The Treasurer’s Guide to Trade Finance

Chapter 4 Integrating cash and trade

The next example shows how a

supply chain finance solution can provide

significant benefits to a company’s

suppliers, whilst also allowing the

company to improve its own working

capital position. The exact structure of the

programme needs to be designed with

care. There is a risk that, if the purchaser

is extending its own payables timings and

increasing creditors, trade payables can

get recategorised as borrowings instead.

IAS 39 (paragraph 40 supplemented by

AG62) introduces rules to determine when a

liability has been significantly modified. The

exact application will need to be confirmed

with the auditors.

Case study

UK fashion retailer importing products from abroad

A leading UK fashion retailer sources many of its products from overseas,

notably Asia. Its suppliers are on contracts offering payment terms of 30–90

days. As with all companies, retailers, who traditionally already operate under

tight margins, are under pressure to improve their working capital position.

Perhaps the easiest way to do this is to try to extend payment terms from

30 days out to perhaps 60 days or longer. However, this could put their

suppliers under significant cash flow and working capital pressure, risking their

businesses and therefore the retailer’s supply chain, which in turn could risk the

retailer’s reputation for fair trade.

Supplier finance has proved to be

particularly beneficial in accommodating

the needs of both retailers and suppliers

when the retailer extends its own terms

as it simultaneously offers the suppliers

accelerated cash receipts at a cheaper

cost of finance.

Once the goods have been shipped and

the retailer has accepted the supplier’s

invoice, they will upload it to the bank’s

invoice purchase system. The bank will

offer to pay the supplier the face value of

the invoice, less a margin based on the

retailer’s cost of credit. This enables the

supplier to accelerate the funds due any

time from acceptance of the invoice until

the maturity by requesting to discount.

The invoice is settled by the retailer with

the bank at the agreed maturity date.

The suppliers benefit because the

bank offers a discount on the whole

value of the invoice (rather than the

70–80% typically offered by invoice

discounters). Furthermore the recourse

in the event of default is against the

retailer, not the supplier. By choosing

to discount, the suppliers receive funds

earlier, at a discount rate that is typically

cheaper than the suppliers’ own cost

of credit, being based on the retailer’s

risk. The acceleration of cash also

enables them to liquidate receivables

and free-up credit limits for further sales

opportunities.