Supply Chain Finance – only a matter of time before it comes under scrutiny

Supply Chain Finance – only a matter of time before it comes under scrutiny

Posted by Pete Loughlin in Financial Supply Chain Management, Supply Chain Finance 07 Dec 2012

“What a tangled web we weave when first we practice to deceive” Walter Scott

I am a fan of supply chain finance. Executed properly it can allow buyers to optimise their DPO without painful extensions to payment terms for suppliers and it can lower the cost of working capital to suppliers. But it doesn’t always work like that.

There isn’t a simple definition that covers all interpretations of supply chain finance but at a high level it involves the collaboration of a strong buyer extending their superior financial strength to their buyers to allow them to borrow on the strength of approved invoices. That sounds very worthy doesn’t it? But let’s look at what can really happen. Let’s listen in to the conversation between a buyer and supplier. The supplier is on 30 day terms and his his generous customer offers to allow him to borrow money for 30 days at a favourable rate.

Purchasing Insight logoBuyer: “As we have approved your invoices for payment, our clever bank will extend credit to you at terms that would not normally be available to you. You can borrow the value of your oustanding invoices for 30 days or, in other words, recieve payment 30 days early at a very small cost.”

Supplier: “Great. Instead of waiting 30 days for my money I get paid straight away?”

Buyer: “Well not exactly, because were changing your payment terms to 60 days.”

Supplier. “Oh I see. So I get paid in thirty days like I did before but I have to pay your bank for the privelage. And you double your DPO? Isn’t that just the same as you borrowing money from the bank to extend your DPO except the loan is in my name and I have to pay for it?”

Buyer: “Shhh! Don’t say it like that. There is a form of words we use with the bank that allows me to avoid the classification of trade balances as debt.”

Supplier: “That’s sounds very technical. You did say your bank was clever!”

The tangled web of supply chain finance

You know something’s wrong when it becomes difficult to explain in plain language. In contrast – look at Tradeshift’s Instant Payments, Taulia’s dynamic discounting or OB10’s Express Payments – straightforward, crystal clear financial supply chain products, all with one thing in common – not a bank in sight.

If supply chain finance really was the worthy win-win opportunity, why do the banks make it so complicated? Perhaps it isn’t always a win-win at all. If I was cynical, I’d suggest that it’s a contrived way for powerful buyers to artificially enhance their apparent value. Or if I was both cynical and mischievous, I’d say that it is a way of banks exploiting their large customers’ supply chain by forcing borrowing on them. But I’m neither cynical or mischievous so I won’t suggest either is the case.

Complexity is often there to conceal the reality – the simple truth. Increasingly, businesses are coming under scrutiny from governments and tax authorities suspicious of the convoluted and contrived structures that are being put in place. Consumers are becoming savvy too. Starbucks recently suffered a PR setback in Britain when it tried to justify its complicated corporate structure and why, as a result, it pays almost no tax in the UK. It may only be a matter of time before supply chain finance schemes, particularly the more complex arrangements, attract the same level scrutiny.

Pete Loughlin can be found on twitter @peteloughlin

  • Siva December 7, 2012 at 6:19 pm /

    Hi Pete, thanks fe your regular comments on Supply chain finance programmes. Very interesting ones indeed. However I fail to understand why your conclusion is always the same – ‘banks are wrong’!!

    I would differ with that comment and observation in all of your articles. Both Dynamic discounting (without involving banks) as well as Supply chain finance have their own advantages. In reality corporates using the former should ideally be penalised as they are artificially creating the need for discounting. Instead under a bank provided programme the bank funds the suppliers and thats where the advantage really comes in.

  • Dan Juliano December 7, 2012 at 11:07 pm /

    First of all easy doesn’t necessarily = better. Dynamic Discounting rates are equivalent to 15% APR on the low end 36% and higher on the high end. Is that better for the suppliers? Good for the buyer charging those rates but good for the supplier? Card programs charge 2 to 3% off the value of the invoice for 30 to 45 days of financing. Is that better for the suppliers?
    Adoption for both these services are typically very low because the value is very low to the suppliers.
    SCF programs offer rates between 1% to, at most, 3% to 4% APR. This is very cheap access to capital for suppliers. Cheaper than many can get in the current banking market.
    And what you describe as the roll out strategy for SCF programs has long been enhanced from that messaging back in 2006 and 07. More sophisticated roll out strategies work like consulting firms looking at buyer’s terms and recommending terms extensions based on industry, commodity, country, etc…not here is low cost financing give me terms. And unlike in the past when consultants made a recommendation on new standard terms the supplier just bore the term extension as a cost of doing business. Today SCF providers are offering low cost access to capital as mitigation to negative cash flow implications to the term extension.

    There are challenges with rolling out SCF programs but what you outlined really isn’t one of them.

    Dan Juliano PrimeRevenue

  • Pete Loughlin December 8, 2012 at 8:42 am /

    Thanks Siva and Dan for comments.

    I do come across as being negative toward the banks don’t I – it reflects what I think – but only partially. The banks play a critical role and in the right place offer an invaluable service. But not always. The article is playing devil’s advocate with the banks approach.

    And to your comment Dan about Dynamic discounting costing 15%-36% to suppliers. For some suppliers, compared to factoring, this is an attractive rate.

    “Today SCF providers are offering low cost access to capital as mitigation to negative cash flow implications to the term extension” – this is exactly what I’ve described. You put it in more professional terms than my tongue in cheek description.

    It’s horses for courses but I am quite genuine when I point out that the banks and their customers need to be cautious of how these arrangement are perceived – perception is reality remember.

  • Ian Burdon December 8, 2012 at 9:15 am /

    For various reasons I keep out of discussions on SCF but I’ll bite in this case. I have noticed in the past year that ‘supply chain financing’ has started to be used as a synonym for dynamic discounting. It is no such thing.

  • Maex December 8, 2012 at 2:38 pm /

    @Ian I completely agree with the merging of terms. Especially in the UK it seems that SCF is actually used as an umbrella for all sort of “paying suppliers early with a discount” (regardless of the source of funds). I am not sure if this is a good or bad trend, it might be worthwhile in discussions to point out what is meant with SCF.

    @Dan There are a few things in your comments that are just simply wrong, and I want to point them out. First of all, there is an obvious place for the traditional, bank/third party funden Supply Chain Finance approach. There is no doubt. But it is tailored (currently) for the largest suppliers for a buying organization only (as you know best). Companies like Taulia working on changing that and extending those early payment options down to the entire supply base, to the long tail, self funded OR bank funded.
    You state that adoption for Dynamic Discounting (DD) is “typically very low”. I would appreciate if you back such a statement with data, I feel that would help the audience. The fact is that the adoption of traditional buyer funded DD programs are, if done right, incredibly high. Just go to website of DD providers, check their case studies or better webinars with _real_ customers.
    When you use the term adoption, I assume you mean some other metrics than actually suppliers getting paid earlier. I looked at the PrimeRevenue website, and since 2004, about 12,000 joined the PrimeRevenue solution. And that is, if I understand that correctly, over all your participating buying organizations. And that is completely in line with how traditional SCF can work: it only addresses the top suppliers in terms of spend and leaves the “little guys” behind.(and there it works very well, especially if you combine it with DD, but that is a topic for another day!!!). Perhaps you did not mean to compare adoption rates of SCF (bank funded programs) with DD (buyer funded) programs to each other, just sounded like that in your comment.


  • Dan Juliano December 10, 2012 at 4:53 pm /

    @Maex I was addressing Peter’s comments and how he perceives SCF is deployed and the issues with it and the leap that DD is an alternative to SCF. There are a few issues with that that but two primary ones are:
    1. The suppliers targeted for SCF will not pay the rates offered for DD. Adoption will not happen at rates at 5 or 6% APR let alone >10%.
    2. The benefits for the buyer between the programs is completely different. SCF is typically a working capital objective around increased cash flow and/or reduction of risk in the supply chain. While DD is a P&L objective or returns on ideal cash and does not help with cash flow or DPO metrics.

    If you look at adoption rates of DD or PCard programs, as you state, they attack the tails of the supply chains. So if you look at adoption by spend vs. number of suppliers the adoption rates are low. I know this for a couple of reason but one is PrimeRevenue runs DD programs for buyers today. We call them self funded programs where the buyer acts as the bank paying the suppliers early. Convincing suppliers to pay the rates the buyer wants as a return has its challenges, as I’m sure you know.

    At the end of the day if buyers want to use their cash to pay their suppliers early and make what they perceive as a better return on ideal cash, more power too them. And companies like Taulia and PrimeRevenue will make products to meet those needs. However, I don’t agree that you can interchange the programs. They go after different suppliers and provide a different value proposition for the buyer.


  • Maex December 10, 2012 at 6:09 pm /

    I think we are perfectly aligned. SCF (bank funded) has a place, so does DD (buyer funded) . Different supplier populations, agreed.
    A strong trend we see is the combination of both, which you do as well. This will provide return on cash and combine it with cash flow and optimizing DPO. best of both worlds.

    In addition, we see that SCF (in the third party funded sense!) goes down market (in terms of size of suppliers), since funding decisions can, with help of massive data, be made easier, cheaper and quicker (which opens the window for those smaller suppliers where banks today have to stay away from due to high costs of on-boarding).

    Hope this makes sense!


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