Treasury Today Country Profiles in association with Citi

Double act take credit for SCF offering

Unlocked padlock on gate

A new offering from PrimeRevenue and AIG promises to open access to supply chain finance to non-investment grade businesses, potentially freeing up billions for the UK economy currently tied up in invoices. We find out what steps have been taken to bring this SCF solution to the mid-market, and what corporate buyers can do to ensure suppliers see SCF as the win-win solution it really is.

Demand for supply chain finance (SCF) amongst UK suppliers is growing as the large organisations they sell to continue to insist on ever longer payment terms. But until now, SCF has not been forthcoming for those companies supplying all but the largest, investment-grade companies.

A new survey of UK businesses that provide goods or services to large organisations, jointly commissioned by PrimeRevenue and AIG, has found that 17% of their invoices is currently tied up in invoices with non-standard payment terms. Over three quarters of the companies surveyed (77%) reported that they had been asked to accept longer payment terms, while just over a quarter (28%) said that the issue had increased in the past year.

The YouGov poll provides yet more evidence that SMEs are facing some stiff working capital challenges, especially in an environment where deleveraging banks are not as able as they were in the past to extend financing to those deemed to be ‘riskier credits’. Supply chain finance, a form of receivables-driven financing initiated by the buyer, could help such companies stay in the black. But the trouble is that those companies who have been offered help through SCF remain a very small minority (a mere 23%, according to the YouGov poll).

PrimeRevenue and AIG believe they know why this is the case and what now needs to be done to bring SCF to a broader set of businesses. In a recent announcement, the leading global insurer and the world’s largest working capital finance platform said that they are teaming up to bring a new SCF offering to mid-market non-investment grade companies. The solution aims to address an issue which has been articulated before by the likes of Taulia: namely that supply chain finance programs, particularly those offered as proprietary services by the large banks, have so far been limited to the largest, investment-grade businesses. But through the new offering, PrimeRevenue say they are now able to cater to this mid-market sector, by providing financing with the credit risk insured by AIG’s trade credit insurance facilities. By doing so, they hope a greater number of suppliers will be able to access SCF.

“It has a trickledown effect,” explains Robert Barnes, Commercial Advisor, Founder, PrimeRevenue. “As you hit mid-market, there tends to be a lot more SMEs in the supply chain. That means we can get SCF right down to the very small suppliers which is where, quite frankly, the real need is.”

But if the demand for SCF is there (and the YouGov poll indicates that there is, with 69% of those who do not use SCF keen to do so) why are the banks so evidently reticent to help? Neil Ross, Regional Manager EMEA, Trade Credit at AIG Europe Limited identifies several inter-related factors. “I think the banks have focused on the investment-grade names because of the capital treatment they can apply to those names,” he says. “It becomes more challenging for the banks to move into the middle market because of the capital costs they would incur. The other key aspect to this is having the ability to take that credit risk associated with unrated companies, and that is where AIG has a considerable amount of experience and expertise, which we are now bringing to the table.”

A different approach

SCF must be approached somewhat differently when targeting mid-market companies and their supply chains – both by the providers and the buying organisations. Generally, the solution has to be much easier for them to understand and to use (after all, smaller organisations are not likely to have huge legal teams to help them with contracts) and platform providers need to be able to communicate with, and onboard, suppliers very efficiently. A lot of it comes down to the types of contracts used, and the way in which the benefits are articulated.

For the supplier the big selling point is, of course, working capital financing at a significantly cheaper rate than they would otherwise have access to. This typically holds true for most suppliers, says Barnes, even when borrowing on the strength of a non-investment grade corporate. On a cautionary note, however, the treasurers of mid-market corporates would be well-advised to think carefully at what the impact will be on each individual supplier. Since it enables buyers to standardise and potentially lengthen payment terms while supporting their supply chains, SCF is widely perceived to be a ‘win-win’, for both corporate and supplier – and rightly so. But those who are too heavy handed in their treatment of suppliers – and neglect to patiently explain what it is they are doing and how it will benefit them – may find, as others have recently, their company’s name in the press for the wrong reasons.

This kind of situation need not arise, though, Barnes contends. “Generally it is very easy to work out whether or not the SCF programme that has been put in place, based on the rate, is going to produce a win-win scenario,” he says. He offers an example of a small supplier factoring its invoices for a 10% fee, that is offered the opportunity to participate in a SCF programme that could reduce its cost of credit to somewhere in the region of 2%. “If that is true then the number of days extended still give an economic benefit to the supplier, and SCF is clearly working. It really comes down to the economic calculation of the value to both supplier and buyer. It should not be done in an arbitrary fashion whereby the buyer goes in and just raises the terms to an unsustainable number of days.”