Supplier finance: The fine print that CFOs need to understand in supply chain finance

In the complex world of supply chain finance (SCF), it’s crucial to get the details right—especially when it comes to financial instruments like Independent Payment Undertakings (IPUs) versus Irrevocable Payment Undertakings (IPUs). Despite sharing an acronym, these two instruments have key differences that can significantly impact a company’s financial statements.

What is an Independent Payment Undertaking (IPU)?

An Independent Payment Undertaking is a standalone obligation assuring the buyer will pay the supplier, independent of the contract between them. It’s a robust financial tool that provides suppliers with a high assurance of payment.

The very strength of an Independent Payment Undertaking can sometimes be its downfall. Auditors increasingly classify SCF programs backed by an Independent Payment Undertaking as debt, affecting key financial metrics like the debt-to-equity ratio and thereby altering stakeholder perceptions.

What is an Irrevocable Payment Undertaking (IPU)?

Guided by ICC classifications, an Irrevocable Payment Undertaking is a commitment from the buyer to the supplier that can’t be revoked or altered once given. While it does provide a level of guarantee, it is often conditional, tied to the delivery or quality of goods, for example.

The ICC has gone to lengths to classify the Irrevocable Payment Undertaking in a manner that usually allows it to be recorded as payables rather than debt. This subtle yet crucial difference can have a significant impact on how SCF programs are reflected on a company’s balance sheet, without the detrimental effects associated with debt classification.

The contractual basis for both is often almost identical. The actual classification can become subjective, which creates increasing uncertainty. Debt classifications can potentially raise red flags for investors and affect credit ratings, whereas payables do not attract the same level of scrutiny.

InvoiceNxt locks supplier invoices (“quasi IPU”)

InvoiceNxt integrates with the corporate buyer’s ERP system. Only once the payment of the supplier invoice is approved, and the payment date set (often 60 or 90 days before disbursal), InvoiceNxt allows suppliers to offer their receivables for purchase with a discount. When a funder agrees to buy the receivable, InvoiceNxt “locks” the specific supplier invoice, and, upon maturity,  routes the payment automatically to the funder.

The collection certainly is equal to or even higher compared with the Irrevocable Payment Undertaking scenario, however, there cannot be a doubt about the classification as payables,

InvoiceNxt provides not only based on class technology and ERP integration but also decades of experience in supply chain finance programs globally.

InvoiceNxt is an enterprise SaaS solution designed especially for emerging markets. It is focused on digitising B2B transactions between buyers and suppliers and offering fuss-free early payment in the form of supply chain financing to suppliers ( large, medium & small, and micro enterprises) regardless of how small the invoice amount is. InvoiceNxt is ESG-inclusive and aids corporates in achieving their net-zero targets.

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