A New Delhi-based start-up has spotted an opportunity to use technology to increase the savings of large buyers and improve the working capital efficiency of their suppliers.
The principle itself isn’t new—a discount in return for an earlier payment—but the use of technology is.
Priority Vendor Technologies Pvt. Ltd was founded by Kunal Agarwal, a Harvard graduate, and Nipun Kohli, a computer science engineer, in 2015.
Priority Vendor’s cloud-based platform aims to optimize the cash discounting process between small and medium enterprise vendors and large enterprises (buyers). It maximizes buyer savings and enables the vendor to receive early payment, shortening the working capital cycle.
Within a year of its launch, Priority Vendor has grown to service 45 large companies, including Jubilant FoodWorks Ltd, Godrej Consumer Products Ltd, Dabur India Ltd and Marico Ltd. Around 22,000 vendors are using the platform to get early payments.
Typically, big buyers spend Rs900-1,000 crore across 500-800 vendors a year. Priority Vendor aims to rope in 200-300 companies as clients in the next two years, creating a potential pool of Rs2-3 trillion of invoices being raised on the platform annually.
“Earlier, the (cash) discounting happened at the mutual consent of my supplier and me (the company)—the company would tell the (cash) discount rate, which would typically be the same rate for all the vendors. But now, Priority Vendor has come out with the technology solution, where the involvement of the company is almost nil," said Ashok Jain, vice-president, finance, and company secretary of Dabur India.
Dabur works with almost 1,000 vendors, of which 20% are using Priority Vendor.
Jain hopes that at least 50% of Dabur’s suppliers will soon be on the platform.
“The technology has made it more of a supplier need-based process. If they (suppliers) need the funds, they can come to the platform and they can bid for the discount. The buyer has a choice to accept or reject the discount offered and get higher discounts from certain vendors too," said Jain.
According to Kohli, the idea of Priority Vendor came from his and Agarwal’s previous start-up in the logistics space. The start-up was perennially strapped for funds, but there was no way to receive payments early from its customers, even in return for a discount. “So, if we needed money, we had to go to the banks to borrow at a higher rate (of interest)," he said. The duo thought of a start-up that would automate the process of cash discounting.
Priority Vendor integrates its own software with the buyer’s resource planning software and also on-boards the vendors onto its platform, which uses artificial intelligence to dynamically calculate the discount rate based on various data points, such as supplier behaviour, supplier’s participation record in offering discounts, supplier’s cost of capital and the buyer’s size.
Vendors can access a dashboard that lists outstanding invoices against which it can adjust the discount or agree with the system’s recommended discount rate before sending the offer to the buyer.
Once the vendor approves the discount rate, it will reflect on the buyer’s screen. The buyer can choose to accept or reject the offer. This way, the buyer also improves its operating margin.
The company claims that typically the buyer is able to prepay at an annualized rate of discount that is double the opportunity cost of investing an equivalent amount in a liquid asset, which usually offers 7-7.2% annualized return.
HT Media Ltd, Mint’s publisher, is also a client of Priority Vendor.
For every 100 invoices put on the system by the buyers, 35 get picked by a vendor to offer discounts to induce a prepayment. On average 40-45 days of credit period, the buyers are able to prepay 23 days prior. Priority Vendor monetizes its service by charging a certain percentage of the saving or the discount that the buyer avails of via the platform. It declined to disclose the percentage number, but said that it varies across clients.
Its revenue depends on the number of invoices that get discounted, which the company expects to grow fivefold in the next year. The company refused to disclose the number of invoices uploaded on its platform, the average value of the invoices and the average rate of discounting that takes place on the platform.
Invoice discounting is seeing some technology play in India. For instance, KredX (Minions Ventures Pvt. Ltd) has created a portal for small business to sell their unpaid invoices to buyers or financiers, including banks, non-banking financial companies, wealth managers and retail investors. KredX raised $6.25 million in a series A round from Sequoia India and Prime Venture Partners in October.
While, invoice discounting is an age-old practice among businesses, the market for start-ups in this segment is huge, says Amit Somani, managing partner, Prime Venture Partners. “Almost 56% of the small businesses in India face working capital issues, either due to late payment of invoices or (due to) unavailability of bank credit. So, technology (led start-ups) are creating easier access to working capital for such businesses and making the process more efficient and faster," Somani added.