The Infrastructure Layer – A Framework to Understand Business Credit Post 1

Last week, we talked about how new models of business credit still require an understanding of the different layers that enable credit to occur. With new techniques ready to disrupt how businesses are financed, we need to think beyond just the technology that acts as a necessary enabler and get down to understanding what I call the infrastructure of credit.

Think Blockchain. What is Blockchain? My colleague Jason Busch quoted this definition: “A peer to peer public ledger maintained by a decentralised network of computers that requires no central authority or trusted third parties”.  And right now there are several blockchain developments that are looking to enable finance in a new tokenized manner.  Perhaps tokens can eliminate risk because they cannot be duplicated, but does that mean we ignore the infrastructure for trade credit and rely on an autonomous system of record between organizations?

While new techniques are developing that will enable data triggered, event finance and receivable marketplaces aided by this technology, we will still live for some time in a world where many commercial finance loans are “asset-based” and the amount of the loans will bear a direct relationship to the amount of collateral available and how that collateral is actively monitored.

Click here to download your copy of the 2016 State of Supply Chain Finance Industry

In short, as traditional and non traditional finance worlds blur together, the infrastructure layer that sits on the top that governs how business trade flows are financed still matters.

Just what is this Infrastructure layer


While not going ten feet deep, below is a flavor of some of these layers in more detail:

Regulatory Framework

Regulatory issues include the Uniform Commercial Code and Basel III bank capital standards.   In the U.S. the Uniform Commercial Code (U.C.C.) governs private transactions including receivables. In Canada, it is the Personal Property Security Act or “PPSA”.  In different countries, different regulations apply.  Article 9 of the U.C.C. harmonizes the law of sales and other commercial transactions in all 50 states and deals primarily with transactions involving personal property (movable property), not real property (immovable property).  This article governs secured transactions where security interests are taken.  By allowing lenders to take a security interest on a collateral owned by a debtor's asset, the law provides lenders with a legal relief in case of default by the borrower. With such legal remedy available, lenders would therefore be able to lend capital at lower interest rates. Security interests are particularly valuable in bankruptcy, because creditors who have security interests in a bankrupt debtor's estate take precedence over creditors who lack such interests (unsecured creditors).

Legal Framework

The United States Bankruptcy Code Chapter 11 permits the reorganization of distressed businesses, while protecting the interests of creditors.   In essence, bankruptcy is a value reorganization event – it fixes value to an estate on the effective date of an agreed plan and finds a way to distribute that value to creditors if the firm cannot continue as a going concern. The value received is a waterfall, that is, senior creditors get what’s owed to them first, than junior creditors, etc. till cash runs out.

As it relates to SCF, while there are lots of common elements and features across supply chain finance structures, no two programs will be alike.   For example, there are legal differences between these three supply chain finance structures.

  • Invoice based SCF programs
  • Negotiable Instrument Based SCF programs
  • Non Recourse Receivable Purchase (Factoring)

Remember, infrastructure matters. Tomorrow we will look at some of the other key Infrastructure Layers.

Click here to download your copy of the 2016 State of Supply Chain Finance Industry

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