The pros and cons of ‘supply chain finance’

Coca-Cola does it. So does the global consumer goods group Procter & Gamble and discount store chain Walmart. In Australia, Telstra and construction group CIMIC are into it.

All are using an increasingly popular scheme known as “supply chain finance” to pay the companies that provide them with goods and services.

The old-fashioned method of paying invoices is simple. A company orders goods from a supplier. The supplier delivers them and issues an invoice with a due date, such as 30 days’ time. The company pays the supplier within 30 days.

Suppliers who have delivered their goods but want to get paid earlier than 30 days have also for many years had another option: approach a bank and sell 80 per cent of the invoice (typically the maximum the bank is prepared to buy) before the due date. The bank later collects the invoice payment.

This is known as debt factoring; the bank or financier that buys the invoices is called a factor.

In recent years, a third option has emerged. With the help of banks and financiers, big companies take the initiative and suggest payment options to their suppliers, giving the companies more control over when and how they pay invoices.

This latter scheme is most commonly known as supply chain finance or, more specifically, “reverse factoring” – a technical term commonly used by ratings agencies to differentiate it from conventional debt factoring.

Reverse factoring compared to normal payment terms

Reverse factoring compared to normal payment terms

In reverse factoring, the big company hires a bank such as JPMorgan or a financier such as London-based Greensill Capital to make agreements with its suppliers. The supplier gets to choose exactly when it wants to be paid the full amount of money it is owed, with payment dates as soon as 10 days after goods and services are delivered.

Banks and financiers team up with technology groups such as Taulia and Oracle, which insert technology known as enterprise resource planning software into the accounting systems of their customers.

Read more at The pros and cons of ‘supply chain finance’

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Supply Chains in Advanced Markets Should Become More Agile, Says Atradius

Atradius, a consultancy specializing in trade credit insurance, surety and debt collections, maintains that the global economy has continued to gain momentum over the past months, with a 3.1% expansion projected for this year.

Higher inflation, falling unemployment, and strengthening Purchasing Manager Indices (PMIs) all suggest higher GDP growth in advanced markets.

Atradius analysts observe that the U.S. economy leads this trend while the recovery in the eurozone becomes increasingly entrenched. The outlook for emerging markets is also brighter, as Brazil and Russia are emerging from recession, and access to finance remains favorable. While the global economic outlook is more robust than in previous years, political uncertainty remains a downside risk to stability.

However, the main challenges to the global outlook – the threat of deflation, negative bond yields, austerity, and low commodity prices – are slowly phasing out.

Global trade is supporting this recovery. After a 1.3% expansion in 2016, trade growth (12-month rolling average, y-o-y) has picked up to 3.3% as of July 2017. The stronger-than-expected expansion is being driven by intra-regional trade flows in Asia and strong import demand from North America.

Despite political uncertainty, most high-frequency indicators point to sustained growth: the global composite PMI posted held steady at 54 in September, pointing to a solid and stable rate of expansion. This has motivated some dramatic upward revisions of trade growth forecasts in 2017. The WTO raised its 2017 forecast for merchandise trade growth to 3.6% from 2.4%.

Read more at Supply Chains in Advanced Markets Should Become More Agile, Says Atradius

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