Excelling at Invoice Financing with Alza

Czech e-commerce firm Alza’s award-nominated invoice financing programme demonstrates that supply chain finance is not purely the preserve of billion-dollar multinationals. By offering financing to all its suppliers, the company is primed to support both its own rapid growth and the resilience of its supply chain.

European e-commerce firm Alza, which is headquartered in the Czech Republic, has experienced rapid growth over the past decade. While its annual turnover stood at €225.78m in 2010, it cracked the billion-euro landmark in 2019 reaching €1.14bn. Despite, or perhaps because of Covid-19, the unaudited figures for 2020 show even more growth, with the year’s turnover hitting €1.412bn.

To cope with this rapid growth, the company had to onboard an increasing number of smaller goods suppliers to populate its virtual shopping aisles with everything from televisions to toys and from mobile phones to smart home appliances. However, Alza soon found, it was not always receiving as many goods as expected.

Jiri Ponrt, Financial Director, Alza, explains: “These suppliers were afraid to say that they had a problem with working capital. They didn’t have enough money to pay their suppliers and deliver the number of goods we wanted. We assumed that they could go to banks or factoring companies to solve this issue, but it soon became clear that many of them were too small to get a loan and didn’t have a long credit history behind them that would satisfy the bank. They also said that they found factoring companies too inflexible.”

Finding a solution

Ponrt knew Alza could offer some form of assistance to the smaller suppliers but wanted to employ an approach that fitted with Alza’s forward-thinking and digital outlook.

“My original idea was to find a traditional factoring company that would have a little bit of flexibility for these smaller suppliers, but that would have simply been the traditional factoring offering,” Ponrt recalls. “While there was merit to this idea, it was a little backwards-looking. Then I was at a conference speaking with a Roger key account manager and an idea took hold. One of Roger’s shareholders is a major EDI [electronic data interchange] provider, and is the same provider we use for invoicing.”

Roger is part of the Komercˇní banka (KB) Group and is licensed by the Czech National Bank. With application programming interfaces (APIs) to connect to any internal financial system or enterprise resource planning (ERP), Roger offered Alza the type of solution it was looking for: something online, automated, and simple for its suppliers to use. As such, Alza and Roger launched Alza Invoice Financing (AIF), which Roger operates through its wholly owned subsidiary Invoice Financing.

The AIF process is straightforward for both the supplier and the buyer. Once a buyer makes an order, the supplier sends its goods and invoice via EDI to the buyer. In the moment the goods arrive to the distribution centre of the buyer the invoice is pre-confirmed by the buyer in the EDI system and thus in AIF system as well. The supplier sells the invoice to Roger and receives 75-100% of the invoice value immediately to its account. The buyer pays the invoice value to the AIF account by the contractual due date. If financing for less than the nominal value of the invoice has occurred, a surcharge minus a fee is sent to the supplier by Alza as soon as the buyer settles their commitment.

Ponrt continues: “The solution is very flexible, suppliers just need to approve the contract once, and then everything is done online via a dedicated supplier website. We have a dedicated team member that helps the suppliers, and we have also worked on the internal education across our business because these suppliers are mostly meeting our purchasers from the sourcing and purchasing department. We have to educate our people so that they can offer this solution to help the smaller suppliers.”

Expanding the scope

With the AIF solution up and running, Alza offered a much-needed level of working capital support to its smaller suppliers. But then Ponrt and his team began to realise the potential that a tool such as AIF could also have for medium-sized and large companies that have their own cash flow and working capital targets.

“Larger firms might not be affected by the seasons in the way a small supplier can be, for example, but they might have a reporting deadline and require financing as a result,” Ponrt notes. “Equally, they could have closed a big deal and need to get money from their customers earlier. Realising this, we extended the programme, understanding that we would probably need a different approach for these bigger companies. As a result, we created three tiers, which all have slightly different conditions. In the upper tier, for the largest companies, we offer lots of other services. For example, we can offer 100% financing if we are satisfied with the company. We are also happy to explain to the C-suite how we do the financing.”

Establishing such a flexible and technologically advanced financing programme has not been without its challenges. Those suppliers who had all of their business running through a traditional factoring company caused some challenges that had to be resolved.

“This is a pain because you have an invoice which has one set of bank account details, and then you get an email or a fax requesting the funds to be sent to a different account,” says Ponrt. “Of course, you do not know if this is a scam or not, and it can be challenging to verify that. An even bigger issue here is that everything goes via our EDI, including the payments, so when the account details don’t match, we have to stop the process, investigate, and do everything manually, which is clearly far slower and less efficient.”

Ponrt found that almost 50 companies were operating this way and had the task of advising them of the disruption this caused to Alza’s smooth process by adding time, cost and confusion.

“We impressed upon them that we want a fair, open, and transparent process that is also secure for both sides,” Ponrt says. “Some discussions took longer than expected, because the businesses might have been used to working in that certain way for 10 or 20 years. Now we are sending them SMS messages to sign and giving them options to tick a box if they don’t want a certain invoice financed – working in such a highly automated manner took a bit of getting used to for some of them.”

Benefits all round

Having instigated the AIF programme, Alza has strengthened its supply chain by ensuring that the supplier gets paid precisely when needed. At the same time, the risk of fraud from a fake invoice is mitigated through the buyer’s role in the approval process. The company was also able to use its existing EDI system to run the programme rather than invest in costly new technology.

On the supplier side, the most apparent benefit of the AIF programme is the working capital optimisation that it provides. Suppliers can set the maturity of the invoices according to their buyer’s needs to reflect the turnaround time of the goods, which enables a shortened cash conversion cycle.

“This programme enables the small suppliers to grow, because they can immediately deliver the goods to us at a higher volume, where previously they might have needed another two or three years to generate the money to grow enough to be able to do such business,” Ponrt notes. “They know they can deliver to Alza and have no hassle with working capital. In our experience, if a supplier starts to use this programme, they will commit to using it. Sometimes they will try it with two or three invoices to see how it works and then, a couple of months later, we will see that they’ve selected automatic’ on the system to finance all of their invoices automatically.”

Expanding the supplier concept

The AIF programme initially launched to suppliers in the Czech Republic and Slovakia, with Hungary added in the second half of 2021. As well as expanding geographically, Alza’s finance team has also been keen to expand the programme beyond goods suppliers.

“As we had been linked to EDI, we primarily looked to onboard suppliers of goods to the programme, but a couple of months ago we extended the programme to suppliers of services as well, which do not usually invoice using the EDI format,” explains Ponrt.

To make financing options available for services suppliers, Alza connected its internal ERP system directly to the Roger system and database, opening up the possibility to finance non-EDI invoices from services companies, such as those suppliers in logistics.

“We have between 30 and 40 suppliers in the transport and logistics space, supporting movement between our warehouses, branches, and our self-collection points. Firms like this did not use to work with us as they were not supplying goods, and there wasn’t an EDI invoice. For example, they were used to handling their working capital through loans and freight payments for discounts, so we thought that our invoice financing could give them a great new financing option. We opened this up to logistics firms a couple of months ago and already have the first one signed up and many other companies are thinking about it.”

As the company with the highest marketing spend in the Czech Republic, Ponrt naturally also saw an opportunity to expand the AIF programme in this direction.

“We are looking to offer this solution to our marketing suppliers. Some are multinationals, but many of them – such as graphics studios – are small players. While this programme started by focusing on the suppliers to our goods, we are now in a great position to provide financing options to any supplier of Alza, across our entire business.”

The project’s success saw the Czech Republic’s Treasury Association (CAT) nominate Alza for the European Association of Corporate Treasurers (EACT) Award 2021, with the project reaching the shortlist of the final six corporates. With the rapid growth of both Alza and its invoice financing solution, the company looks set for even more success in the years ahead.