Legal View on Supply Chain Finance Structures David Gustin - August 4, 2015 6:33 AM | Categories: Risk Management | Tags: Accounting treatment SCF, Mayer Brown, UCC Article 9 It’s always good to get the legal input on supply chain finance, and I had the recent opportunity to sit in on Mayer Brown’s webinar Leveraging Supply Chain Finance to Optimize Value. Unfortunately I was in Whistler B.C., home to some of the most famous mountain biking trails (and yea, skiing too). So I had one foot in the webinar as I was preparing to head out and steal a day. While there are lots of common elements and features across supply chain finance structures, no two programs will be alike. Mayer Brown examined the differences between three structures. Invoice based SCF programs Negotiable Instrument Based SCF programs Non Recourse Receivable Purchase (Factoring) Chart courtesy of Mayer Brown Basically the key differences occur around the following areas: Article 9 versus Article 3 (In the U.S., the Uniform Commercial Code (UCC) governs private transactions including receivables – in different countries different regulations apply. By allowing lenders to take a security interest on collateral owned by a debtor's asset, the law provides lenders with a legal relief in case of default by the borrower. UCC filing or not – do you put a lien on that receivable? Buyer notified of funding and pays bank or not Accounting treatment Mayer Brown went into some special situations. For example, if a buyer is a special purpose entity, especially operating offshore (Singapore, Ireland), it is common for banks to require a parent guaranty from a creditworthy group further up the corporate tree. They had some interesting points around the accounting treatment of these programs, specifically how to avoid short term payable finance structures. There is limited GAAP guidance on the subject, and I have written about some of these issues here here and here . Essentially, Mayer-Brown mentioned four things to avoid: – Supplier participation is mandatory = BAD – Buyer involvement in negotiations between Supplier and Bank = BAD – Excessive Buyer control = BAD – Make-whole arrangements between Buyer/Supplier = BAD They have another webinar Trade and Supply Chain Finance Update, taking place in New York on September 16, 2015. P.S. If you would like to receive TFM’s weekly digest, sign up here. Related Articles Is Supply Chain Finance Constricted by Accounting Rules? When One Bad Alternative Finance Transaction Blows up Your Portfolio The Accounting behind Receivables – What you need to know Voices (2) Fred Steyl: 10.08.2015 at 3:24 am David, I have a problem with this statement: “Supplier participation is mandatory = BAD”… In an invoice based scenario the supplier of goods/services is also the supplier of an invoice, the instrument around which any transaction turns, right? So, if the supplier’s involvement is NOT mandatory (to render it GOOD), how does the invoice find its way on to the portal for funding, and in what way would either of the other two parties (bank or buyer) be able to complete the transaction without the “mandatory” participation of the supplier in asking for early settlement thereof? This seems to me to defeat the entire objective of the practice, that being to release working capital to SME’s that need it most. Unless I’m missing the point … always possible! Reply David Gustin: 10.08.2015 at 10:38 am Fred, I believe Mayer Brown was referring to specific supply chain or reverse factoring programs which “require” all suppliers to enroll. You are mixing apples and oranges, ie, the AP automation and einvoicing before the invoice reaches an approved state. Cheers David Reply Discuss this: Cancel reply Your email address will not be published. Required fields are marked *Comment Name * Email * Website Notify me of new posts by email.