The uptake of Supply Chain Finance (SCF) and dynamic discounting programs is on the rise globally. Companies are realising big benefits in improvements in cash flows, cost reduction, administrative efficiencies and supplier stability. But how do you select the right partner?
To ensure a successful & long-term outcome, here are a few key things to consider.
1. Is it a global solution and platform?
Chances are that you work for a multinational company with customers and suppliers around the world. So, to be successful in a global business world requires a SCF solution that can be deployed in multiple languages and currencies.
2. Bank or Non-Bank platform?
Originally, the provision of SCF was very much the domain of the Global and Regional Banks. But over the last 5-10 yrs the market has evolved to the point where today, in Europe, bank proprietary platforms account for a little less than half of the SCF platforms. Also, the emergence of new funding models seems to be making it even more likely that banks’ SCF market share will continue to come under more pressure
So, if you are considering a program run by one of your lead banks, it is important to remember that such programs can grow to be quite large and a single bank may not have the capacity to accommodate that growth. Bank funding is also provided on an uncommitted basis. This means that the financial institution running your program can reduce its funding, increase pricing or in the worst case, even stop funding.
If you are not comfortable with that uncertainty you should consider a SCF platform that allows you to quickly add, change or replace funders. These bank independent multi-funding SCF solutions are provided by Fintech companies.
3. How will it be funded – using your cash or a third-party funder?
At various times of your business cycle you may have built up large cash reserves and you may be considering a dynamic discounting solution, to provide your suppliers with early payment in exchange for an attractive discount. In this case you need to ensure that your platform of choice is flexible enough to cater for both SCF and dynamic discounting.
If you choose to self-fund your program, remember that in good times or bad, your suppliers will come to depend on the early payment options. As a result, even if you decide to use your cash for other purposes, it’s crucial to have the flexibility to invite external third-party funders to ensure there is a continuity of funding.
The SCF market has historically been dominated by bank funded programs, be they single or multi-bank.
In Single Bank balance sheet lending the lead platform bank manages the program and is based on their credit appetite. A participating bank who is not interested in doing any credit work can still be a funding source via a risk participation agreement.
Typically, the way a multi-bank funding model works is that a technology vendor will run the platform. You will connect to the platform and that should give you access to choose from the multiple funders that are already signed up with the platform.
Each funder gives parameters of what terms they will take (price, tenor, currency, etc.) and total exposure and suppliers are assigned to a funder often by the platform provider who onboards them.
However, at a time when demand from corporates for working capital finance is rising, the regulatory environment, in which Banks operate, is making it less attractive for banks to offer it. This is creating an opportunity for nonbank funders as there is a dearth of liquidity in the market looking for some yield, so specialist supply chain finance groups like Greensill Capital or Demica are flourishing.
While more and more of the non-banking money is finding its way to supply chains, banks will continue to play a role in servicing their clients, whether that’s through participation in funding of a tech provided platform or offering up solutions specifically to their own clients.
4. Supplier onboarding capability?
The relationship you have with your suppliers is key to the success of your SCF or dynamic discount program. Having suppliers onboarded to the platform, educated on the benefits and keen to participate is essential. Without that funders will soon lose interest and you will also allocate your spare cash elsewhere.
A partner who is able to analyse, segment and prioritise the suppliers in your supply base will provide you with a significant head start for a successful onboarding campaign.
Banks tend to have local or regionally located supplier onboarding staff who will be on hand to assist you and your suppliers with education and onboarding.
Technology vendors will generally have the education and onboarding process automated using sophisticated web based outreach programs. These programs will allow you to educate and onboard a large number of your suppliers in a relatively short timeframe.
Make sure you ask your partner how they handle the collection of KYC (Know Your Customer) information from your suppliers. This is mandatory for banks and an efficient collection process will form a critical component of the success of the onboarding strategy.
5 Legal structure?
When undertaking a SCF program the most time-consuming processes is generally the contract negotiation. The legal structure is vitally important as you must ensure that the structure of the program is such that your auditor can confirm that the extension of payment terms is classified as accounts payable and not debt.
If it is reclassified as a liability to a bank or debt, then your company loses one of the many benefits to come from implementing SCF.
The benefits to come from a successful SCF program can be significant, but remember to:
- Clearly define and communicate your objective;
- Do your research; and
- Treat it as a project by allocating resources accordingly.
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