Working Capital

Using Tax Savings to Pare Supply Costs?

Buyer-supplier intermediary C2FO hopes for a business windfall from the GOP tax bill.
David McCannDecember 11, 2017

The economic impact that will follow President Trump’s presumed approval of the tax bill that congressional Republicans are working to finalize will surely generate a diverse collection of winners and losers. Some of them might not be immediately obvious, however.

For example, one company hoping to cash in is C2FO, which provides an online working capital marketplace. Through the marketplace, companies pay suppliers earlier than the contractually agreed date in exchange for discounts.

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Buyers (i.e., customers of suppliers) seeking such discounts provide an ongoing feed of approved invoices to C2FO, which posts them in the online marketplace. The buyers also tell C2FO how much money they’re willing to make available within a particular timeframe and what level of return they’re looking for on the up-front cash.

Suppliers that want quick access to cash can view their approved invoices in the marketplace and request early payment in exchange for discounts in amounts of their choosing. Finally, C2FO algorithms guarantee each buyer’s target rate of return while awarding early payment to as many suppliers as possible.

The service is free for suppliers, while buyers pay C2FO a monthly fee to manage the program. The transaction is between the buyer and seller, with C2FO merely acting as a facilitator. Those elements make it different from factoring, where a supplier sells discounted accounts receivable to a third party that then becomes responsible for collection.

Sean Van Gundy

Sean Van Gundy

In addition to the factoring option, cash-needy suppliers could go directly to customers and ask for early payment in exchange for discounts. However, many suppliers fear that doing so reveals a weakness, according to Sean Van Gundy, managing director of working capital advisory for C2FO. Additionally, he says, it’s inefficient to have perhaps thousands of such one-on-one conversations.

“C2FO provides a hassle-free way for suppliers to make an offer to get paid early at a time that makes sense to them and at a price of their choosing,” Van Gundy says.

What does this have to do with the tax bill?

The proposed cut in the U.S. corporate income tax to 20%, together with the prospect that companies would repatriate some cash holdings they’ve parked in countries where their tax liability is lower, presumably will result in a significant cash infusion for many U.S.-based companies.

C2FO’s ultimate hope with respect to the upcoming change in tax law is that companies will be more likely to use their enhanced cash positions to leverage discounts from suppliers.

Of course, corporate America is chock full of companies that are already cash-rich, which raises a doubt as to just how much extra business any particular company could expect to land as a result of the tax overhaul.

However, under the new tax legislation, interest on corporate debt will either no longer be tax-deductible or will be capped. “Suppliers using C2FO will see a big boost to the value of the working capital they access, as [compared with] acquiring more debt,” says Van Gundy.

C2FO aimed to buttress its viewpoint with a poll at the Association for Finance Professionals’ October conference in San Diego. As the basis for participation was merely attendance at the event, it was a decidedly unscientific poll.

For the record, however, the 274 participants were asked whether, if corporate income taxes were cut, their companies would repatriate cash to the United States. Almost half of those polled, 45.6%, responded “yes.”

Those so answering were then asked what their companies would do with the repatriated cash. They were instructed to choose all that applied from a list of options that included:

  • Technology updates (62% of respondents)
  • Short-term, low-risk investments (59%)
  • Research and development (46%)
  • Trade finance programs for suppliers (14%)

Certainly there are many potential uses of cash, if indeed companies are going to use newly available cash for anything at all. And among the 274 poll participants, only about 18 said they’d use repatriated cash for supplier trade finance programs generally.

But that’s not the message Van Gundy takes from the poll results. “The survey is very clear that U.S. corporations will invest repatriated cash into low-risk, high-return options,” he says, in a reference to C2FO’s service.