Article published by Global Trade Review, Sep-Oct 2015 issue.
Kendall Stevens, CEO of Swiss company Global Supply Chain Finance Ltd. (GSCF) discusses the challenges of supplier finance and how these can be alleviated by GSCF´s offering.
What is really Supply Chain Finance?
Supply Chain Finance (or “SCF”) refers to the solutions available for companies to finance their supply chain, this being their purchases from suppliers (Accounts Payable based solutions) and their sales to buyers (Accounts Receivable based solutions).
SCF is linked to companies’ working capital and has the objective of reducing the working capital cycle (WCC) either with vendor-sponsored Accounts Receivable based solutions aimed at decreasing DSO or with buyer-sponsored Accounts Payable based solutions aimed at increasing DPO.
SCF resolves the problem posed by “my DSO” is “your DPO” or in other words, making a company’s working capital cycle more efficient places extra pressure on the rest of its supply chain.
SCF is frequently associated exclusively to “Supplier Finance” (also known as “Reverse Factoring”), despite being a wider-ranging concept. Supplier Finance is the program type whereby a company (the buyer), generally a highly rated and stable household name, obtains extended payment terms from its suppliers via onboarding them into a program that allows suppliers to sell their related receivables to a funder at a financing rate that is usually better than what they would obtain by themselves. In theory, this creates a credit arbitrage between the credit risk of the buyer (the program sponsor) and its suppliers. The funder in this instance will try to charge the supplier a higher discount rate on its receivables than it would have charged to lend to the buyer – this being the excess arbitrage rate. In consideration of the fact that in Supplier Finance there is one obligor – this is one party to credit monitor and receive payments from – these programs are relatively easy to structure and manage, making them very popular amongst commercial banks in Europe and in the United States. However, this does not come without challenges.
Challenges in Supplier Finance
For a Supplier Finance program to be successful, it needs a significant number of suppliers to be on-boarded and with considerable volume. On-boarding suppliers is a complex and lengthy process that requires substantial man-hours for administration and negotiation and involve considerable legal costs. Due to the tight competition, banks tend to price Supplier Finance programs very thinly in order to win deals, thus making it very difficult to absorb all these costs. In addition, there are circumstances in which Supplier Finance does not work:
- If the buyer (the sponsor) is not highly rated it cannot attract many suppliers, as the credit arbitrage is not possible.
- If suppliers are large and highly-rated companies they would get better financing rates by themselves hence not accepting being part of such a program.
GSCF’s solutions to challenges
Global Supply Chain Finance (or GSCF) is a Swiss-based company with 25 years of experience in setting up and managing SCF programs for companies worldwide and in partnership with a wide range of world leading financial institutions and credit insurance companies. GSCF has been increasingly focused on the most complex, receivables-based type of SCF programs (supplier sponsored), as they tend to be the ones that maximize the benefits to all stakeholders, developing credit-sensitive processes based on a highly advanced technology platform. GSCF has historically developed innovative products within SCF, including some that tackle the challenges of Supplier Finance explained above.
- Trade Payables Financing: These are buyer-sponsored financing programs that enable companies to extend payment terms towards their key suppliers. Also called “Synthetic Receivables” these programs are fast to implement, as the documentation requirements are straightforward leading to a short negotiation phase. Most importantly, the suppliers selected by companies for these programs, do not need to be legally engaged. Trade Payables Financing has proven to be very successful, particularly, though not exclusively, with distributors in the technology sector. At GSCF, we have seen Synthetic Receivables programs growing very rapidly, fuelled by the addition of new suppliers onto existing facilities with the individual buyers.
- Distribution Financing: Instead of participating in several buyer-sponsored Supplier Finance programs, large suppliers (also called vendors) can take control by setting up their own Distribution Financing program and selecting the buyer portfolio to onboard. Distribution Financing is the most comprehensive type of SCF programs, as it is a combination of factoring, whereby the vendor is paid earlier than as per the original terms, and an extension of payment terms to all the buyers in the portfolio. The main benefits achieved are:
- Fully tailored Distribution Financing program that meets the vendor’s requirements
- Vendor can offer a menu of payment term extensions to selected buyers in an off balance sheet manner. The costs for the extended terms can be allocated to the buyers
- Vendor enhances competitiveness and drives more sales to the buyers, whose working capital improve by the extended terms obtained
- Vendor has the option to sell the level of accounts receivables desired before maturity on a true sale basis, thus improving cash, reducing credit risk, enhancing its working capital and balance sheet
Receivables-based financing programs
Receivables-based financing requires the credit assessment of buyers in the programs, many of which also incorporate credit insurance coverage. The large number of buyers usually involved in these programs, added to the need of tracking the requirements of credit insurance policies, makes the servicing of receivables-based financing programs a key function. Banks active in the receivables-based financing space tend to focus on Factoring (i.e. invoice-discounting programs for companies in need of cash) and leave the servicing of the program with the originator (the supplier), which poses a high supplier performance and fraud risks. Moreover, the cost-cutting pressure suffered by banks over recent years has caused that they lack a technology that could handle the programs servicing complexity, particularly when it comes to cross-border, multi-currency programs funded by various participating banks and covered by credit insurance or a group of insurers.
Here is when GSCF’s services become a key success factor.
GSCF not only masters the processing of complex programs in a fully flexible and automated manner, but also provides advice on structuring the programs so that operational and credit risks are minimized. A very valuable aspect of GSCF’s servicing is that it allows banks to benefit from credit insurance cover that is almost free of conditions related to the acceptance of claims, which generates a substantial capital release benefit. This is possible thanks to GSCF’s capability to undertake the entire management of insurance policies’ conditionality and the trust that GSCF’s credit sensitive-processes has generated amongst the world-largest credit insurance companies over the years.
GSCF is the leading servicer of Accounts Receivable and Accounts Payable based financing programs worldwide. We work together with multiple global financial institutions and the main credit insurers to offer a comprehensive solution tailored to each customer that includes financing, credit insurance and servicing. GSCF´s core offering centers around our state-of-the-art, self-developed and fully flexible technology platform called GSCF Information Services (or GIS) and its complementary value-added services. We pride ourselves of GSCF’s highly regarded reputation in the marketplace due to our accurate services, innovative products and constructive approach ingrained in the company´s culture. The company has remained at the forefront of technology developments, thanks to constant investments. Innovative new tools and features have been continuously released, showing our deep understanding of the SCF market´s developing needs.
Today GSCF processes and manages over 1,000 obligors in 95 countries on behalf of our partner liquidity providers. At present, 20+ banks use the GSCF platform, including fronting and participating banks and the companies that GSCF services have an aggregate turnover in excess of USD 440 billion.
The main benefits of working with GSCF are:
- Outsource the entire processing of SCF programs to the most experienced and successful servicer in the market
- Advice on the most optimal structure for each program
- Program-dedicated platform providing full transparency on the program performance in real time to all stakeholders
- Management of bank participations and credit insurance policy requirements
- Reduce operational and credit risks, increasing the appetite of funders and credit risk-takers
- Outsource credit analysis function to GSCF’s experienced team of Financial Analysts
- Enhanced efficiency and reduce admin expenses
- Utmost security standards
- Privately owned by its management.
To learn more about GSCF Group, please contact us.