Supply Chain Finance, David Cameron, and why Procurement should take more interest

We noted with interest the UK Prime Minister’s announcement a couple  of weeks back about supply chain finance (SCF). At first, it seemed like a welcome initiative, but as we read some of the expert comment around it, some concerns started to emerge.

Would it be an excuse for larger firms to delay payment to their small suppliers on the grounds that if they need the cash, they can always get it via SCF? Will the banks really be interested in the "long tail” of small suppliers and even smaller invoices?  And do firms actually have the processes in place to make it happen?

We looked to people who understand these things better than we do. Our go-to guy on matters invoice related, Pete Loughlin at Purchasing Insight, was worried about the margins the banks might make out of these schemes:

If the UK government means what they say, that they want to help small business who struggle to get credit, they need to get a little bit closer to these supply chain finance schemes to ensure that they operate in favor of hard pressed suppliers and not in the interests of big business and the banks. That really could give a welcome and timely boost to the UK economy.

And, as Stefan Foryszewski of OB10 put it:

For SCF to have a significant impact, a company must receive and approve invoices swiftly and accurately before a financing party can advance funds to suppliers. For many large organisations, this process is still paper-based, manual, error-prone and incredibly slow.

We also wondered why, if this was suddenly a hot topic for David Cameron, was there no mention of some of the really innovative developments going on in the field of broader supply chain finance, often linked to e-invoicing and dynamic discounting? If you read Spend Matters US and PRO, and Purchasing Insight, you may have seen recent discussions of new innovations and development from OB10,Taulia, Oxygen Finance, Tradeshift and Basware amongst others.

Had the Prime Minster been nobbled somehow by the banks to put forward a “bank centric” view of SCF, we wondered? After all, the word on the street was that Irene Graham from the British Bankers’ Association was close to this work, and one of the driving forces within Cabinet Office in this area is Lex Greensill, working as an Adviser - he’s ex Morgan Stanley and Citibank, so you might assume a certain interest there.

However, our sources suggest that Cabinet Office themselves are genuinely open to all and any option that ultimately gets liquidity into the supply chain, which should benefit the economy of course. And it was probably too much to expect that Cameron would give a detailed Jason Busch type analysis of every dynamic discounting and supply chain finance option, provider by provider! Having said that, I’m sure the BBA does push in certain directions - let’s face it, they have easier access to the corridors of power than any individual solution provider is likely to achieve.

So, our conclusions so far.

Firstly, it is good to see the issue of finance for small firms and through the supply chain getting an airing at the very top levels. Secondly, and we’ve said this a few times before, we do believe that procurement executives need to get involved, if they’re not already, in the whole area of invoicing, payment and supply chain financing (and they’re obviously linked issues). There are wins to be made and credibility to be gained – and procurement is at least as well placed to achieve that as finance colleagues.

And thirdly, do look at all the options. That includes “traditional” SCF schemes led by the banks, solutions from OB10, Taulia, Oxygen Finance, Tradeshift, Basware, and perhaps card-based options.

We’re not going to try and give a comprehensive list of options or evaluation criteria here today, but clearly the robustness and ease of use of the process / solution, its cost, the underlying cost of finance for the firms, integration with other processes (the wider P2P cycle), and provider service levels are likely to be part of that picture.

There’ll be more on this topic to come as well from us.

Voices (2)

  1. Ian Heptinstall:

    Am I the only one why cant quite see the underlying model which makes SCF sensible for the buyer? I’ve read a little but it still hasnt quite clicked

    The SCF specialist must make their money somewhere, and what special expertise do they bring? I can see is a benefit where the buyer is not good at (i) using their own financial strength in the money markets to secure the cash to pay suppliers early (ii) negotiating to pay less for faster payment or (iii) managing AP processes.

    If you dont want to process your own AP, would it be better to outsource just this part? Then the buyer could arrange their own source of cash to pay suppliers, and negotiate discounts for early payment. A common practice in Germany used to be always to have twin payment terms in place with main suppliers – such as “net monthly or -1.5% for 15 days”. In this case the in-house finance team used to make a regular decision whether to take the early payment discount or delay, dependant upon what better uses of cash they had.

    In house solutions could actually favour smaller suppliers – since the amount of cash is less significant.

  2. Robert Kramer:

    Peter,

    The attraction to bank funded Supply Chain Finance programs lies in the low rates charged to suppliers. The downside to watch out for is how the SCF solution provider will address the “tail” suppliers, the small suppliers who may need cash the most. The ideal solution can be a combination of both bank funded and self funded (aka Dynamic Discounting) SCF.

    At PrimeRevenue we provide both bank funded and Dynamic Discounting solutions. The big advantage of bank funded SCF, and perhaps the attraction for the UK Government, is the early payment discount rates charged to suppliers are much, much lower than those generally seen in Dynamic Discounting programs. For an investment grade buyer, an SCF program funded by banks will generally charge suppliers about 1.5% – 3.0% APR whilst Dynamic Discounting offers rates of about 10% – 30%+. That’s a huge difference!

    Some banks don’t want to fund some types of suppliers, particularly small suppliers, and here is one advantage for Dynamic Discounting. Most banks aren’t interested in suppliers with less than £250,000 in sales to the buyer (this is one reason why we bring in multiple banks on our bank funded SCF programs, to make sure all required suppliers are covered). Dynamic Discounting generally will target suppliers with much smaller spend than bank funded SCF.

    Given the rates charged to suppliers for Dynamic Discounting it’s basically the equivalent of pay day loans for suppliers but there will be some suppliers that are very desperate for cash in industries with high enough gross margins to cover the expense.

    Robert Kramer
    Vice President, Working Capital Solutions
    PrimeRevenue, Inc.

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