Is the UK Ahead of the US When It Comes to Supply Chain Finance?
I've been quietly getting more involved behind the scenes in the supply chain finance market in the past six months, learning more and participating in a sector that I think will ultimately grow up to become the major driver of finance-led purchasing and invoicing initiatives. However, the market is extremely immature in North America, with only a handful of vendors and banks fighting for deals whose entire sum on an annual basis represents less than the total costs of a dozen sizable P2P deals. Globally, these tools aren't terribly far ahead of where they are in North America, either. Yet I think there might be some early signs that the UK will emerge as the country leading the adoption curve when it comes to this area. Moreover, the UK appears to be defining standards as to what types of programs are most beneficial.
In the above-linked Procurement Leaders post, we learn that the Association of Corporate treasurers (ACT) in the UK suggests a particular type of SCF program: "One good thing that the ACT has done is to clear up some of the confusion that continues to surround SCF by referring to it as a 'buyer-driven receivable programme.'" Stuart Siddall, CEO of ACT, is quoted noting that "In market conditions where lenders are concerned with credit quality we do believe that buyer driven programmes can and will help ease funding conditions." It's worth reading the rest of the post for additional color on the argument in favor of buyer-driver approaches (which stand in contrast to those where suppliers initiate the early-payment request or sell their receivables to third parties without the consent of the buyer).
Regardless, it feels to me that both the private and public sector in the UK are taking the whole concept of SCF -- including both buyer- and supplier-driven receivables programs -- more seriously than we are in North America, where the concept often remains a convenient extension to eProcurement and invoice automation solutions, with minimal overall penetration. I suspect, however, that as companies continue to hoard cash and as the economy flattens out or drops, and especially as credit continues to get tighter, we'll see this topic begin to take on more importance on our side of the pond. When it comes to reducing supply risk and profiting from receivables while saving suppliers money (relative to factoring) in the process, there's no better approach than what these types of solutions bring. Moreover, the longer working capital management remains a priority and/or top concern for CFOs/controllers on both sides of the transaction, the greater importance they will ascribe to SCF -- or whatever you want to call it -- over other areas of transactional procurement and A/P automation.
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Supply Chain Finance (SCF) and its approach should be of interest to each and every reader and professional within Finance, Treasury and Procurement. But before we look into this, it may be worthwhile noting that SCF, as we know it today, has been around for over a decade. This timeline is of significant importance, as it was back in those 'good old days' when cash was in abundance and anyone could get a loan to buy a detached home, without the need to prove supporting income; which all changed post the collapse of our trusted neighbor, Lehman Brothers. This is when we entered he world of the credit crunch where lending froze. I still question that if SCF did not become mainstream in its current form, then, why will it work today, when times have changed?
In its old form SCF is based on a receivable i.e. a suppliers invoice, and it normally requires for that invoice to be approved in order that the bank will provide what is termed 'non-recourse lending' i.e. no rights to their money back. So let us look at that, as today a supplier still has the right to factor their invoice, which in simple terms means selling their invoice to the bank; until such times as the buyer pays. The supplier has the right to do this, upon the issuance of the invoice, even if the buyer has not approved, therefore removing themselves from the control of the buyer. So if the old SCF model requires an approved invoice and it takes the buyer 28 days just to approve or even longer to submit to their Accounts Payable [A/P], which is an old trick used for years to preserve cash flow, then why would the supplier not factor in the interim, removing themselves from this equation?
One area that I believe is holding us back from mainstream SCF global adoption is the area of A/P and the perceived need to control; which I look forward to debating with the Spendmatters readership and bring to a rightful conclusion.
Control and where does it lie; what and where is the cost and how do we get suppliers to trust that we really plan to deliver on what we say?
1. A Purchase Order is not a favor to the supplier; it is an IOU for Goods and Services bought and therefore requires to be financed for the time it takes from order to payment. The buyer is paying for this IOU in the price and therefore should be concerned on the cost of finance associated with their P.O.
2. Payment as a tactical weapon and the perceived control by A/P on leverage. Suppliers do understand 'payment' and 'payment profiles', therefore this perception of control is misaligned as again you are paying for this in the cost of your goods and services.
In our buying and selling world it is important to realize that buyers are suppliers and suppliers are buyers. The sophistication of finance is relative to the practices adopted in the supply chain of the supplier organization. These can range from the most advanced to the most basic and will include the cost of finance and delayed payment / payment terms; WHICH YOU THE BUYER ARE PAYING FOR. In fact industry analysts quote up to 4% of invoice value within the financial supply chain.
Organizations need to look internally at the perception around what are they trying to control and at what cost. After all is it correct that Accounts Payable can withhold a supplier payment on an invoice for $ 3 million, due to a discrepancy of $5,000? Or indeed checking thousands of invoices that in fact have no errors at all? Have you ever checked your A/P data to run an annual report against credit notes generated against volume? Is the process correct? Could it be changed for a better financial outcome for all concerned parties? We believe so!
We believe that the process around A/P requires an update for the true connection and trust between a buyer and supplier to enter into a truly trustful relationship. After all, what does the supplier want beyond your P.O.? We would like to think trustworthy reliance on their cashflow. Do you think the supplier, if given the choice would rather pay "their" bank or "their" customer, assuming they could count on the customer for cashflow certainty? Does the buyer actually believe that their trustworthy supplier is actually going to run a mile, in the event that they brought up a discrepancy? Can we move A/P to its actual role in life, which is dispute resolution, not payment.
We live our daily lives on trust, we settle our bills by direct debit, we pay for goods and services with credit cards; does this mean we have given up our rights to challenge our suppliers? No, in fact these suppliers, often give incentives for this 'trust' in the way of discounts for their ability to count on us for their cashflow stability without the delay of dispute. Maybe another incentive in getting us to adopt automated payments is the promise or guarantee of a 'one on one' 5 minute phone call to resolve dispute; not a 40 minute wait with some call centre.
Hopefully one day, Jason and I can meet to discuss, the 'what if we could do it all over again' strategy, as there are certain small improvements that all corporates could leverage which would really deliver tangible benefits. Back to the SCF debate, sorry for the diversion!
Banks and their role in SCF, do you really trust one bank to provide you with your infrastructure? Treasury appears content with this, but what risk does it carry if you really look into this? What if you want to change banks, or indeed are so big that you require multiple banks [syndication]? Do you have one lead bank in the use of multiple and do you really have control? These questions should exist in any receivable based approach. Even when the wolf comes to your door, disguised as payables (just like the granny in little red riding hood), are you really in control or is it just receivables in disguise?
Technology companies and their role in SCF, how big are they? What is their market cap and revenue? How many employees do they have? Is the service multi lingual, currency and tax verified? Where are their servers located? What are their security and data protection procedures? More importantly, do they pass the bank and investor risk profile as no one wants to be left holding the baby?
So what if we did roll out an SCF solution, what does it really really mean, in a world where debt has become the prime issue facing Governments, businesses and individuals globally? In its most basic form, it is a finance facility, how big or small will be relative to its successful rollout. It may be 'on balance sheet' [a loan] or 'off balance sheet' [not a loan], but irregardless it is a facility that requires to be paid back. How are you going to pay this back, if indeed you have any intention of doing so [think credit crunch part 2 - the corporate debt time-bomb - more later]? And herein lies the question: should we now be looking at SCF for the next generation in a world that now understands the accountability in paying off our debts? Do we really need Supply Chain Finance and Refinance i.e. the ability to pay back, whatever facility we have created? Absolutely 110%, we believe we do!
David Brown
Chief Executive Officer
Oxygen Finance Ltd.
A True Payables "buyer in control" driven solution for responsible global markets
http://www.bankingtimes.co.uk/28072010-buyer-drive...