Supply Chain Finance explained
Supply Chain Finance has been around for many years, but it became a more popular option after the financial crash of 2008. The aim of SCF is to decrease the weighted average cost of capital and make businesses financially more efficient, for both buyers and suppliers involved in commercial transactions. This is done through automating transactions and tracking invoice approval, as well as settlement processes, using a secure and trusted technology platform.
The process starts with the buyer of goods and services. After delivery, they approve a supplier’s invoice for early payment. Suppliers can then elect to receive early payment (i.e. capital) through an external financier or bank. Ideally, the buyer needs to have a better credit rating than the seller, which gives suppliers access to capital at a lower cost and buyers the ability to agree longer payment terms, i.e. also free up capital.
For SCF to work the best, there should be a collaborative relationship between the buyer and the seller. SCF is the most efficient way for a company to unlock capital that may be tied up in its supply chain while giving suppliers access to cheap working capital off the back of its own unutilised funding lines. These programs should always result in a win-win solution for both parties, but transparency and trust are critically important factors. If these principles are compromised, it can have a ripple effect across a buyer’s and supplier’s business.
How to make sure that your SCF is secure
Greensill’s demise has been well documented in the media over the past five weeks. Let’s take a look at some of the finer details. Greensill raised money from investors such as Credit Suisse and numerous banks after purchasing invoices from suppliers, using said invoices as collateral. This meant that Greensill was the conduit for all payments to suppliers. Investors did not have direct line of sight into the underlying suppliers, invoices or the individual agreements between Greensill and the suppliers.
The real problem began when Greensill started offering alternative financial products to suppliers and these assets were commingled with legitimate SCF invoices and sold to investors. In addition to this, it appears as if Greensill’s also advanced money on future invoices. Greensill’s banking subsidiary came under scrutiny from a regulator because an audit revealed that the company couldn’t show any evidence of receivables purchased from at least one of their clients. This ultimately led to the withdrawal of credit insurance, a critical element used by Greensill to raise funding from investors, by Greensill’s credit insurance carrier. This in turn led to the liquidation of Greensill’s funds by investors, which had a huge ripple effect on thousands of suppliers dependent on supply chain finance.
It is said that the loss of finance could lead to thousands of job losses, amongst other issues for their clients and suppliers. Ultimately Greensill proved to be an unreliable and untrustworthy supply chain finance service provider. The lack of transparency into the underlying funding structure and invoices purchased have caused immense damage to investors like Credit Suisse, dozens of clients, thousands of suppliers and also to supply chain finance as a product.
Greensill is however not the only culprit in this tragedy. It is well documented that Greensill had very little proprietary technology underpinning their business. Third-party technology was used to implement Greensill’s SCF programs, where they took advantage of smaller suppliers by charging them outrageous rates, not linked to the creditworthiness of their customers. Even now, these same technology platforms continue to take advantage of the fact that many suppliers are desperate for finance and have no other option, charging different funding rates for different suppliers, at different times of the month, using specific algorithms to add margins onto the bank’s rate, instead of offering suppliers the same low supply chain finance rate, which is, after all, what creates the win-win solution supply chain finance is supposed to be.
One such example is well documented. The program implemented for a large mining group in Australia resulted in The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) enforcing regulations for SCF due to misconduct being found between corporates and SCF providers.
Despite the Greensill debacle, other SCF service providers continue to use middlemen or SPV funding structures, which means that the funding vehicle first has to raise money from other funds or banks before they are able to pay suppliers for invoices purchased. This poses the same secondary credit- and payment risk for suppliers and could ultimately also leave them high and dry without funding, depriving them of direct access to funders or banks.
It is time for all the supply chain finance community members – buyers, funders, service providers and suppliers, to uphold the unwritten ethics and values of SCF; and more importantly, call out unscrupulous behaviour.
Keep an eye out for SCF structures and service providers where structures are complicated and SCF funding rates are opaque. This could compromise the legitimacy and longevity of your supply chain finance programme and could lead to significant reputational damage for all parties involved – buyers, funders and suppliers.
Addendum’s safe Supply Chain Finance solution
Addendum has helped customers free up billions of dollars in working capital, which has led to our client’s supply chains being strengthened, and better relationships being formed with their suppliers. How do we do it? We use our innovative, award-winning solution, extensive experience and a constant drive to be the best and to put you in charge. Funders, buyers and suppliers can all benefit from the Addendum SCF solution, which allows each party access to one of the most efficient invoice financing systems in the world, for the same SCF rate, regardless of the supplier’s size.
We differ from the competition in that we don’t use obscure middlemen in the process, and banks or funders pay suppliers directly through our structure. Suppliers also repay the banks or funders directly, cutting out any intermediaries which can be a large security risk in the situation. A great example of a successful Supply Chain Finance project run by Addendum was Richard Bay Minerals, which earned a global award for its success. Each supplier involved in the program reported that they were happy with their experience and Richard Bay Minerals and Rio Tinto’s reputation was bolstered by this positive outcome.
There are a host of clients who can attest to the Addendum Supply Chain Finance experience, such as Gerhard Ackerman, Group Finance for Pick n Pay, “If you decide to own your supply chain and the costs and benefits associated with it, then Addendum is the right partner to help roll out and support your supply chain finance program. Addendum’s offering is completely unique. Their knowledge and professional approach support all parties in decision making. Their international awards are testimony to their personal and professional credibility. I can recommend them wholeheartedly.”
Here at Addendum, we pride ourselves on upholding the highest standards for SCF, as well as using the most secure methodologies that we can. Transparency and trust are critically important and we aim to help buyers, suppliers and funders create a safe and secure supply chain finance structure, which leads to a win-win solution for all parties involved.
Get in touch with us, to see how we can unlock value for your business through your supply chain.