Treasury Today Country Profiles in association with Citi

Credit where it’s due: SCF innovation

Gold coins stuck in a clamp

SCF solutions have helped numerous blue-chip companies and their large suppliers, but for smaller players reasonably priced credit often remains elusive. With a host of new solutions coming on to the market, are we about to turn a corner?

Supplier finance, which many in the market refer to under the generic banner of ‘supply chain finance’ (SCF), is often described as a ‘win-win’ for buyer and supplier. Suppliers are able to receive earlier payment through the help of a financier, while buyers can extend payment terms without putting strain on their supply chains. Everyone is happy.

That SCF looks such a great deal on paper only makes the slow adoption we have witnessed amongst smaller suppliers to date all the more puzzling. After all, SMEs, facing twin pressures of late payments and squeezed credit lines, would seem to be the companies with most to gain from supplier finance.

“That is where classic SCF has fallen short,” says Nigel Taylor, European Business Development Director at Taulia. “It has mostly been between large investment-grade buyers and their large suppliers.”

But with a range of innovative new solutions coming on to the market there is hope that we will see the benefits extended down to a greater number of mid-market companies in the near future. One of these was unveiled last week by Taulia, a cloud-based invoice finance solutions provider. Most treasurers will already be familiar with the concept of dynamic discounting, a practice whereby a supplier offers a buyer a discount in return for earlier payment. Taulia’s new offering, “Enhanced Discounting”, combines the benefits of traditional dynamic discounting with a flexible supplier finance programme which allows buyers to choose whether to use their own cash or the capital of a third-party financier to capture early payment discounts.

Size doesn’t matter

“For us, the goal is to get cash where it is actually needed,” Taylor explains. “Those big suppliers already have a fairly decent rate of borrowing – it is the smaller players that really need it.” Automation is the key. In SCF – as in most areas of business – paper is a great source of inefficiency. For one thing, contracts and documentary requirements for SCF can be prohibitive, and for another it can be very difficult for buyers to track as invoices get shifted from one desk to another. Paper processing can make even a supposedly straightforward task like matching invoices with Purchase Orders (PO) needlessly complex, lengthy processes. Taulia believes that these are the reasons why adoption has stalled and why, with its automated solution, SCF can now be much more than the preserve of the largest corporates.

The treasurer’s ability to choose between third-party finance or working capital to offer an alternative source of finance to the supply chain is vital, says Taylor. “Flexibility is also important for suppliers, if you think about factoring, it can actually be quite prohibitive because the supplier signs over all their receivables,” he says. But Enhanced Discounting allows the SME to look at each individual discount offered and assess whether it is cheaper than the company’s existing cost of borrowing. “It is simply a yes or a no.”

Follow the money

At present, Taulia is using a capital market financier to source credit for users, although the vendor explains that it is looking at the possibility of bringing some banks on board further down the line. John Mardle, Managing Director at CashPerform, thinks that the absence of bank intermediation could actually prove to be one of the solution’s strengths.

Banks, of course, have to comply with the capital requirements set-out by Basel III. As a result, a number of companies have seen working capital withdrawn by their banking partners of late. “But the capital market funders may not be included in Basel,” says Mardle. “Since that might be the case, it just might allow companies to secure credit at cheaper rates than what they would with the banks.”

Spoilt for choice

Taulia’s offering is but one example of innovation within what is becoming a highly competitive market for non-bank SCF solutions (in the broader sense). Platform Black, for instance, operates an online auction platform through which businesses can tender their invoices. “That is unique,” says Mardle. “It is essentially bringing in both payables, on an invoice trading basis, and investors into the same environment.” Another platform called Licuos, which featured last year in Treasury Insights, incorporates a netting service with its accounts receivable (AR) financing solution.

“Each of these solutions plays to certain aspects of the market,” says Mardle. Since each of the solutions “have horses for courses”, treasurers would be well advised to think carefully about what suits them best before committing. And for blue-chip buyers, it is also important to evaluate the extent to which SCF will be beneficial before a solution is adopted. “You’ve got to develop regular strategic reviews,” adds Mardle. “Assess how critical each supplier is to the current supply chain, develop a risk rating, and then ask how they could be involved in your future strategy.”