If we are involved in receiving payable files, then we can certainly add early pay finance. While there is growing interest on the part of B2B payment providers to develop early pay capabilities, the credit and banking world has changed substantially in the surreal reality of the coronavirus crisis. The low-risk reputation of “purchasing” invoices or receivables has changed dramatically with coming credit downgrades, deterioration in balance sheets and income statements, seller and buyer bankruptcies, and many other aspects.
From the banks’ perspective, supply chain finance (SCF) is an uncommitted credit facility to a large company to purchase invoices from their suppliers. There are many issues around this simple statement, from the complexity of onboarding non-customer suppliers to the accounting treatment concerns that are now reeling heads.
With any finance technique, money needs to change hands and a payment is made to some supplier, either domestically or offshore. With SCF, the payment happens to be done early, by a third party that transfers funds electronically to the supplier’s bank account.
Supply chain finance (SCF) is a relatively small market compared to its more short-term liquidity cousin, commercial paper (CP). Yet, the SCF market is going through turbulent times and may need to be rescued with some form of guarantees. The CP market is extremely important to company liquidity and was frozen before the Fed put together a $1 trillion backstop. Essentially, CP broker-dealers would not buy paper because they were unsure companies would be able to pay it off at maturity within 90 days or less. The Fed announced a special credit facility to purchase corporate paper from issuers that have been having a difficult time finding buyers on the open market.
As such, that leaves us the supply chain finance market, where arguably there are anywhere from $50 billion to $75 billion in outstandings at any one time compared to $1 trillion or more for commercial paper.
The coronavirus outbreak is shutting down our service economy. Besides the usual suspects — restaurants, bars, gyms, etc. — we have a whole host of products and services where demand is collapsing.
It’s tough sledding when demand is vastly reduced or just plain stops.
One area where we won’t see declines is around digital commerce. As widely reported, Amazon announced plans to hire 100,000 warehouse workers. Many of the sellers on these platforms will be in need of cash to survive or to meet demand, and thus keep workers paid, including employees and gig workers.
While merchant cash advances (MCAs) may not be the cheapest form of generating quick cash flow, they are fast and are not a loan, but a sale of future receivables.
“The ultimate flaw in bitcoin and alternative money is it is contesting the State for the control of money.” — Ben Hunt, Epsilon Theory Back […]
David Gustin is the chief strategy officer for The Interface Financial Group responsible for digital supply chain finance and is a contributing author to Trade Financing Matters.
“Ahhh. This porridge is just right.”
— from “Goldilocks and the Three Bears”
The Goldilocks principle is named by analogy to the children's story “The Three Bears,” in which finding the right temperature for porridge took some sampling.
So how do you make sure the porridge is just right if you are today’s middle market treasurer and need to balance liquidity, access to capital (and if rated, a quality rating), and ensuring the right amount of cash?
Most middle market companies are not flush with cash. In fact, when thinking of capital structure, there are many things that keep the CFO/treasurer up at night.
Whichever way you look at it and define it, supply chain finance has grown into a big number. And if you define it as using the balance sheet of a large company to offer early payment to some or all of its suppliers, it is has gained in popularity. Plus, it’s not only offered by large banks who can both originate and distribute large-scale programs for the likes of Unilever or Procter & Gamble, but also non-bank asset arrangers like Greensill, Seaport and others working together with source-to-pay platforms or directly with buyers to develop programs. And always in the background we have heard this whispering of accounting treatment. And by now, most people who have dabbled in this space know the issue: Is it trade payable or is it debt? Fewer understand the implications.
How long has this benign credit cycle been going on? How about since 2008, when the Fed began dumping money into the economy to go way beyond its mandate as a last-stop liquidity gap. This has led to many distortions in the credit and capital markets, and one area where this is poorly understood is around “approved” invoices. Despite what many players in the space might believe, underwriting is necessary — even critical. Even though the invoices that are on the platform are, by definition, approved for payment (i.e., highly de-risked), they are by no means risk-free.
The United Nations Conference on Trade and Development (UNCTAD) is calling for reforms to the international monetary system, saying the need for government to support long-term development finance on domestic and international levels has “not been met” thus far. Trade Financing Matters believes that alternative financing models based on tech-enabled receivables financing and payables financing offer strong potential to serve developing markets.
An Internal Checklist for Procurement: Are You Ready to Implement a Trade Financing or Invoice Discounting Program?
With an increased awareness over reducing supply risk and implementing working capital programs, the world of trade financing is increasingly coming to procurement and supply chain organizations. In addition, many procurement organizations are entering new levels of maturity with their purchase-to-pay (P2P) programs and systems that can serve as a foundation for a range of trade financing initiatives, starting first with approved invoices as a trigger for early payment. But trade financing can appear complicated from the outside. To assess whether you’re ready to take the plunge in developing and implementing a broader trade financing strategy with a procurement-centric (i.e., holistic supplier engagement that balances a range of elements) model in mind, you need to ask yourself a few questions first.
There has never been a more absurd situation than exists now between procurement and supply chain practitioners and finance team members. On the one hand, there are countless programs attempting to unify and extend payment terms to suppliers, to the greatest degree possible. Such activity can have a negative procurement interest on supplier relationships while increasing supply risk, especially with lower tier suppliers, where visibility into financial health and stability is often lacking but where the trickle down effect from payment term extension ultimately comes home most to roost. Yet on the other hand, we have access to a truly amazing array of new technologies that accelerate and provide visibility into approvals and trade documentation, combined with what appears to be a near limitless supply of third-party capital, which is willing to invest in and fund both receivables and payables financing programs. Collectively, the combination should drive down the cost of capital for early payment programs, accelerating the flow of cash in the supply chain.
Join us Friday, April 24 at 9 a.m. CDT for Q2 and Q3 Metal Market Forecast (And How Bearish Markets Create Opportunities for Global Trade Cost Reduction). Trade Financing […]