07 Dec 2012 Supply Chain Finance – only a matter of time before it comes under scrutiny
“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.
Buyer: “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