With macroeconomic uncertainty taking the wind out of the sails of a globalisation process that has played out over the past few decades, corporate treasurers find themselves posed with a particular conundrum. How can they secure their own working capital positions without adversely affecting their supplier base? One solution gaining favour is payables finance – a buyer-led programme that enables suppliers to sell their receivables contracts to receive early payment at a financing rate linked to the buyer’s credit profile.
Globally, the scope for this technique to revitalise corporates’ working capital positions is colossal. PwC’s Working Capital Survey 2018/2019 estimates that global, listed companies could release as much as €1.3trn simply by addressing poor working capital performance.
Yet buyers increasingly have concerns beyond working capital efficiency in mind as demand for payables finance increases. The global trade landscape is increasingly volatile. Protectionist tariffs and nationalist policies are seemingly on the rise and, as these take hold, the task of maintaining integrated, uninterrupted global supply chains seems harder than ever. What payables finance offers is a means of fortifying points of vulnerability in the supply chain.
This goes some way towards explaining why payables finance is a growing industry – and one expanding along several different lines. For example, the ranks of anchor buyers for these programmes – traditionally occupied predominantly by the largest multinational companies – are now being swelled by non-investment-grade businesses. At the same time, these programmes are increasingly being expanded beyond buyers’ core groups of large suppliers, with a view to extending the benefits to smaller and potentially more vulnerable businesses further down the chain.
While payables finance programmes offer the flexibility necessary to cope with incoming pressures, the industry also faces its own pressures. When British construction company Carillion collapsed in January 2018, much of the blame was attributed to irregularities in the accounting of the company’s payables finance programme. The programme in question, known as the “Early payments facility”, remained off Carillion’s balance sheet, allowing debt to accumulate unchecked. This must act as a warning signal to companies and their banks as they look to seize the opportunities of payables finance. To avoid a similar scenario, banks and corporates must work with regulators and auditors to define and standardise practices, promoting principles such as ensuring payment terms are not forcibly extended. This is, however, something that buyers must ultimately address with their accountants.
In spite of these challenges, payables financing is evolving in new ways. For instance, there is a growing appetite for sustainable business practices across the supply chain – with companies increasingly seeing the value of implementing sustainable practices from both a brand and a business perspective.
What’s more, the negative press coverage and concerns about accounting treatment are galvanising the industry to do more to create standards all participants can understand. A driving force in this effort is the Global Supply Chain Finance Forum (GSCFF), which, since 2014, has convened subject matter experts from ICC, BAFT, FCI, ITFA and EBA to provide guidance on terminology and KYC standards for key supply chain stakeholders, such as financial institutions, accounting firms, rating agencies and regulators. In 2020, the GSCFF plans to publish its industry guidance on payables finance. Consistent work in this vein – drawing and developing the lines that define payables finance and supply chain finance more broadly – will be crucial to ensuring that the industry, and the businesses it upholds, can continue to grow sustainably.
For more information on the ever-evolving questions surrounding payables finance, please see Deutsche Bank’s recently released industry guide – Payables Finance, A guide to working capital optimisation
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