A Reference Guide to Trade Finance Techniquescan be difficult to bring suppliers ‘on board’,
as a result of a combination of suppliers’
suspicion and work required to permit them to
participate. In July 2010 a working group set
up by the Bank of England and chaired by the
ACT concluded that growth in this technique
would be slow and would benefit from
increased standardisation of the product and
a better level of background understanding
amongst companies. In October 2012, David
Cameron provided further backing for supply
chain finance as a way to support small
and medium-sized enterprises. A group of
38 companies supported a Supply Chain
Finance scheme, recommended by the
Breedon Taskforce on Non-bank Lending.
It is possible to arrange a similar structure
without using a third party supplier through
the use of early payment discounts or
dynamic discounting. These would have to
be initiated by the supplier and effectively
result in the buyer funding the supplier for
the period covered by the discount. This
is effective for the supplier as long as the
discount rate is less than its external funding
rate. The buyer benefits by strengthening
its suppliers’ cash flows in a similar way to a
supply chain finance structure.
All these factors together suggest a
greater role for supply chain finance in the
future. At present, supply chain financing
structures are being developed largely
at the behest of the largest companies.
As discussed elsewhere in this book, the
motivations for developing such structures
are varied, whether to improve liquidity in
the supply chain, to mitigate risk or, in some
cases, to enhance sales.
The following case study illustrates how
one company has used a supply chain finance
structure to manage its own working capital
more efficiently, while reducing risk along its
supply chain at the same time. Critically, the
solution includes a significant integration of
cash management and trade finance activity,
which is made possible by improvements
in technology over recent years. Over time,
as it becomes easier to share information
between companies as electronic messaging
is standardised through the use of XML and
other technologies, this form of cooperative
working will become common.Case study
European division of major international retail company
implementing a cash and trade solution
The European division of this major international company wanted to improve
the efficiency of its cash management structure, improve its working capital (via
an extension to its days payable outstanding) and strengthen its supply chain to
reduce the risk of disruption.
The solution involved the division
centralising its treasury operations and
establishing a true end-to-end payables
solution, including a supply-chain finance
(SCF) programme. As part of this process,
the company was able to automate a
number of its cash and trade processes,
including its accounts payable function.
Central to the success of the SCF is
the way the company has minimised
its involvement in the accounts payable
process. The company uploads all of its
approved invoices (payables) automatically
from the company’s ERP system to its
bank on a daily basis. Invoices relating
to suppliers which participate in the SCF
programme are filtered by the bank on
receipt to its trade platform. Other invoices
are forwarded directly to the bank’s cash
management system.