Facilitate Your Supply Chain Finance RFP Process – Post 2

Yesterday we looked at one of the three “E”s in the Supply Chain Finance RFP process – Education. Today we look at Establishment and in particular, the single bank, multi-bank, or platform provider issue.

Program Establishment

The first big issue to deal with is what is the most appropriate funding model.

  • Do you want to self-fund some or all of your suppliers’ receivables?
  • Do you want to work with a single relationship bank? Or do you want to have a few relationship banks involved?
  • Do you want an agnostic Funding Model or one managed by a platform provider (who can work with your relationship banks)?

Ah, so many questions and we haven’t even started yet.

It’s important to realize that bank led supply chain finance or what we sometimes call reverse factoring involves your credit.  Any bank setting up a program must set up an unsecured facility.  In traditional factoring, the underlying assets are the seller’s accounts receivable, which are purchased by the factor at a discount. The remaining balance is paid to the seller when the receivables are received, less interest and service fees.  In supply chain finance programs, the credit risk is equal to the default risk of the high-quality customer, and not the seller.  In this arrangement, credit is set up to “buy” the receivables on a without recourse basis to the seller and the risk is the buyer does not pay the amount on due date.

So back to the big question - How do you make this decision – feed one relationship bank, go with a multi-bank model, go with best of breed technology providers funding model, or use an agnostic funding model?

Single Bank balance sheet lending can restrict program capacity due to changes in limits, supplier exclusions, Basel III constraints, etc. This has been the experience of more than one Buyer we spoke with.  The lead platform bank manages, usually under a pricing band from the Buyer.  A participating bank who is not interested in doing any credit work can still be a funding source.

Typically the way a multi-bank funding model tied to banks or non banks works is each funder gives parameters of what they will take (price, tenor, currency, etc.) and total exposure.  A supplier is assigned a bank (easier this way in case of supplier default so multiple invoices are not out to different banks)

From our discussions, there are three issues with funding:

  • Given SCF is an uncommitted credit product, how do you manage if funding partners suddenly change their credit policies and limits?
  • How to ensure enough capacity for the future?
  • Do funders have the ability to handle large key suppliers?

Another important consideration is can your funder(s) provide your suppliers finance but not off an “approved invoice” so you don’t need to use your credit here.

Right now, there are new platform providers coming into the market.  CRX Markets has recently entered the market, and won a bid to roll out CRX’s proprietary Supply Chain Finance platform, initially at the Lufthansa subsidiary LSG Sky Chefs. They also are working with a major global food manufacturer.

So there is plenty of capacity out there beyond banks.

If you are interested in comparing notes, please contact me at dgustin at tradefinancingmatters.com

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