Supply chain finance can be a powerful cash flow and growth-acceleration tool for corporate buyers. Alongside the supportive measure of the EU’s Late Payment Directive, SME suppliers are beginning to see it as a potential lifesaver too.

When opportunity knocks, Sebastian Zegocki, Managing Director of specialist transport company, Brit-Pol, knows when to open the door. As soon as his company was presented with the chance to join its customer’s supply chain finance (SCF) programme, it made its move and has never looked back.

The company has grown rapidly from a single truck to 65 trucks in four years, Zegocki explains. “It was foreseen that this growth needed to be financed properly and, as we expect continued growth, the decision was taken to look into SCF.”

Having seen how SCF could help meet the company’s needs, Zegocki describes the on-boarding process – and the requirements made of the business to be able to participate – as “quite straightforward”. Brit-Pol has an established track record and good credit history, he explains. “We were not asked to do anything different in order to participate as our invoices are raised under a self-billing regime.”

Today, he reports that the programme is meeting Brit-Pol’s needs “very well”. Indeed, he confirms that the cash being received is being re-invested into the business “to improve our facilities and infrastructure”. The help provided by PrimeRevenue, he adds, “has been invaluable in this process”.

However, at a broader level, PrimeRevenue is concerned that with the late payment Directive, suppliers like Brit-Pol would not have the option for early payment with SCF. The vendor’s unique SCF solution is thus an essential part of its clients’ growth plans.

Positive disruption

Why PrimeRevenue’s approach to SCF is seen as a disruptive intervention in this market is obvious to Hana Ferklova, Regional Vice President of Legal & Compliance, EMEA at PrimeRevenue.

“Our approach to supply chain finance is different from many of our competitors. First and foremost, we rely on multiple sources of funding whereas other providers often rely on a single source,” she explains.

Indeed, in many cases it is the bank that is acting as provider, and more often than not, that institution has limitations on which geographies and currencies it supports. “Several years ago, we saw many banks scale back their SCF operations in Central Europe,” notes Ferklova. “The net result was that organisations faced significant funding gaps in their SCF programmes. That dealt a blow not just to the organisations running the programmes, but also to the suppliers who participated in them that had come to rely on SCF to accelerate cash flow. Our customers don’t have to worry about that.”

The reason is simple. PrimeRevenue currently has over 100 funders on its platform. This means that it is able to extend the benefits of SCF “to more suppliers in more geographies using more currencies than any other provider”.

Another way PrimeRevenue is disrupting the market is by bringing SCF to organisations that have historically been overlooked, adds Ferklova. This includes small and mid-sized businesses as well as companies with sub-investment grade credit ratings. As she rightly points out, these organisations are often the ones that need cash flow improvements the most.

Wider benefit

SCF programmes effectively have benefits for both buyers and suppliers. Buyers use it to strengthen their supply chain or to accelerate their cash flow by extending payment terms, in the latter case knowing that SCF programmes create opportunities for suppliers to mitigate the impact of payment terms changes, if desired.

For suppliers, SCF is a powerful tool that can be used for planning (giving cash flow predictability) or to receive early payment by a funder (ensuring cash flow optimisation), all without the balance sheet impact. “In short, SCF is a win-win for both parties,” comments Ferklova.

PrimeRevenue SCF programmes are structured to derive maximum value for users. Its multi-funder approach translates into all the above benefits. But, says Ferklova, PrimeRevenue also delivers benefits not offered by competition.

She explains that using its best practices, PrimeRevenue implements and onboards fast, and yet its programmes are backed up by a comprehensive legal framework. In addition, PrimeRevenue’s programmes utilise an advanced system that benefits from a continued focus on innovation. Our system, she notes, is “robust” with “unparalleled security” and “first-class” user support.

“In short, we provide an outstanding experience and push further than anyone else in the industry to provide greater opportunity to succeed, for both buyers and suppliers, in optimising their cash flow.”

The need for a more supportive regulatory environment

Adopted on 16th February 2011, the Directive 2011/7/EU (on combating late payment in commercial transactions, also known as the ‘Late Payment Directive’ or ‘LPD’) is intended to help suppliers optimise their cash flow. It introduced mandated payment terms and penalties for late payment in commercial transactions and required the member states to reflect the regulation locally. As a result, in number of EU jurisdictions, the local regulation now dictates that in commercial relationships all suppliers get paid in 60 days (or 30 or even 15 in certain circumstances), unless the customer-supplier relationship qualifies for an exception recognised under applicable law.

This may appear to be good news for suppliers, but deeper inspection reveals a downside. As it stands currently, if implemented restrictively, the LPD regulation unintentionally harms those suppliers that rely on SCF to accelerate cash flow. Ferklova says, “there is little doubt that LPD is designed to protect European businesses, but it also discourages companies from offering SCF programmes to their suppliers”.

The scenario she presents is compelling. Thousands of European businesses rely on SCF programmes to get paid early (often immediately) for their products and services. If they were to rely solely on the LPD regime, suppliers that are used to getting paid on day two or ten would get paid on day 30 or 60. That could be devastating to suppliers that rely on fast access to liquidity provided by SCF to invest in innovation, manage seasonal demand or navigate fluctuations in the market.

This makes the case for regulators to take a different view of SCF.

“It is very likely that suppliers would wish to continue using the SCF solution, with or without the restrictive measure in place,” comments Ferklova. But there is a risk that restrictive implementation of LPD could negatively impact the availability of SCF solutions to suppliers in Europe. If the intent is to help small or medium-sized business grow, driving SCF solutions out of the EU market would not achieve the goal.

Ferklova asks what would happen if the law restricted any payment term extensions in the manner described in the example above, with no exceptions allowed? “The ability to unlock cash via SCF and use it to invest in growth and innovation would be materially impacted as a result, for both buyers and suppliers,” she states.

Buyers wouldn’t be able to extend payment terms beyond the mandated number of days, and their appetite to support the availability of SCF solutions would inevitably drop. As a result, only a limited number of SCF solutions would be available to suppliers, if any.

“That’s a big deal,” states Ferklova. “As our colleagues at Brit-Pol have shown, SCF gives suppliers an easy, low-cost way to fund strategic growth objectives that are often incredibly expensive.”

This is true for Kiddyum, a small UK-based food manufacturer that would have struggled to fulfill orders for a major client – one of the country’s largest grocery chains – without SCF. Indeed, it was only its participation in that customer’s SCF programme that enabled it to accelerate its cash flow, which in turn enabled it to expand production to meet the growing demand of its customer. Without SCF, notes Ferklova, these suppliers would have had to turn to “less dependable, more costly, and non-immediate sources of liquidity” to grow their businesses and remain competitive.

Maintaining the power

LPD certainly has its place in combating late payments in commercial transactions in Europe. However, the intended reach of the regulation itself, and the approach to its implementation, must be carefully evaluated; market participants must not be negatively impacted and their opportunities for growth supported not impaired. For Ferklova, the implications of insensitive implementation of LPD “could be dire and the impacts devastating”, particularly for the SMEs that it aims to protect.

SCF has the power to accelerate cash flow to fund strategic growth initiatives for all suppliers, regardless of geography, currency and size. It can do so without burdening them in the process. SCF is thus perfectly positioned to complement the efforts and help achieve the objectives of the LPD, supporting employment, growth, and an improvement in the liquidity of European businesses, including SMEs.

“Let’s hope that the current EC initiatives aimed at evaluating the potential benefits of SCF for European businesses and the European economy bear fruit, and the resulting regulatory environment enables European businesses to grow and succeed”, concludes Ferklova.