are two of the main areas that concern businesses today. Currently these problems are being partially addressed by Financial Institutions but unfortunately they are not solving them efficiently. Banks offer, on the one hand, accounts receivable and business credit insurance to mitigate the credit risk exposure of businesses but these products are expensive and tight sales margins do not permit contracting them extensively. On the other hand, they offer short-term financing solutions to cover temporary deficiencies in funds so that companies can meet their accounts payable and other obligations, but credit is tighter and more expensive now than at any time in recent history and static discounts don’t reflect suppliers’ dynamic cash needs.

Peer-to-peer finance

Current solutions do not offer a suitable answer to the problems that businesses face. This has led, during the last few years, to the emergence of new entrants providing non-banking methods of financing to try to solve the problems commented above with a clear aim of banking disintermediation. This trend can broadly be described as “financial intermediation involving entities and activities outside the regular banking system”. Some examples of peer-to-peer finance (P2P Finance) business models that are trying to address the credit risk exposure and working capital financing problems are:

  • Peer-to-peer lending (P2P Lending) or crowdfunding platforms where individual or professional investors provide funds directly to businesses or projects allowing entrepreneurs to access funding in an easier and much cheaper manner.
  • Invoice discounting solutions that allow suppliers to obtain short term funding from their clients.

Obviously, these new channels are not substituting the traditional banking channel but they do complement it, giving businesses an alternative access to liquidity.

Additionally, not all disruptive and innovative solutions for the non-banking segment are emerging in the funding channel space. Following the same trend of banking disintermediation, new payment methods and platforms are also appearing. The new online payment platforms that are being developed are primarily focused on the individuals (P2P) or merchants (P2B) segments. When it comes to business-to-business (B2B) payments, there are some new entrants emerging that allow real time payments and provide businesses a greater visibility into the payment process, but they miss completely a much higher value-add capability such as debt multilateral netting, with which the need for money movements can be dramatically reduced, improving the system efficiency as a whole.

Although this multilateral netting process may sound extremely disruptive in the B2B payments area, it is in fact already being used in several areas of the financial sector, including interbank transactions, brokerage companies and intergroup subsidiaries.

  • Within the interbank payments, the clearest example is the Clearing House for International Payment System (CHIPS) in the United States which is in charge of processing fund transactions, particularly interbank settlements. Before effectively settling the funds, CHIPS executes a multilateral netting process of the different positions each bank has, so as to avoid mutual or cyclic payments, and reduce costs.
  • Brokerage companies and Clearing Houses perform the multilateral netting processes at the end of the day as part of their standard daily operations.
  • Multilateral netting processes between intergroup subsidiaries are also extremely common. In this segment, many multinational companies with subsidiaries in different countries and currencies utilize this methodology to save a significant amount of money.

 Multilateral netting benefits

Netting processes can help solving significant problems as described earlier. The multiple benefits that netting provides have been largely proven in other segments of the financial sector, but multilateral netting can also help businesses and governments both with their commercial debts and other financial obligations.

Multilateral netting capabilities allow businesses to only finance what is really necessary, thereby generating a significant costs reduction, at the same time that the facility to gain access to funding increases (compensating debts, companies´ financial ratios improve). Among other things, multilateral netting promotes early-payments, reducing credit risk exposure given that once the invoice is paid, the credit risk disappears.

Separately, as Lisa Pollack explains on the Financial Times´ Alphaville Operation sovereign debt net (http://ftalphaville.ft.com/2011/09/19/680436/operation-sovereign-debt-net/), multilateral netting would allow sovereign debt cancelation among countries: The EU countries in the study can reduce their total debt by 64% through cross cancellation of interlinked debt, taking total debt from 40.47% of GDP to 14.58% […] France can virtually eliminate its debt – reducing it to just 0.06% of GDP.”

The European debt crisis is the shorthand term for Europe’s struggle to pay the debts that have built up in recent decades. Five of the region’s countries – Greece, Portugal, Ireland, Italy, and Spain – have, to varying degrees, failed to generate enough economic growth to make their ability to pay back bondholders the guarantee it was intended to be. A powerful and efficient mathematical algorithm such as the one LICUOS has developed would allow the cross cancellation of interlinked debt. Even then, it would be necessary to solve a series of additional problems that are highlighted by Lisa Pollack:

  • Fungibility: “[…] sovereign debt varies along many parameters — currency, maturity, law under which it is issued, coupons, covenants…The list goes on and on, which leads to…”
  • Agreeability: “[…]  the only way to get there is to agree parameters for valuing certain attributes […] it can take years to agree on valuations”
  • Desirability: “[…] one may be holding certain assets and liabilities for a reason, whether one is a central bank, an individual, a pension fund, or an actual bank.”

These problems aside, the fact that the countries are maintaining so much interlinked debt (we can see the amount of debt in the “Eurozone debt web” developed by BBC http://www.bbc.co.uk/news/business-15748696) indicates that there is huge opportunity to solve, at least partially, one of the biggest problems Europe has.

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LICUOS, making it possible

With the problems of credit risk and working capital financing remaining unresolved by the financial institutions, a non-banking system of funding and payments has been created.

Peer-to-peer based platforms do try to provide an answer to these problems, and do so following the current trend of disintermediation of financial services, however they are not able to address the huge value-add that can be obtained through services such as debt multilateral netting. In this environment, and overcoming the shortfalls of existing solutions, we are proud to introduce LICUOS: www.licuos.com.

LICUOS is the global B2B platform that provides multilateral netting, payment and funding services to other companies that do not necessarily belong to the same group, in an easy, intuitive and automated manner.

LICUOS has developed a unique proprietary and patent-pending technology that automatically identifies and generates the most convenient and efficient multilateral netting, with completely automated payment and funding proposals that also manages all of the associated transactions that allow businesses to significantly reduce or eliminate their commercial debts.