Supply chain finance (SCF) may have been available for many years, but there is no shying away from the fact that it has never quite taken the starring role in the pantheon of banking products. It may lack glamour but, for those that know, it is a simple and effective working capital solution that functions in the background helping both corporate buyers and their supply chain. Lionel Taylor, Head of Trade Products at Lloyds Bank Commercial Banking, gives Treasury Today a guided tour of all that SCF means today – and what it may mean in the future.
Head of Trade Product
Lionel Taylor is Head of Trade Product at Lloyds Bank Commercial Banking. He leads a team responsible for the development and delivery of the bank’s international trade products and supply chain finance proposition. Taylor has over 25 years of international trade and receivables finance experience – at senior management and director level – with major European and US financial institutions including RBS, Citi and Rabobank. He has extensive knowledge of working with companies operating in Asia and is also at the forefront of innovation in the field of supply chain finance.
The often unrecognised beauty of working capital solutions, also known as supply chain finance (SCF), is that it is simple and it works. There is no mystery or magic about its success – it just provides an answer for trading partners that otherwise have polarised needs, which often lead to the buyer wanting to pay their supplier as late as possible by extending their payment terms (days payable outstanding (DPO)), and the supplier wanting to reduce those terms and be paid as quickly as possible (days sales outstanding (DSO)).
“One political critic recently suggested that SCF may well be redundant if large companies paid their bills on time”. This opinion entirely misses the point as the payment terms and approval process dictated by the buyer may themselves be prohibitive. Also, if corporate buyers use up their excess cash by paying their suppliers earlier, they will deplete their own working capital which is essential for investment and expansion as the economy grows. In essence, a SCF programme is (mostly) a bank-led bridge spanning the needs of a buyer and its corresponding supplier chain. Despite this, a supplier only has to calculate its cost of borrowing for carrying the receivable under its own credit line on its existing terms and compare it to the cost of supplier finance initiated by its buyer to see that it will probably (but not always) be better off signing up for the latter.
What’s more, because most major buying organisations prefer to be seen in a positive light, in terms of business conduct, and most suppliers are keen not to upset the balance of the relationship with their buyers, both buyer and supplier need to exist in a state where all forces are equal and opposite and anything that can facilitate this state of harmony is surely welcome. Buyers are looking to introduce the SCF scheme as part of a wider corporate social responsibility (CSR) policy.
Taking SCF further
The common perception of SCF today begins with the payables finance model operating between a large corporate buyer and its many suppliers. This model enables an accelerated payment to a supplier based on the buyer’s approval of its invoices.
In order to understand the whole spectrum of buying and selling for a specific company, it is essential to get straight to the heart of a client’s trade relationships and the context in which that business is carried out. This demands a detailed discussion covering the precise nature of the business, where it is buying from and under what terms, what it is doing with its purchases, who it is selling to – and so the list of questions continues. It is an exhaustive, but nonetheless essential stage that enables Lloyds Bank to offer the right solution first time.
For Lloyds Bank, the aim is to take such an offering beyond mere talk of a specific product and steer it towards an intelligent discussion, based on genuine customer need. “We spend a lot of time across the whole of the transaction banking space talking about working capital solutions,” says Lionel Taylor, Head of Trade Products at Lloyds Bank Commercial Banking. “We have a variety of products ranging from an overdraft to more specialised offerings such as trade finance, but the bank is focused on being able to find out exactly how our product set best suits the needs of our customers.”
This inclusive approach within Lloyds Bank transaction banking requires an intimate knowledge and understanding of the supply chain of each client. From order-to-pay, this must include the various touch points along the way, from agents to shippers to financiers, depending on the nature of the business. “It starts with trade cycle analysis,” explains Taylor. In order to understand the whole spectrum of buying and selling for a specific company it is, he notes, essential to get straight to the heart of its client’s trade relationships and the context in which that business is carried out. This demands a detailed discussion covering the precise nature of the business, where it is buying from and under what terms, what it is doing with its purchases, who it is selling to – and so the list of questions continues. It is an exhaustive, but nonetheless essential stage that enables Lloyds Bank to offer the right solution first time.
Indeed, whilst any discussion around SCF with a client implies an immediate or impending need, Taylor says engaging in this way generally opens up a wider discussion based around anticipated growth and expansion of that client’s business. This is exactly the reason why Lloyds Bank has adopted the inclusive approach he says, but stresses the need to be mindful that future-proofing cannot be executed at the expense of today’s need. “We find out where the pressure points are and then start to think more closely with the customer as to how we might provide the right solution. This is for the long term and we want to make sure that what we put in place does what the customer needs now and in the future.”
Aligning the functions
There is a natural tension within the buyer organisation between the treasury’s need to extend terms and the procurement department’s desire to pay early to protect its supply chain. “But in recent years I have seen a trend evolving towards a greater degree of alignment between the divisions,” notes Taylor. The progressive move to open account trading by some trading partners may have seen some buyers wanting to push terms out ever further. But as the economic environment turned downwards, a number of companies started to think more in terms of how to protect key suppliers with programmes such as SCF spearheading the way.
By ensuring suppliers can take advantage of more competitive funding, secured through the buyer’s superior credit strength, it secures the supply line and potentially puts improved pricing on the buyer’s table, and also enables treasury to extend terms. “It’s good for everyone,” comments Taylor.
The progressive move to open account trading by some trading partners may have seen some buyers wanting to push terms out ever further. But as the economic environment turned downwards, a number of companies started to think more in terms of how to protect key suppliers with programmes such as SCF spearheading the way.
Putting a programme in place
Once Lloyds Bank receives a mandate from its client to put a SCF programme in place, it will begin working with that client to introduce the concept to its suppliers. “We take as much care on the supplier side as we do in bringing in a major buyer,” states Taylor. The care and attention required, particularly on the part of the supplier, can sometimes reveal SCF as a product that takes a while to be put together, erroneously making it a target for criticism.
“The truth is that if a programme is put in place, the buyer will be extremely sensitive as to how it works before they will consider rolling it out fully,” Taylor explains. The buyer will typically want to see a pilot project to make sure it works, and that, he concedes, does take time. Lloyds Bank consciously adopts a ‘softly, softly’ approach with suppliers because most will have established payment patterns in place. SCF will move them away from those patterns. “The supplier, rightly so, has to make its own decision about SCF in its own time and that decision must be right. It is a fallacy that they do what their buyers tell them to do – even the smaller suppliers will speak up if it is not right for them.”
Transparency and simplicity
A phrase that Taylor hears from time to time in discussion with suppliers is that SCF “sounds too good to be true”. Getting funding at a competitive price and without having to give any security does seem like a fanciful proposition for any supplier but, he assures, SCF is what it claims to be. It may not suit some suppliers, particularly those that are part of a larger group who can benefit from advantageous inter-company lending rates, but generally SCF really is beneficial to all parties.
“Transparency is the key,” notes Taylor. Because it provides suppliers with greater visibility over buyer approvals, although many suppliers will “watch and wait for a while” before immersing themselves in SCF, it often becomes the preferred method of payment. “Suppliers also tell us that it removes some of the concentration risk they have with certain buyers.”
Having typically been through a request for proposal (RFP) process to secure the client mandate, all stakeholders will be keen to ensure the success of an SCF programme. From a banking perspective, Taylor says it is essential to know that every function that SCF will touch in the buyer organisation is entirely comfortable with the concept, not least because suppliers invariably call upon their contacts on the buyer side to learn about the programme independent of discussions with the bank.
The main concern around international expansion is not necessarily one of technology or risk mitigation, but instead more around the management and care of suppliers. On-boarding a supplier in a country far-removed from its buyer may not be easy if that supplier is located in a country not served directly by the bank running the programme: a global bank may have a presence in that country, but it is unlikely it will have a team dedicated to SCF. Thus it becomes a matter of ensuring the level of service is of an equally high standard across the board.
Once the facility is in place and Lloyds Bank has created the necessary web pages and portal for suppliers to enrol, the bank will undertake an educational programme, putting together comprehensive and bespoke information and training material for both buyer and supplier. This programme may also involve joint roadshows with the buyer, where more intensive and personalised discussions are held with suppliers. Whilst most of the work in creating a successful SCF programme must be done upfront, the good news, Taylor says, “is that once suppliers are on-board, because it is largely automated, from then on it is easy to run”.
The technology required for most providers’ SCF programmes, at least at the user interface, remains purposefully simple. Each has to make information available and visible, so a supplier can see what has been approved and choose if and when it will discount those invoices, with payment being made automatically if required. But it must do so in the most intuitive way. Like most things in life, states Taylor, the simpler it is, the better. “The key with SCF is to resist the temptation to over-engineer it, making it more complicated than it needs to be.”
This is a challenge for a bank such as Lloyds Bank where there is a clear need to drive the service deeper into its banking infrastructure – to open up products and solutions from other banking sectors – or expand functionality beyond payables finance and, for example, enable funding against purchase orders. Because the immediate function of an SCF programme is largely about the interpretation of data, technology has a major role to play. But, insists Taylor, “whatever challenges arise at the back end, it still has to be as clean and simple for the user as possible.”
Making the difference
If the SCF products offered by the banking community are all purposefully uncomplicated and somewhat similar in approach, at least at the front end, how does Lloyds Bank mark itself out from the crowd?
“The truth is that differentiation is all about the execution and whether the client is confident that its bank can provide the right level of service and due care and attention for both buyer and supplier,” notes Taylor. With a strong reputation in terms of its relationship with customers of all segments, he adds, “this is where Lloyds Bank achieves and succeeds very highly” and where the focus is on “people meeting people” and “real conversations”.
Once the facility is in place and Lloyds Bank has created the necessary web pages and portal for suppliers to enrol, the bank will undertake an educational programme, putting together comprehensive and bespoke information and training material for both buyer and supplier.
This means following-up on every promise, ensuring progress is being made and that if an issue is raised, it is tackled quickly and effectively. This applies equally to buyer and supplier but, for suppliers, there will perhaps be special provision: “As simple as the concept may sound to some, there may be a supplier who has no knowledge of it whatsoever. We have to respect that and take them through each step.”
What lies ahead
The challenge for banks in advancing their SCF programmes lies in how they will expand their international capabilities, Taylor notes. One up and coming enabler for an SCF programme in this context is SWIFT’s Bank Payment Obligation (BPO) tool. Where a Lloyds client (as a buyer organisation) is working with a trading partner in another country, trade will require a level of guarantee between the two banks; if the overseas bank is making a payment to a supplier under the SCF scheme, it will of course seek a recovery from Lloyds Bank if there is an issue. In this respect, he feels that the BPO mechanism would mitigate that risk, acknowledging the International Chamber of Commerce (ICC)-approved solution as “an aid going forward”.
However, Taylor feels the main concern around international expansion is not necessarily one of technology or risk mitigation, but instead more around the management and care of suppliers. On-boarding a supplier in a country far-removed from its buyer may not be easy if that supplier is located in a country not served directly by the bank running the programme: a global bank may have a presence in that country, but it is unlikely it will have a team dedicated to SCF. Thus it becomes a matter of ensuring the level of service is of an equally high standard across the board, says Taylor.
“At Lloyds Bank, because our service in the UK is run so well, it is natural for buyers to ask if we can look at expanding it to other areas. We can do this – on a very careful, step-by-step basis – by collaborating with other best-in-class banks in the relevant region,” he explains. “But whatever we put in place, it has to be at least as strong as it is in our client’s home market.”
Lloyds Bank Commercial Banking provides comprehensive expert financial services to businesses of all sizes, from start ups, through to small businesses, mid-sized businesses and multinational corporations. These corporate clients range from privately-owned firms to FTSE 100 PLCs, multinational corporations and financial institutions.
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