Supply Chain Finance: The Recipe for a Financial Layer Cake
Supply chain finance (SCF), or reverse factoring, is similar to the choice between traditional stew and a well-balanced nouvelle cuisine dish: it is heavy on the stomach and rapidly abandoned for lighter dishes.
In modern SCF programmes, the corporate needs to act similar to ‘le chef’ by demanding that everyone sit at the table to devise the best menu. There is indeed a menu to manage and no corners should be cut in the wish to get to the dessert. Before opening discussions to all participants, the corporate requires that its own internal organisation (procurement, accounts payable (A/P), treasury, etc) is united in its efforts to achieve a palatable result.
To be frank, a SCF programme can be a layer cake lacking in sugar and spice, becoming rather bitter if the necessary preparations are not made, and, similar to a soufflé, can deflate rapidly, alongside the guests’ appetites.
Preparation is indeed key, as only quality ingredients can be used for a successful recipe. Three ingredients – legal frameworks, technology and a supplier roll-out plan – are key to a guaranteed three Michelin stars.
The corporate chef should test their ingredients with expert service providers and avoid immediately inviting its largest bank for lunch. As a protective measure, a bank would inevitably order all items on the menu, with eyes too big for its stomach, biting off more than it could chew. The corporate must avoid a custom-built SCF programme, but leaving it with a substantial bill to pay in addition to washing the dishes. Most often, corporates only consider tasting SCF if the programme remains as supplier debt. Quickly whipped, SCF programmes with standard terms and conditions will no doubt be salt in the wounds of those worried auditors, who would swiftly turn the great dish into financial debt.
A SCF expert will provide quality SCF ingredients but will also ensure that the varying cake layers can appeal to the appetite of all different categories of suppliers. Three essential tiers can be applied, based on suppliers’ financial needs:
These three modes provide corporates with additional independence from banks in controlling all aspects of the funding and potentially keeping a lid on costs applied to their suppliers.
Auctioning suppliers’ receivables is in the fresh-from-the-market category. This mode allows the corporate to propose suppliers’ receivables to a much wider array of financiers. Again, the implication for the corporate in this gastronomic lunch à trois needs to be carefully weighed up, so not to risk any shift of supplier debt into financial debt in order to avoid an unpleasant hangover.
To attract diners, the menu can also propose funding on different steps of the transaction: partial financing for purchase orders (POs) with trusted and strategic suppliers, financing on received but not yet validated invoices and also validated invoices. Again, a unique menu won’t fulfil the dietary requirements of all suppliers, so choice is paramount.
A well-oiled technology will allow for multi-currency, multi-language, and multi-bank management. Corporates should control the technology and access to it. Importantly, modern SCF platforms could be peppered with appetising functionalities offering early visibility to suppliers, and also PO management, electronic invoicing (e-invoicing), collaborative dispute resolution, remittance advice, etc, all proposed as options.
With the expansion of software-as-a-service (SaaS), the technology does not necessarily need to be purchased, leaving all technical hurdles to be managed by service providers. Service providers can also actively participate in the supplier recruitment phase (marketing, technical, contract distribution and collection).
A multi-dimensional SCF layer cake can tempt all types of suppliers into taking a bite at the programme and decide whether to have seconds or not. While participation should be free for suppliers, with as few obligations as possible, the corporate should make it clear to the supplier that there is no such thing as a free lunch. The corporate can demonstrate that pre-financing costs are kept to a minimum for the supplier’s benefit.
Corporates can enjoy the different layers of their cake:
The crème de la crème remains the revenue opportunity for the corporate that can be adjusted on categories of transactions, suppliers, etc. And, thanks to the SCF programme, the‘cherry on top is the enhanced buyer and supplier relationship, which is tangible proof that supply chains are evolving.
For suppliers, the announcement of a reverse factoring programme within supply chains used to sound like corporates sharpening their knives (again). With pick & mix SCF programmes, suppliers can enjoy numerous benefits based on service, early visibility, online dispute management and very ‘appetising’ costs against early payment.
The more corporates and suppliers take bite at SCF programmes, the more their palate discovers the host of flavours available to them. There is no secret recipe for SCF, but efforts are rewarded. As always, the proof is in the pudding, so try it. Bon appétit.