Supply Chain Finance in Europe
In summer 2008, prior to any warnings of an imminent financial crisis, the French government introduced a law reducing payment terms to 45 days end-of-month or 60 days net. They imposed this on the private sector in order to resolve a lengthy history of bad payment habits and stem corporates’ excessive power over their suppliers. because suppliers of all kinds often found themselves in a treasury ‘limbo’ and could no longer sustain the 90 days payment terms from their clients – in reality, often paid beyond 100 days – and 45/60 days payment terms with their own suppliers. Clearly, the numbers were not working in their favour.
Many corporates have been ill-prepared, supposing that the law would not be adopted. However, this was not the case. Many corporates are currently seeking extra cash, often billions of euros, to comply with these new, earlier payment terms. Others succeeded in negotiating an extension with the government in order to comply at a later date. But the disappearance of cheap credit, suppliers have struggled as reduced payment terms fail to compensate credit lines or overdraft facilities that continue to vanish overnight. Meanwhile, their customers have struggled to find extra cash in order to make payments.
As many corporates face interruption in their supply chain, owing to slow supply deliveries and/or supplier receivership, securing the supply chain has become an important element of corporates’ business continuity. The first tangible step has been to question suppliers regarding their needs. However, suppliers are often wary of their clients’ motivation, which has usually been related to obtaining improved terms. Many suppliers have resorted to expensive confidential factoring, which enables them to mask their financial frailty from their corporate clients. However, at their procurement team’s request, corporates are now endeavouring to build supply chain finance (SCF) initiatives to alleviate their suppliers’ financial uncertainty.
Corporates are evaluating all current technical solutions such as inventory management, e-procurement, electronic data interchange (EDI) and e-invoicing, and are realising that the variety of tools available do not provide a complete solution to create a thorough SCF proposition.
SCF portals provided by independent operators act as a hub, enabling collaborative, dematerialised and auditable transaction management. Such portals complement existing technical solutions and provide visibility to suppliers, enabling them to forecast, be informed of disputes and manage early payment requests. Furthermore, it enables financial institutions to participate and address early payment demands partially or totally. To that end, corporates can repay banks on invoice due dates and still provide a crucial facility to their suppliers.
In implementing a SCF solution, many corporates are aware of the advantages of hosting and controlling their chosen supply chain portal. Indeed, this enables them to select participants from their suppliers to banks. Banks wishing to partake are effectively being offered new business, leaving the suppliers the opportunity to demand a financial contribution, which in turn helps to cover technical costs. Hence, such programmes offer substantial mutual benefits for all three parties involved (corporates, suppliers and banks) at a low cost.
Although some US, UK and Spanish banks are actively involved in SCF, banks are finding it difficult to handle the French market, owing to the very specific criteria put in place by French corporates. To this end, banks are witnessing the transition of SCF initiatives from bank to corporate control. Banks often prefer to reserve their commercial finance for lesser-volume products such as factoring, offering them a higher return. However, corporates want to see their suppliers freed from the constraints that factoring solutions imply and that the corporates have no control over. Additionally, factoring utilises credit lines that could otherwise be employed by corporates.
Furthermore, those banks that posses a technical solution to SCF only address the transaction when it has become a validated debt, ignoring solutions pertinent to the initial stages of the transaction, such as purchase order (PO), delivery, invoicing, dispute managagement and validation. Consequently, such programmes do not currently offer a thorough solution to SCF that fully benefits corporates and suppliers. Also, such programmes involve a single bank regardless of the size of their client’s portfolio, thus limiting the ability to serve the client’s full supplier base. However big or small the supplier, they are always crucial to the supply chain and require on-time payment.
Finally, and most importantly, remains the challenge between the banks and the corporates as to handle contractual collateral for SCF programmes. Corporates obviously do not want such programmes to be transcribed into financial debt, but to remain as operational debt.
SCF is continuing to flourish in France – unlike other large European markets such as the UK, Germany and Spain – serving its numerous large corporations and their associated network of cash-hungry suppliers. The current situation means it is vital for corporates not only to keep abreast of such initiatives, but also to drive them and provide assistance to their supplier network.
To this end, certain corporates are collaborating with their competitors to organise joint programmes for common suppliers. For corporates, SCF is indeed the opportunity to bring together departments, from logistics to procurement, accounts payable (A/P) and treasury. Moreover, corporates taking control of such SCF solutions have the opportunity to rid themselves of the negative image often associated with the handling of their suppliers. In providing them with flexible, collaborative solutions as well as competitive credit terms, suppliers are also relieved of the significant costs involved with confidential factoring and overdraft costs in particular.
Ultimately, such initiatives are a new way to do business. Notably, relationships between corporates and suppliers are improved, as suppliers are no longer considered as vendors, but partners in a crucial supply chain. Protecting the weakest should prevent the devastating impact that such disruption has on companies’ revenues.
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