As any company that sells in the business-to-business market knows, at least a few big-time buyers like to throw their weight around and take some time before paying their suppliers. According to this recent article in the Wall Street Journal, the practice has grown even more pronounced over the past year or so, as credit has tightened and companies have tried to boost internal cash flow.

Ariba, a provider of spend management solutions, has several solutions geared to financial executives whose firms are getting squeezed. These systems take advantage of Ariba’s network of suppliers, which now numbers more than 200,000, says Drew Hofler, senior manager of financial solutions with Ariba. The company started by providing procurement and sourcing software and connecting buyers and sellers. As the business grew, the electronic network connecting the two parties did as well. In fact, about $120 billion worth of purchase orders flows through the network annually.

Ariba’s management realized that the network could be used as an intermediary to help buyers hold on to their cash a bit longer, while also allowing suppliers to get paid more quickly. That’s been particularly important over the past 18 months, Hofler says. “Everyone’s concerned about liquidity, because they can’t depend on credit.”

So, the company developed three solutions to help both buyers and sellers. One is a discount management solution. Using an online function, buyers can negotiate early payment terms. For instance, if an invoice is due in 40 days, the buyer can say it will pay in 30, but take a discount. The supplier can accept or reject the offer.

Of course, buyers have always been able to propose early payment terms to their suppliers. This tool allows them to more easily manage the process. The number of suppliers using the system to receive accelerated payments is up 23 percent over last year, Hofler says.

Another option is supplier financing. Although Ariba is not a financing company itself, it has joined forces with several banks and financial institutions to offer their products. A buyer can ask a bank to pay its invoice early, while agreeing to pay the bank the full amount of the invoice on the due date. The bank then tells the supplier it can get its money early, albeit at a slight discount.

At this point, the risk of default is based on the buyer’s, rather than the supplier’s credit profile. If the buyer is larger and more established, their cost of credit will be lower. When that’s the case, it usually makes sense for the supplier to take the early payment with a slight discount, rather than try to finance the transaction until the buyer’s normal payment date.

While this sounds a lot like factoring, supplier financing differs from it in several significant ways, Hofler says. For starters, the fees are much lower. And, the buyer, rather than the supplier, initiates the transaction.

Finally, Ariba offers suppliers the ability to auction their receivables through the Receivables Exchange. As the title of this service implies, a supplier posts information on a receivable it’s holding on the Exchange. The firms that supply capital to the Exchange, such as hedge funds and banks, can bid for the receivable and buy it before it’s due. “This drives the cost of capital for the supplier down to what the market will bear,” Hofler says.

Ariba’s trio of solutions is aimed at suppliers with annual revenues of up to about $1 billion, Hofler says. At the same time, buyers of all sizes can use them to hold on to their cash with less risk to their supply chain than they’d cause by unilaterally extending payment terms.

Use of these systems is growing rapidly, albeit from a small base, Hofler says. For example, the number of early payment transactions has grown 38 percent month-over-month, and firms in about 60 industries are receiving accelerated payments via dynamic discounting. Companies that are having a hard time getting external financing and are subject to the payment whims of their business partners may find the solutions worth checking out. ###