The main reason for setting up a supply chain finance programme is to support your suppliers in your supply chain and to improve working capital performance by extending the DPO. But what if, when you are cash rich, you could also generate extra income by using this spare cash to fund your Supply Chain Finance programme replacing the bank funding, flipping between your own funding and the bank's funding as appropriate?
It sounds good, however, as Demica's Avarina Miller explained in a previous item, it is difficult to get auditors to approve the accounting for a standard SCF programme, let alone one that flips the funding between the buyer and the bank. Most banks do not offer split funding SCF programmes, e.g. Deutsche Bank, only Citi, CTMfile believe, offers this option.
Based on discussions with clients, Deutsche Bank has found that corporates' main concern with SCF programmes is the complexity of the accounting as well as the need to ensure that trade payables are not converted into financing payables on their balance sheet. Indeed, Joao Galvao, Head of Financial Supply Chain Americas, Global Transaction Banking at Deutsche Bank, commented, "We have had very few requests for self funding in a SCF programme, and we are not actively marketing such programmes. There are a number of issues that need to be considered when taking such an approach, and it would only be effective in very selective circumstances."
To overcome corporate concerns about how to treat the trade obligation(s) to the seller on their balance sheet in a SCF programmes, Citi have developed a proprietary accounting structure for their clients. This structure ensures that the buyer's trade obligations in a normal bank funded SCF programme are treated correctly and are accepted by the corporate's auditors. If, at a later stage, after the SCF programme is well established, the accounting structure also enables Citi's clients to move to funding some of the programme themselves by adding extra functionality to the original structure. This unique complex accounting structure has taken considerable investment to develop.
Abhijit Prasad, EMEA Director of Supply Chain Finance, Citi commented, "Citi's supply chain finance solution continues to rapidly expand as clients recognise the value of additional investors in the programme. In our experience, additional funding partners in our programmes are very often banks although increasingly other investor classes (including corporates) are also starting to participate."
It is getting more and more difficult to obtain a decent return on spare cash. For some corporates, self-funding a part of their SCF programme could be an important new source of income.
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