Supplier finance is often seen as a solution too good to be true. And whilst corporates operating in Europe and the US may now have seen the benefits it can bring, many here in Asia are only just beginning to realise its potential. So what makes a successful supplier financing programme? Treasury Today Asia speaks to a number of experts to find out.
Experienced business practitioners will tell you that there is no such thing as a ‘free lunch’. So when a solution is being billed as ‘win-win’ it can, perhaps correctly, cause distrust and doubt. And supplier finance – sometimes called supply chain finance (SCF), reverse factoring or confirming, depending on who you speak to – is one such product that carries the ‘win-win’ label.

Supplier finance is a form of receivables-driven financing that is initiated by the buyer, through their relationship bank(s). The traditional model works by allowing the supplier to leverage the buyer’s credit rating and access an agreed percentage of the due payment up front from the bank. The ‘win-win’ comes from the fact that in return, the buyer is able to push out payment terms or benefit from early payment discounts, safe in the knowledge that their suppliers are being supported financially.

Although in Asia Pacific (APAC) there remains a debate on whether the solution is a ‘win-win’ for corporates and their suppliers, it certainly has begun to take hold elsewhere. Indeed, research undertaken by BCR Publishing and published in their 2016 World Supply Chain Finance Report, estimated that at the end of 2014 the market was worth €46bn (roughly $52bn) globally. And there is plenty of room for this market to grow, driven in large part by corporates in Asia.

The first step to success

Having said that, corporates that have worked on supplier finance projects in Europe and the US will confirm that these programmes are often difficult to get off the ground. This is not because of any failure of the product itself. The initial challenge instead comes from the need to drive alignment across numerous business functions and achieve buy-in to the project.

“As companies grow in size, individual departments often develop independently of one another,” notes Roque Damacela, Head, Open Account Trade & Commodities Financing at Standard Chartered. “In doing so, they often establish their own key performance indicators (KPIs). As supplier finance programmes often depend on multiple functions, they have the potential to disrupt individual departments and as a result, the benefits of adopting such a programme are not always immediately clear to each function.” For example, the procurement department may be incentivised to strengthen only certain more critical suppliers, while treasury may wish to leverage a programme to fully optimise working capital benefits across the supplier base.

Whichever department is championing the solution – this is likely to be either treasury or procurement – therefore needs to ensure that it outlines a clear set of objectives that not only demonstrate how it can deliver value to the business holistically, but also how it can enable each individual function to better deliver on their own objectives. “If this isn’t completed correctly and internal alignment isn’t achieved, there is a danger that the project will fall at the first hurdle,” adds Damacela.

The formation of a cross-functional working group can be another method used to ensure that the company is aligned with the project. This will be led by either treasury and/or procurement, but also feature colleagues from other functions that will be materially impacted, including accounting, IT and legal.

For Brian Medley, Director of Sales at Prime Revenue, the formation of such a group is vital given the broader implications a supplier finance programme can have on the business. “A supplier finance programme is not just another project run by treasury or procurement. It is a fundamental transformation of how the company does business with its suppliers. It shouldn’t be completed in a silo and should be built into the broader, long-term strategy for the company.”

To that end, it can also be very useful to have a mandate from senior management. After all, CFO and CEO buy-in will always ensure that other departments take notice of the project.

Important decisions

Once internal alignment and buy-in is achieved, the next step is to find a solution, and a partner, that will be able to deliver on the company’s requirements and give the programme the best chance of success. For the most part, corporates have two options: a bank-led solution, or the offerings of a technology provider – some large corporates have also developed their own in-house solution, although this isn’t typical. Both options have their own unique selling points.

Bank-led

Here in APAC there are a number of banks that are offering supplier finance solutions. These are typically the US and European names, as well as a handful of regional players. In the view of Bruno Lechevalier, Head of Supply Chain Management Asia at BNP Paribas, a bank led solution, particularly that of an established name, has an advantage because “it has been tried and tested over many years in numerous markets”. This results in those banks having “best-in-class platforms and a standardised offering in terms of documentation that enables corporates to quickly and relatively easily set-up a programme”.

It must be noted however, that whilst the expertise of a bank and its well-developed platform can be an attractive proposition, bank-led supplier finance programmes are not homogenous. They can vary greatly depending on the footprint of the bank and its appetite to do business in certain countries. Understanding a bank’s network and future plans is therefore crucial when selecting a solution.

The choice of bank is often more important than first considered when carrying out a supplier finance project.

Paul Melkebeke, Vice President, Supply, Asia, Samsonite

For Paul Melkebeke, Vice President, Supply, Asia at Samsonite, a company that opted for a bank-led solution, this point is especially pertinent. “The choice of bank is often more important than first considered when carrying out a supplier finance project,” he says. “All banks are able to talk-up their solution, but it is important to carefully evaluate their capabilities in the markets that you operate in and across the currencies that you use to make sure these align with your objectives. We operate a US dollar and RMB programme, for instance, and not all banks can offer a RMB programme.”

Samsonite’s banking partner did not only have to offer a suitable solution, however. It also had to have a significant presence in the markets that the company’s suppliers operate in. “We wanted to make sure that our suppliers had somebody local that they could speak to and who could visit them personally to discuss the solution. In my view, this was critical to ensuring the suppliers bought in to the project and its overall success.”

Bank agnostic

There are corporates however, that may not wish to align its suppler finance programme to a single bank. These companies are likely to be more interested in bank agnostic supplier finance solutions offered by third-party technology providers, such as Prime Revenue, Demica and Taulia, to name but a few.

In brief, these companies offer portals which sit in between the corporate, its suppliers and numerous sources of funding. The main advantage of these solutions, of course, is that it enables corporates to utilise numerous parties to fund their suppliers. This doesn’t have to be limited to banks, a corporate may use their own cash, or even tap into alternative funds such as hedge, mutual and even pension funds, all of whom are increasing their interest in trade receivables.

“The multi-funder strategy matches the pressures of today’s business environment as the needs of corporates, suppliers and funding providers shifts,” says Prime Revenue’s Medley. “By choosing a bank agnostic offering, corporates will not only be able to build a supplier finance programme in all the countries they need to, using the currencies they require, they will also be able to use their funding sources strategically.”

Building on this point, Medley notes that: “Supplier finance is not about one point in time. It is about developing a long-term viable solution that is scalable as the business ebbs and flows. Using a multi-funder solution therefore allows your supplier finance programme to adapt as the business, regulatory environments and banking relationships change.”

Regulatory hurdles

Whichever solution is selected, corporates and their partner(s) here in Asia will still have to navigate the region’s complex regulatory environment. When this is tied to the myriad of currencies that are used this can create a wealth of complexity, particularly if the solution has a broad reach.

In fact, it is this point that Standard Chartered’s Damacela believes has limited the penetration of regional supplier finance solutions across Asia. “We see many corporates offering supplier finance on a standalone single country basis. This is largely driven by the procurement patterns of corporates and generally reflects situations where the corporate has a local country entity that is doing a fair amount of procurement in country and in local currency. Corporates in these situations sometimes shy away from establishing a fully-fledged regional programme because of the complexity this could bring.”

There are various ways that companies can overcome these challenges. On the currency side, for instance, Samsonite have been able to entice all of its suppliers, aside from those in China, to accept US dollars for payment. As a result, the company has been able to launch a regional programme and also a RMB programme for its Chinese suppliers.

For those that aren’t able to do this there will be a need to launch a number of individual, in-country programmes. But as Standard Chartered’s Damacela, highlights, doing this means that it can be very challenging to “scale a solution similar to how a corporate would in the US and Europe, particularly if the corporate is not able to rely on a single bank partner across the region that understands the country level nuances and also possesses the required capabilities to successfully onboard suppliers”.

Even if the currency problem is overcome, regulation can still prove a big stumbling block. “In Asia, aside from when working in the developed markets such as Singapore and Hong Kong, there may be many blocking points that prohibit the roll out of a regional supplier financing programme,” says BNP Paribas’ Lechevalier. “In some countries, for instance, all transactions must be completed with recourse, creating accounting difficulties for the corporate seller,” he adds.

Selling the product

The final, and arguably most crucial, aspect of any supplier finance programme is the ability to sell it to suppliers. It may also be the most challenging.

The aforementioned scepticism around the ‘win-win’ billing the product receives is arguably one key reason that supplier finance programmes are relatively difficult to initiate anywhere in the world. Treasurers and procurement professionals from both Europe and the US will be able to attest to the fact that when the solution is discussed with suppliers there is often some doubt that this will be a good deal for them. And indeed, the same belief exists here in APAC.

Take Samsonite’s experience, for instance. The company, due to both internal and external forces, holds working capital efficiency as a key performance indicator (KPI) and Melkebeke and his team were set the objective of pushing payment terms out to 105 days. There would be no exceptions, apart from with those business critical suppliers. This, of course, was a tough ask for a number of the company’s suppliers and had a detrimental impact on supplier relationships.

Supplier finance seemed to offer a solution. But when having initial conversations with suppliers about the solution Melkebeke found there to be significant resistance. “It seems that there are some negative connotations that exist in the market around supplier finance. Many suppliers seem to believe that there is no upside for them and that it is just a way for larger corporate names to take advantage of them and push out payment terms. It was a big task to convince suppliers that this solution is a win-win,” he explains.

To do this, the company set about educating its suppliers with the aid of its banking partner. “Key to these discussions was transparency,” says Melkebeke. “We never disguised that there was a cost involved for the suppliers – there is a cost for us setting up the programme after all. But we made sure that we communicated that, in the grand scheme of things, there is more upside for the suppliers. This is because by agreeing to join the programme they are able to receive cheaper funding than they could from financing their receivables with a local bank, they can have a more predictable cash flow, they will be able to access their cash faster than before and also by accepting our terms they will become our preferred suppliers and thus potentially receive more business.”

Melkebeke offers a final key word of advice: “It is vital that you take time to pick which suppliers you will trial the solution with. The success of the trial will ultimately make or break the programme. If possible this should be done with well-known companies in the industry to give your programme credibility and the best chance to succeed.”

Long lasting benefits

Samsonite has reaped the rewards of this approach, with nearly 95% of suppliers now accepting 105 day payment terms. “Once we went live with the first batch of suppliers, which were high profile names in our industry, the solution quickly gained credibility and traction,” explains Melkebeke. “Where once we had to explain the benefits to suppliers, now they are knocking on our door wanting to be part of the programme.”

As a result, relationships, which at first were tested due to the new payment terms, have actually been strengthened. Internally, there have also been many benefits including procurement now being a net contributor to working capital, for instance, due to the increase in the company’s days payables outstanding (DPO). Cash flow planning has also been greatly improved as a result of the certainty around AP.

“Based on our experience, there is no reason not to launch such a programme, especially if you are paying attention to working capital metrics and do not want to undermine your key supplier relationships,” says Melkebeke. “And now, given the low interest rate environment, is an especially good time to get suppliers on board.”