True supply chain finance is much broader than simply financing your payables, writes Enrique Jimenez. Banks and companies that pay attention to the value that can be created through supply chain finance in its broadest context will generate competitive advantage and closer commercial relationships.
When I speak to banks interested in starting or expanding supply chain finance (SCF) solutions, or upgrading their technology, my first step is to find out precisely what they mean by the term. Often, SCF is taken to mean payables finance – something offered to suppliers, who can choose to be paid earlier in return for a small discount often in return for an extension in commercial terms. Even some corporates have this understanding, based on their discussions with banks.
Yet, the true scope of modern SCF is much larger than that. The ICC, through the Global Supply Chain Finance Forum, define SCF as “… the use of financing and risk mitigation practices and techniques to optimize the management of the working capital and liquidity invested in supply chain processes and transactions. Visibility of underlying trade flows by the finance provider(s) is a necessary component of such financing arrangements which can be enabled by a technology platform”, and as part of this Forum we agree with it. Today’s SCF is about supply chains as a whole, embracing suppliers and customers, payables, receivables and inventory.
Once that more comprehensive definition is accepted, then the power of SCF as a working capital tool becomes much more significant. Cash tied up at every stage in the trade cycle can be freed up and used for more productive purposes optimising commercial relationships at the same time.
So what’s holding banks- and the corporate clients they serve – back from embracing this emerging opportunity?
Two factors stand out.
- Payables and receivables finance have traditionally been sold as alternative solutions, by different firms or by different teams within banks. This is starting to change, but the legacy of ‘factoring’ versus ‘reverse factoring’ as very different products remains. That makes it hard for some organisations to offer a genuinely integrated solution leaving behind very big economies of scale.
- Some legacy platforms are optimised for payables finance but aren’t easily adapted to offer a holistic view of receivables and payables financing opportunities in the same place and within the same user experience. As a result, the ability to offer ‘full spectrum’ SCF is often lacking.
Fortunately, both these obstacles are being overcome by forward-thinking solution providers.
At Demica, our product vision is for one platform that banks can deploy to deliver the full range of supply chain finance products to Corporate Treasurers. With a highly flexible architecture we are able to build to customer requirements with new features released to our community on a regular basis. Use of public cloud infrastructure enables us to deploy rapidly on a global basis with lower up-front costs than traditional software solutions and a much faster rate of product development.
Working capital across the supply chain
Most commercial relationships that exist between buyers and sellers present an opportunity to bring in a funder to improve the cash conversion cycle. Supply chain finance can improve commercial terms in a variety of ways. As an example, on the payables finance side, typically banks price financial risk on a confirmed receivable very differently to the way a corporate may set an early payment discount. So a 2% early payment (sometimes nominal) discount on a 60 day receivable can be replaced by the discount of that receivable to a bank on extended terms to provide a win-win to both supplier and customer. Distribution finance allows for a customer to pay on extended terms and deliver more credit capacity than a treasury or risk function may be prepared to extend. This provides scope for the corporate to grow sales as its customers are able to access longer payment terms and invest in delivering higher volumes or more complex projects.
Supply Chain finance offers corporates the ability to generate liquidity through the sale of entire portfolios of receivables, generating a one-off increase in cash which is sustainable through a committed revolving Receivables Discounting or Trade Receivables Securitisation facility. This can be achieved without increasing financial leverage through off-balance sheet structures.
A fast-growing segment of the market has been Dynamic Discounting which allows a corporate to deploy excess cash to retire trade payables early in return for a fee, thereby improving operating margins. The supplier is able to benefit from immediate liquidity, often from funders to which they would not typically have access.
The uses for SCF are many and varied. Earlier in the sales process Purchase Order Financing or Trade Loans are available to facilitate investment ahead of a sale being concluded and both payables and receivables finance are increasingly being deployed to substitute traditional trade finance instruments such as Letters of Credit.
For the growing number of banks who work with us, we provide a system that allows them to offer the whole supply chain finance spectrum to their corporate clients. Simple to use structuring tools are available to make it easier for their teams to scale their commercial activity and advanced portfolio reporting enables risk management access to real-time data on a programme level basis or consolidated across the portfolio.
Our aim is to provider the Corporate Treasurer with a single platform through which to monitor and manage all supply chain finance products with data and historic trend analysis showing advance rates, dilutions and receivables level performance. Just think of the power of a platform that connects Sales, Procurement, Treasury and Operations with a single view of their receivables and payables flow, connecting funders to it with the capacity to structure solutions that improve customer and supplier outcomes.
Capturing new opportunities
Many of the processes deployed by SCF teams remain highly manual and dependent on excel to deliver calculations and reports. Banks are consistently asking us to deliver automation which enables the funder to run an “originate to distribute” strategy, helping to ease capital treatment of these products.
Increasingly our bank clients are looking to bring SCF products together into single teams able to present solutions rather than sell products. This drives obvious efficiencies in the form of smaller and more productive teams able to have focussed discussions with Finance and Treasury teams and fewer counterparties for engagement with corporate relationship managers.
This generates an obvious requirement for a single platform able to connect into corporate ERP systems and draw the full receivables and payables ledgers, which structuring and risk professionals can use to develop structures that deliver value to their clients. Customer relationship management is easier with a single view of working capital performance and the utilisation of facilities that have been put in place.
Imagine the customer conversation if the full range of solutions are enabled by an expert team working with a single platform. Distribution finance for larger key accounts to drive sales, on balance receivables discounting in jurisdictions where there is credit appetite to deliver and risk distribution for others. A flexible relationship with suppliers where Dynamic Discounting by a corporate can be seamlessly substituted with external funders and a single set of dashboards available for banks and customers tailored to their needs. The list of benefits is substantial.
What we are seeing, then, is a three-way transformation of the market for supply chain finance. First, there’s a shift in the way supply chain finance is viewed, from a focus purely on payables to a recognition that true SCF spans supply chains from payables to receivables.
Second, there’s a transformation in how modern platforms like Demica’s handle SCF, reflecting a modernised banking view, where financing working capital is an essential part of a corporate’s financial health.
Third, we’re seeing the start of a transformation in the way SCF products are sold, with banks and other service providers now much more likely to offer ‘full-spectrum SCF’ in a joined-up way that’s better for the corporate client and better for the bank.
At Demica, we’re pleased to be leading the way to a broader definition of supply chain finance. We look forward to supporting many more banks – and their corporate clients – as they embrace these new opportunities.
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Enrique Jimenez joined Demica in June 2016. He previously worked at Banco Santander as Head of Supply Chain Finance & Trade products in Continental Europe. Enrique has 20 years’ experience in corporate banking with a mix of Equity Research and Working Capital Solutions roles. He covered the full spectrum from Product Specialist to Origination and hence managed the team who originated, structured, implemented and monitored operations.