The Treasurer’s Guide to Trade Finance

A Reference Guide to Trade Finance Techniques

also be that buyers are prepared to share in
some of this risk going forward, to make the
proposition more acceptable to the lenders.

Michael Hyltoft: We know that supply chain
finance works. There are established
techniques and structures which have been
in place for some time. Most of the world’s
largest banks (48/50) offer a form of supply
chain finance to their corporate clients.
However, there are still a number of
barriers to expansion. Chief of these is
cost. There is a required minimum annual
expenditure to a supplier of GBP 1 million for
a supply chain finance structure to be cost-
effective. Banks currently earn relatively low
margins on these structures, so they need
to have a reasonable volume to generate
a sufficient return. This may change as the
regulatory treatment of the structures is
standardised. There is also a significant cost
of implementation, especially in terms of
incorporating suppliers into the structure.
Second, the accounting treatment
remains unclear. IAS 39 (paragraph AG63)
is vague, meaning there is no common
approach by auditors. The practice has
developed such that auditors are now
familiar with the concept of supply chain
finance. However, to confirm accounting
treatment, treasurers will still need to
engage with external auditors as soon as
possible, and certainly at the beginning of
the planning process.
Third, there are still many different ways
in which local rules and regulations can affect
the availability or viability of supply chain
finance. For example, in the UK there are
unwritten laws: it is bad practice to extend
payment terms beyond 30 days for fresh
goods. In Poland, an SME cannot be placed
on payment terms beyond 60 days, but there
is no legal definition of a Polish SME. In
France, the Law for the Modernisation of the
Economy (LME) requires French companies
to reduce payment terms to 60 days (or
45 days from the end of the month), down
from the terms they previously had that were
above the new legislation: the result has
been that a number of French companies
have moved their purchasing departments to
nearby countries to avoid the legislation.

The late payment directive (2011/7/EU)

also has the potential to disrupt existing

supply chain finance programmes.

E-invoicing techniques

E-invoicing can help improve efficiency by

increasing visibility over the supply chain. This

visibility can help to reduce uncertainty over,

for example, invoice approval, and thereby

mitigate any financing risk for a lender.

E-invoicing suffers from the same

definitional problems as supply chain

finance. Some estimates suggest there may

be 500 different solutions available in the

market, with uptake of about 15% in Europe.

However, not all initiatives aid efficiency.

MH: For example, the Danish government

required all invoices to be submitted

electronically. Instead of an increase in

electronic invoice generation, Denmark saw

the introduction of scanning bureaux which

took paper invoices and turned them into

electronic items suitable for submission to

government. While this improved efficiency

for the Danish government, it had the effect

of increasing costs for its suppliers, with little

benefit for the supply chain as a whole.

Saeed Rezavi: The bank’s perspective is

to link e-invoicing with the financing. In

general terms, any delay in the receipt and

approval of an invoice reduces the window

of opportunity for supply chain financing. For

example, from the point a paper invoice is

raised to receipt by the buyer usually takes

about three and a half days. It can then

take a further six to 12 days to approve the

invoice. Because invoice approval is a key

trigger to attract financing, this represents

a significant reduction in the opportunity to

raise funds. So in these circumstances, if

payment terms are 30 days, the process up

to approval can take half that time.

Mark Ling: Financing this pre-approval period

is important for suppliers. It is not just about

paying invoices promptly. For example,

although the UK public sector tries to pay

within ten days of invoice approval, it can

take 60 days to process an invoice, adding

cost for the supplier.