The age-old problem of buyers wanting to pay as late as possible and suppliers wanting the cash immediately seems an intractable one at best. Of course, corporate buyers could pay their suppliers in good time, but different markets have different attitudes to this issue. D&B reported a set of figures from its annual review of Asian, European and North American payment practices last year which showed that in 2011 Taiwan led the pack on due-date settlement with 69.3%. Hong Kong had a 34.5% punctuality record and China 33.1%. The European average was 37.8% with Germany way ahead on 74.7%, while Switzerland followed with 55.3% and the UK lagged way behind at 26.3%. Only Portugal was slower to pay, with a punctual payment figure of just 21.8%. The US displayed an average 51% punctuality record, while Canada’s average due-date payment was 44.9% and Mexico was 59.9%.

Lelaina Lim, CFO of RSH Limited, told Treasury Today that when she first started in her role as the Shanghai-based Regional Financial Controller of International SOS (a medical evacuation company) she was faced with a receivables turnover of 350 days. She brought this down to 120 days over a two-year period but said even this was not easy. “It was hard and people thought I was very harsh, but after two years people realised that it was a do-or-die situation. A business that doesn’t collect cash can’t survive.”

In Europe, the EC issued Directive 2011/7/EU to try to encourage a fairer play between both parties. The directive came into force on 16^th March 2013 as a means of combating late payment in commercial transactions. However, the Directive does not harmonise payment periods across the region, but instead creates a statutory right to interest 30 days after the date of the invoice, unless of course another payment period has been negotiated in the contract.

A place for SCF

This is where supply chain finance (SCF) has a role to play in easing the tension. SCF has been playing an increasingly significant role in the trade finance portfolios of some banks, with major global institutions claiming an average annual growth rate of up to 40%. According to the annual industry survey of global banks and corporates by working capital solutions, advisory and technology provider, Demica, this sustained uptake will continue to the end of the decade.

Growth in SCF programmes indicated by those surveyed is highest in the US and Western Europe, particularly in the UK (with its low payment punctuality record) and Germany (with quite the opposite), with Eastern Europe, India and China (the worst of D&B’s payment punctuality Asian countries) noted as leading regions with the greatest SCF market potential. Some 90% of bank respondents see SCF as a “must-have” financial product for corporate buyers and more than 75% of them see it as an “added-value” product. Respondents believe that domestic SCF programmes will lead the expansion and that the level of competition between banks will soon commoditise the offering. The adoption of cross-border SCF programmes will continue to gather pace but the greater complexity involved will enable it to retain its ‘value-added’ status.

Asian trade

Sanjay Dalmia, EVP Global Cash Management and CEO of Fundtech India, notes “a pick-up” of interest in SCF, particularly in the Asian markets. “But challenges remain,” he adds. From the banking perspective there is a degree of separation from the actual beneficiaries of the solution. As banks work with the CFOs, it can be difficult to steer procurement managers and suppliers towards a common platform and to get them to understand the benefits of such a programme. The parties often cite perceived issues and complexities around supplier on-boarding and technical integration of systems and workflows as a reason for not doing it.

Although he agrees there may be workflow issues within certain corporates, Dalmia says this is not solely an IT issue, but also one of poor communication caused by operational silos. These silos underpin a misalignment of purpose internally between accounts payable (AP), procurement and treasury, and where respectively each is intent on holding on to cash, keeping suppliers happy and keeping on top of cash management.

The purpose of supplier finance in its various forms is to bridge the payment gap between a supplier’s delivery of goods and the final settlement of its invoice by the buyer. The latter typically initiates a programme via its own bank (and so it does not impact the buyer’s own balance sheet), using its own strong credit rating to secure better rates than its suppliers can on their own. The corporate may even self-fund the programme “if it is flush with liquidity”, notes Dalmia, adding that this obviously has balance sheet implications and that any charges must be set “at arms length”.

In terms of technology, Dalmia comments that “the tools are improving all the time, but the model of operation broadly remains the same.” David Gustin, President of Global Business Intelligence, a Canada-based international trade research and advisory firm, has been following the industry closely for many years and notes that there are a lot of misconceptions about what the various forms of supplier finance are and how they work. As part of his research Gustin is currently finalising a ‘vendor positioning grid’ that looks at a multitude of vendors that market various working capital technology solutions to try to understand the lay of the land.

“Certainly in an effort to leverage the wider adoption of supply chain automation tools, or in believing specific under-served opportunities exist, many vendors have been adding working capital capabilities to their product suite,” he notes. These solutions may not fit all purposes and Gustin notes too that large-scale buyers – multinationals – that have developed approved programmes have tackled the matter in a way that complements their own industry peculiarities and as such “they are all very different and have met with varying degrees of success”.

The typical view of the supply chain, from the finance perspective, considers the funding of suppliers. This will mostly take the form of post-shipment finance but increasingly in Asia the requirement is for pre-shipment finance, says Ashutosh Kumar, Global Head of Corporate Cash and Trade at Standard Chartered. The beneficiary of post-shipment finance is the direct supplier. Pre-shipment finance will push the finance “much deeper into the supply chain”, to the point of funding the upstream suppliers that supply raw materials to direct supplier, he explains.

These upstream suppliers tend to be in the small and medium-sized enterprise (SME) sector and often do not have a sufficiently strong balance sheet to secure lower-cost bank funding, or may even find that funding in their domestic market is not readily available. The arrangement of pre-shipment finance moves away from a predominantly balance sheet-based discussion towards a supply chain risk analysis, executed by the bank (because it is the one taking the financial risk) in tandem with its corporate client. This, explains Kumar, must consider many points of the relationship between buyer and supplier to determine acceptability, pricing and so on. Assessment includes factors such as the unresolved rejection rate of the goods supplied, the nature and marketability of the products being bought and the dynamics of the market itself.

The other half of the story

But SCF is “only half of the story” in the Asian markets, says Kumar. Corporate clients of the bank are now asking for extended programmes to cover funding of their distributors too. “Of late we have seen a much greater demand for distributor finance; currently every company is looking to sell more and this is a way of helping distributors to achieve more sales without having to worry about finance.”

Indeed, in China, Benjamin Lam, China Trade Head, Managing Director, J.P. Morgan, noted in a recent Treasury Today Question Answered article that as domestic companies increasingly trade cross-border and international firms continue to invest in China, demand is rising for properly integrated SCF solutions that can link upstream and downstream procurement, buyers, vendors and distributors.

Distributor finance mirrors supplier finance in that the large corporate buyer becomes the supplier, using its credit status to finance the distributor’s purchase of goods. It is prevalent in markets such as India, China and Korea and, notes Kumar, it is evolving in quite a few other regional markets, but in all cases cuts across a broad spectrum of industries.

There is a difference between the procurement and sales side in how risk management is handled. As a corporate moves into an Asian emerging market trading on open account terms (because letters of credit (LCs) may prove too administratively restrictive or expensive), a detailed supply chain risk analysis is essential. But this almost takes the reverse view of a pre-shipment finance risk assessment, considering factors such as the marketability of the corporate’s own products, its position in the market, the relative strength of that market and the financial dependencies between the corporate as supplier and its distributors.

The role of SWIFT’s BPO

Where a corporate exhibits a level of discomfort with the counterparty risk of its buyers, credit insurance would be appropriate but, says Standard Chartered’s Kumar, this is not readily available in some Asian markets. This drives companies to use LCs as a risk mitigation tool but, he notes, these can be inefficient from an administrative perspective, often adding up to ten days in processing time.

This is where the International Chamber of Commerce (ICC)-approved SWIFT Bank Payment Obligation (BPO) (which became effective in July of this year) could play a major role by helping firms working in and out of the region to mitigate the counterparty risk arising from open account trading. Standard Chartered has already carried out transactions – with BP Chemicals and its client Octal – using this tool (see Treasury Today’s May 2013 Corporate View with BP Petrochemicals’ David Vermylen).

SWIFT promises that the BPO will give easier access to risk mitigation around pre and post-shipment finance. It allows sellers to electronically send trade documentation to their buyers and exchange the documentation data with both obligor and recipient banks. This enables them to get involved earlier facilitating payment as soon as the buyer raises the purchase order (PO), not delaying until the invoice has been approved as is the case with LCs. The four-party approach also means suppliers can use their own local bank rather than the buyers’ banks (as would be the case in the traditional SCF programme), removing Know Your Customer (KYC) from the process and potentially lowering on-boarding costs.

“Asia is the centre of global trade growth and as the supply chain space evolves, more corporates will be looking towards open account and supply chain solutions,” says Vinod Madhavan, Standard Chartered’s Global Head, Local Corporate Products and Receivables and SCF. “Our expectation is that many corporates will now start using BPO to free up their working capital.”

Whilst treasurers know that freeing up working capital is beneficial, an increasing number of large corporates are aware that doing it by extending days sales outstanding (DSO) too far can harm their suppliers – as such SCF is gaining traction. The two case studies illustrate different ways in which it can be approached.