Tag Archive for: supply chain finance

Recap of the SCF Forum and Awards event 2019

| 23-12-2019 | by treasuryXL |

On the 28th November 2019, treasuryXL attended the SCF forum Europe 2019 in Amsterdam – an annual event. Here is our review of the day.

So, what is Supply Chain Finance (SCF)?

It is a series of processes, both financial and technological, designed to improve business efficiency and reduce financing costs by providing bespoke short-term funding solutions for both buyers and sellers, with a view to improving and enhancing working capital and liquidity for both buyers and suppliers.

There are three parties involved – buyers, suppliers and financial providers. Traditionally, banks acted as the provider of funding but, with the advent of fintech other non-bank firms are also offering solutions.

The ultimate purpose of SCF is to improve the cashflows for both buyers and suppliers.

Participants included banks, fintech, academia, together with companies that use SCF solutions such as DFDS, Airbus and Jumbo supermarkets.

The forum started off outlining the major themes surrounding SCF that needed to be considered:

  • Data collection and analysis
  • Education
  • Financial Flows
  • Procurement
  • Logistics – the missing link
  • Inclusiveness
  • Sustainability

Time was given to highlighting the awareness needed to form a true collaboration with all participants – intra firm, inter firm as well as the supply chain itself. No one department can successfully implement SCF on their own – it requires the input from a wide range of departments.

Rabobank gave a talk about trade and its impact on poverty. Between 1900 and 1950 Europe and the USA moved ahead, economically, from the Far East and Africa. Since the financial crisis of 2008 the middle ground of Europe and the USA has been squeezed and whilst poverty has decreased worldwide, the levels of inequality between income and wealth had risen back to the levels of the 1920’s.

Whilst trade tariffs are on their way down, trade barriers have been rising.

Politically the near future is likely to bring about new confrontations on world trade:

  • USA – China
  • Brexit
  • Capital controls to counter tariffs
  • Restrictions on foreign ownership

DFDS – case study

DFDS are a Danish shipping and logistics company, focusing also on ferries and door-to-door solutions. From an environmental view they have big concerns about the impact of logistics on world climate. Their aim for the future is to be smarter, cheaper and to have less impact on the environment. On the logistics side they must be more cost efficient as they operate in a market with small margins and large competitors.

As data has grown exponentially, they have embarked on an extensive SCF programme that has seen their return on invested capital improve from 5% in 2012 to 19% in 2017.

Major challenges are still to be faced – especially because of Brexit as 45% of their business goes through the UK. Hauliers in the UK are especially worried. This sector of the industry is best suited to younger truck drivers (there is a 73% satisfaction rating amongst drivers between 18-24 year olds), but problems are evident in the lack of female drivers and an average age for drivers of 50 years old and rising all the time.

DFDS strives to help hauliers via SCF by paying early with discounts. This had led to both an improvement in working capital fo DFDS as well as hauliers – one was able to purchase 10 extra trucks by being paid early.

Jumbo – case study

Jumbo is the second largest supermarket chain in the Netherlands with a 21.6% market share. Their growth in turnover has been impressive – from EUR 120m in 1996 to EUR 8.5bn in 2019. There is a strong impetus to manage the needs of both the suppliers and the company. Whilst Jumbo has grown rapidly a lot of their small suppliers had trouble keeping pace especially with the terms and conditions that existed before the implementation of SCF solutions. As and when Jumbo grows, their suppliers need to follow and 80% of their suppliers are defined as SME (Small and Medium Enterprises).

Jumbo has implemented a variety of different solutions to meet the needs of their suppliers, such as reverse factoring, dynamic discounting etc. It was important for Jumbo that the suppliers got on board with the programme – they have more than 1000 small suppliers. There was a 63% pickup in the first few months.

Moodys – word of warning

One of the main instruments used in SCF is reverse factoring, which differs markedly from traditional factoring. Reverse factoring is initiated by the ordering party – the buyer. As they are normally the larger party to an agreement their credit standing is of a higher order than the supplier – hence their interest costs are lower than for the supplier. With reverse factoring suppliers get paid early and buyers can delay payment to the factor (financial counterparty). However, the liability rests with the buyer.

Whilst it is increasing in popularity as a source of financing it can lead to a weakening of liquidity. Rating agencies are grappling with the legal consequences and lack of disclosure of reverse factoring. Now there is no legal requirement to disclose how much reverse factoring is on the books. This can lead to an incorrect picture of the financial health of a company. Companies that embraced Reverse Factoring but eventually suffered as result include Carillion, Abengoa and Distribuidora International de Alimentacion.

Big Data and AI

With the advent of ever more computing power it has become possible to analyse increasing amounts of data. This will lead to big changes in SCF through the use of Artificial Intelligence such as:

  • Traditional SCF
  • Fintech solutions
  • AI powered SCF solutions
  • Blockchain and Internet of Things

However, whilst embracing technology solutions we must not lose sight of old axioms such as “garbage in is garbage out”. It will be necessary to truly understand the flow of data, the variables and the output. Modern history has plenty of examples of large sources of data and experts, leading to losses and mistakes as well as profits and rewards.

Conclusions

  • A truly collaborative arrangement both internally and externally
  • Greater understanding of the business drivers
  • Improved early payment for suppliers
  • Chance to delay payments for buyers
  • Mutual transfer of knowledge and requirements for both parties
  • Improved relationships
  • Need to onboard all relevant departments

The opening quote at the forum was “Bridging physical and financial supply chains”. The one area that I, personally, felt was missing was the impact on the circular economy. Whilst there was talk on sustainability and global climate, I wished to hear more about how to increase the effective use of assets – trucks going to clients full and then returning empty, etc.

Maybe that can be a “hot item” for next year’s forum.

 

 

 

Lionel Pavey

Cash Management and Treasury Specialist

 

Busting some of the ‘holy grail’ myth of reverse factoring as example of supply chain finance solutions….[Part 2]

| 8-1-2019 | by Marc Verkuil |

In the first part of this article, which focuses on the potential disadvantages, risks, and pitfalls of SCF and RF Programs in particular from the perspective of the Seller, the benefits of an RF Program were mentioned, while the almost unavoidable impact on a Seller’s WACC and the potential negative outcome for the Seller from an EVA, ROE and EPS perspective have also been discussed. In this final part of the article, focus will be on the possible commercial impact on account of SCF for a Seller, as well as on the regulators’, investors’ and credit rating agencies’ points of view. The article will present conclusions and some recommendations in the realization that since no company is the same, the thought-process going into the decision for entering or not entering into SCF will not be the same either; certain positive or negative arguments described herein may be more relevant for one company, while others may be more impactful to another. It is safe to conclude, however, that there is substantially more to SCF than what is typically presented and marketed, and it is hard to argue that SCF is the ‘holy grail’ to working capital finance for each and every party involved.

Both the immediate and potential future commercial impact of entering into an RF Program should carefully be considered…

What may be overlooked by Sellers when they are concluding upon a “cheap SCF solution that increases their ROIC and reduces their working capital balances”, is that such solutions are different from the usual forms of debt funding in the sense that even though the Buyers can not be a party to the transaction, these solutions implicitly involve all three parties in the combined commercial/financial transaction. This results in the Sellers having little control on the terms, conditions, and continuation of such funding solution, while there is an important commercial element that is not apparent in more common debt funding. The potential consequences of a lower credit-worthiness of the Buyer or less credit capacity or appetite of the Factor to the Buyer have already been mentioned in this respect. Moreover, and as argued before, an RF Program is usually offered subsequent to the Buyer, being the financially and commercially ‘stronger’ party, requesting an extension of its payment terms from the Seller. Even though the Seller may not be in a position to decline such a request anyhow, the Seller should carefully consider a number of commercial questions and, if deemed relevant, negotiate these as best as possible upfront with the Buyer: “does the RF Program provide real(istic) opportunities to increase sales and EBIT or ensure a more committed and longer term relationship between Seller and Buyer, i.e., do the commercial benefits outweigh the negative (financial and/or ratio) impact, if any?”, “can the Seller charge the additional funding cost, including the cost of extending its payment terms, of an RF Program structurally through to the Buyer?”, “could such a program create a precedent, and if so, what could be the impact (think of other customers requesting/requiring the same extensions and programs)? E.g., what are the long-term consequences of extending payment terms under an SCF program and what happens if or when the program is terminated; will the Terms & Conditions ‘automatically’ return to the old payment terms?” A sound argument in favor of an RF Program may be the fact that credit insurance (on the Buyer or in the market as a whole) may either no longer be available or be higher priced than what the Factor is offering. Hence, a number of questions and arguments a Treasurer usually does not need considered, let alone answered in a straightforward, bi-lateral working capital facility with a lender.

Also note the continuing trend of the desire for more transparency…

There is clearly a trend, driven both by regulators and investors, towards (public) companies being required or demanded to reporting or disclosing more financially relevant information, and as such, not only to leave less room for the non-disclosure of off-balance sheet transactions that may be relevant for the public, but even to add certain transactions that have historically been treated off-balance sheet, back into the financial statements for certain reporting parties; think of IFRS16 as a recent example in this respect. Currently, if receivables (invoices) are sold in an RF Program on a non-recourse basis there are no required reporting or disclosures in any financial statement filings under US GAAP or IFRS. For the MD&A section of a public company’s quarterly and annual filings (at least under the US SEC rules), however, disclosures are more judgmental and subject to materiality thresholds. Such potential disclosures cover a wide range of corporate events, of which the most relevant (from an SEC and FASB perspective, but probably similar for IFRS purposes) are: (a) “trends, demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, liquidity increasing or decreasing in any material way”, and (b) “any known material trends, favourable or unfavourable, in capital resources, including any expected material changes in the mix and relative cost of capital resources, considering changes between debt, equity and any off-balance sheet financing arrangements”. An exact materiality threshold above which a company would be required to disclose its off-balance sheet (SCF) programs has not exactly been defined (yet) from an SEC or FASB perspective.
The reference above to the impact of certain (SCF) transactions on a company’s liquidity position is worth explaining further, as this is a position the major credit rating agencies also tend to take: due to the uncommitted nature of basically all SCF solutions and certain other (significant) financial transactions that are not reported in the financial statements of a company, the rating agencies, if or when made or becoming aware of these types of deals, will add these back into the financial statements for ratings purposes. The most important reason for their argument is that the moment these programs are terminated, the company’s liquidity position will be impacted and the company will most likely need to replace the off-balance sheet funding with an alternative source of funding, which the agencies unconditionally assume to be on-balance sheet unless the company can and would want to proof differently, which is a difficult task. Although there are no exact materiality thresholds with the rating agencies either (to the author’s knowledge), it is clear they effectively decide to adjust for those known SCF solutions that they deem relevant and material (in total) in both the balance sheet and income statements.

Conclusively, SCF solutions may be a valuable funding tool, but be aware…

SCF solutions, including RF Programs, may be a valuable additional and alternative source of funding, even for financially and commercially ‘weaker’ Sellers participating in such programs. However, these parties in particular should be well aware of both the broader financial impact, i.e., beyond the “cheap discount rate and positive ROIC impact” as often advertised by the Factor, as well as of the immediate and strategic longer term commercial and financial consequences of such programs, i.e., these solutions should only be entered into for “all the right reasons” and at the “right” cost (of marginal debt funding as the upper limit). Finally, from a Treasurer’s point of view, typically targeted with at least considering, if not outright optimizing the investors’ interests and having a ‘bottom line’ (WACC, ROE, EPS, EVA) perspective on things, it is recommended to ensure that even if certain of these solutions do not tick all above boxes positively, they do not impact or threaten to impact the company materially, both instantly and in the future, which could include putting a firm limit, e.g., an x% of total debt threshold, for these types of programs in place. Finally, it would probably not hurt for Treasurers, particularly those employed by Sellers again, to pro-actively advise their executive management teams and wider (financial and commercial) organizations of those arguments in this article that they deem to be relevant for their businesses.

 

 

 

Marc Verkuil

Treasury Professional

 

 

Busting some of the ‘holy grail’ myth of reverse factoring as example of supply chain finance solutions….[Part 1]

| 7-1-2019 | by Marc Verkuil |

Supply Chain Finance (hereinafter referred to as ‘SCF’) involves financing solutions helping businesses, usually through the involvement of a third party lender, to free up working capital trapped in supply chains. These solutions target financing of specific working capital items, such as payables, inventories or receivables, as the underlying products move from origin to destination in the physical supply chain. Examples of SCF solutions include factoring, inventory repurchase, dynamic discounting, and reverse factoring programs. The latter solution (hereinafter, the ‘RF Program’), which has been offered by an increasing number of banks lately, involves a Seller being given the opportunity to sell its receivables (invoices) on a specific Buyer (typically) without recourse to a financial institution or investor (hereinafter, the ‘Factor’) at a discount in return for the immediate receipt of the (discounted) cash or liquidity from these receivables. In funding the Seller, the Factor is exposed to the Buyer as it assumes the credit risk on the latter, i.e., the (in)ability of the Buyer to pay its outstanding debt to the Seller (or Factor directly) at maturity.

RF Programs are in essence a form of credit arbitration and require participants in the supply chain with different credit standings…

SCF is often marketed as a ‘win-win’ for all parties involved. In recent years dozens of articles in Treasury and related magazines and possibly a similar number of sessions at conferences and seminars, some of which were even completely dedicated to this subject, have heralded SCF, and RF Programs in particular, as the ‘holy grail’ in working capital (finance) management. Although most of the observations in this article are valid for other SCF solutions, focus will be on RF Programs, which are based on the premise that a Seller will benefit from the better credit-standing (or rating) of a Buyer, as a Factor is willing to provide funding to the former on the basis of the credit (risk) of the latter, i.e., at a discount rate similar to the one the Buyer rather than the Seller would be able to obtain from lenders for funding its working capital. Interestingly enough, however, principally without exception all of these articles and sessions have been written and presented by representatives of two of the same participants in these solutions: the Buyers and the Factors, and although they all provide various, mostly valid arguments for the benefits of these solutions to the Sellers, they also tend to provide little or no input on the disadvantages, risks, and pitfalls of these solutions to the latter. Therefore, this article focuses on the perspective of the Seller, the financially and often commercially ‘weaker’ participant in the SCF transaction. Please note that the reference to the ‘weaker’ participant does not limit this to small SMEs, but in day-to-day reality applies to the vast majority, if not all Sellers (with an intent to) participating in SCF as the premise of the solution would otherwise not be valid anyhow. The author of this article used to work for an investment grade rated, powerful, global commodities trading company with revenues in excess of USD 45 billion, which was in fact frequently requested, or even practically forced to participate in RF Programs as the ‘weaker’ Seller.

The opportunity for Sellers to enter into RF Programs usually does not come in isolation…

One other aspect of basically any RF Program is important to take into account; even though an RF program cannot be directly or formally linked to the (payment) terms & conditions agreed between Seller and Buyer, as the program may in that case be deemed by auditors to correspond to and thus to be reclassified as debt in the financials of either participant which would defeat at least part of the purpose of these solutions, the most common benefit sought by the Buyer, often even expressed prior to the Seller being made aware of the opportunity to enter into an RF Program, is the request to the Seller for an extension of its payment terms to and in favor of the Buyer. The Buyer clearly does not wish to cannibalize the debt capacity with its lenders (read: the Factor) in return for nothing; in fact, the Buyer is usually the initiator of the sequence of events leading up to an RF Program in its efforts to improve working capital management first and foremost for its own and rightful benefit (and even if a Buyer would claim it (indirectly) offers an SCF opportunity in order to support a ‘struggling’ Seller, this would still be done primarily in the best (short term) interest of the Buyer, which in that case will no doubt already be looking for longer term buying alternatives). It should be evident that an extension of the payment term has an embedded cost for the Seller, which it should (at least try to) pass on to the Buyer through an increase of its product pricing. A term extension from, e.g., 45 to 90 days, will otherwise require the discount rate of the SCF solution to be half of the Seller’s existing cost of (incremental or marginal) debt funding in order for both funding options to break even.

The benefits of RF Programs are evident…

The most obvious benefits of RF Programs to Sellers are well documented: lower cost of funding, immediate availability of liquidity, lower working capital and (usually) debt levels, financial opportunities to grow and invest, and more limited credit exposure to the Buyer(s). The risks, disadvantages, and pitfalls to the Seller are on the other hand much less frequently mentioned.

However, disadvantages may include an increase in the Seller’s cost of capital…

One of the most important objectives of a Treasurer, certainly one of a public company, is minimizing its company’s weighted average cost of capital or ‘WACC’, i.e., achieving the optimal level and cost of debt and equity funding. By entering into an RF Program, and most other SCF solutions for that matter, the Buyer and Seller are effectively scaling down the value of their working capital and balance sheets respectively; the Buyer by virtue of obtaining extended terms from the Seller and thus of increasing its days of payables outstanding leading to lower net working capital and (debt) funding balances, and the Seller by virtue of converting part of its receivables balance into immediate liquidity and thus of reducing its days of sales outstanding typically followed by the repayment of outstanding on-balance sheet debt. As the proceeds of an RF Program will practically never be used to return funds instantly to the Seller’s shareholder(s), the Seller’s WACC will practically always increase as it has reduced the normally more cost efficient (i.e., less expensive after tax) debt balance on its balance sheet without proportionally reducing its more expensive equity position, e.g., through share repurchases. An increase in a company’s WACC is hardly ever a desired outcome for a Treasurer in considering a financing transaction, and even if this by itself does not necessarily preclude Sellers from entering into these types of (off-balance sheet) transactions for other good reasons, especially the size and relative proportion of this type of debt funding should merit careful consideration from a Treasurer in its analysis of the company’s total (future) debt to equity mix. A company with a not a-typical debt to equity ratio of 30/70, a cost of equity of 8,5% and a cost of debt of 3,5% has a WACC of 7,0%; if, as a result of an SCF solution and the subsequent repayment of some of its on-balance sheet debt (and all rates staying equal), such company would end up with a debt to equity ratio of 20/80, its WACC would increase to 7,5%, even if its total cost of debt funding, i.e., including the cost of an SCF program that is less expensive than the existing cost of debt, would end up being lower in this example!

The argument of RF Programs resulting in ROIC improvement is generally true; at the same time, it is not the whole story…

One of the most important reasons for companies to use the proceeds of RF Programs to pay down debt is the fact that a vast majority of these programs is uncommitted, implying that each participant in the relevant supply chain, Seller, Buyer or Factor, may unilaterally and ‘without cause’ decide to discontinue or amend the RF Program at any given moment. E.g., a Factor may decide to increase the discount offered to the Seller if the former assesses that the Buyer’s credit-worthiness has deteriorated (or if the Buyer has been downgraded) or it may decide to discontinue or limit the RF Program if the Factor no longer has (sufficient) credit available on the Buyer, while the Buyer and/or Factor may decide to discontinue the Program if the Buyer needs its credit capacity for other transactions, such as a significant acquisition financing need. The Seller should consider two pitfalls as a result of the uncommitted nature of these SCF solutions: (1) the cost or discount rate of these programs should be compared to existing cost of debt funding of the Seller, and (2) prior to entering into an RF Program, the Seller should carefully assess its commercial proposition both at inception and at the moment these programs are discontinued.
With reference to the first pitfall, marketeers of SCF solutions regularly argue that their programs are “cheaper than the WACC of the Seller”, “will increase the return on invested capital (hereinafter, ‘ROIC’) of the Seller”, or will “decrease the total cost of debt funding”. With respect to the comparison to the Seller’s WACC, this argument has already been refuted earlier: it does not make sense to compare the cost of debt funding (in an SCF solution) to that of debt and equity funding (in a WACC) of a company, while SCF solutions will most likely increase the WACC in any case. The ROIC improvement argument is mostly true, but far from a complete one. Even if an SCF solution is significantly more expensive than a company’s cost of debt funding, an increase of its ROIC may be achieved due to the fact that despite the return, i.e., net income in the numerator decreasing, the invested capital, i.e., (receivable) assets in the denominator will decrease even more leading to an improved ROIC or return on net assets. However, in that case this company’s net income and thus its return on equity will decrease, while it will also lower the company’s earnings per share as a result of such transaction. Bottom line, such a transaction will reduce a company’s shareholder value (or EVA), another outcome a Treasurer would typically want to avoid. A numerical example of this is included at the bottom of the second part of this article which will be posted tomorrow. It suffices to say that unless a company only wishes to be managed and valued on its ROIC performance, which would be surprising to say the least, any SCF solution that is more expensive than a company’s existing cost of debt funding will harm most of its financial ratios and definitely its shareholders. This brings up the last argument mentioned above of a decrease of the total cost of debt funding; comparing working capital financing provided by SCF solutions to long term and often committed debt funding is an ‘apples to oranges’ comparison as the latter forms of funding are intended and used for different purposes or reasons, such as funding of permanent or other long term assets, or as a safeguard against volatile markets or sudden spikes in working capital needs. Furthermore, as argued before, the proceeds of SCF solutions are typically used to pay down short-term and usually uncommitted (working capital) debt making the comparison to the cost of (incremental or marginal) debt funding the only appropriate one in most cases.

In the next and final part of this article, focus will be on the possible commercial impact of SCF for a Seller and on the regulators’, investors’ and credit rating agencies’ points of view, while some conclusions and recommendations will be presented as well. To be continued…

Marc Verkuil

Treasury Professional

 

Blockchain and Trade Finance: how it could work

| 07-06-2018 | by Vincenzo Masile | treasuryXL|

 

How can trade finance operate leveraging a Blockchain based infrastructure to drive efficiencies, reduce cost base and open up new revenue opportunities?

It is vital that the international trade flow is smooth and transparent but this is not always the case for the below reasons:

 

Current Isues

  1. Manual contract creation: The import bank manually reviews the financial agreement provided by the importer and sends financials to the correspondent bank
  2. Invoice factoring: Exporters use invoices to achieve short-term financing from multiple banks, adding additional risk in the event the delivery of goods fails
  3. Delayed timeline: The shipment of goods is delayed due to multiple checks by intermediaries and numerous communication points
  4. Manual AML review: The export bank must manually conduct AML checks using the financials provided by the import bank
  5. Multiple platforms: Since each party across countries operates on different platforms, miscommunication is common and the propensity for fraud is high
  6. Duplicative bills of lading: Bills of lading are financed multiple times due to the inability of banks to verify their authenticity
  7. Delayed payment: Multiple intermediaries must verify that funds have been delivered to the importer as agreed prior to the disbursement of funds to the exporting bank

Blockchain can help as follows:

Blockchain Advantages

  1. Real-time review: Financial documents linked and accessible through Blockchain are reviewed and approved in real time, reducing the time it takes to initiate shipment
  2. Transparent factoring: Invoices accessed on Blockchain provide a real-time and transparent view into subsequent short-term financing
  3. Disintermediation: Banks facilitating trade finance through Blockchain do not require a trusted intermediary to assume risk, eliminating the need for correspondent banks
  4. Reduced counterparty risk: Bills of lading are tracked through Blockchain, eliminating the potential for double spending
  5. Decentralized contract execution: As contract terms are met, status is updated on Blockchain in real time, reducing the time and headcount required to monitor the delivery of goods
  6. Proof of ownership: The title available within Blockchain provides transparency into the location and ownership of the goods
  7. Automated settlement and reduced transaction fees: Contract terms executed via Smart Contract eliminate the need for correspondent banks and additional transaction fees
  8. Regulatory transparency: Regulators are provided with a real-time view of essential documents to assist in enforcement and AML activities

Part of the gain from digitization lies in cutting costs: transactional and overheads. Digitization should also free the flow of finance to firms starved of it, partly by helping banks’ compliance with anti-money-laundering rules.

Vincenzo Masile

Treasury Expert/Credit Risk Manager

 

Buy now, pay sooner – dynamic discounting

| 12-04-2018 | Lionel Pavey |

 

We live in a time of very low interest rates which translates to lower funding costs. However, at the same time, obtaining credit is becoming more difficult as banks are reluctant to lend in the ways that they did years ago. This is caused by the need for additional financial buffers to comply with all the regulatory issues that surround modern day banking. Credit is still available via other avenues – look at P2P lending for example. When all else fails, it is necessary to look at one’s own internal supply chain to see how financing can be facilitated. Here is a report on the practice of dynamic discounting.

Dynamic discounting

As a corporate is common to purchase goods and services on the basis of receiving an invoice and paying at a later date. It is normal to see invoices stating that payment must be made within 30 days of the invoice date – not the acceptance date. As an incentive to pay the invoice early many companies offer a discount – the classic example is called 2/10 net 30. Breaking down this code shows that a 2 per cent discount is offered on the face amount of the invoice if it is paid within 10 days of the invoice date, otherwise payment is expected within 30 days.

Whilst 2 per cent might not sound very tempting, we need to look at the mathematics that lie behind this:
On an invoice for EUR 1,000 this means a discount of EUR 20. If we decided not to use the discount and only pay after 30 days we would have held onto our EUR 1,000 for an extra 20 days – this being the difference between the early payment date and the standard payment date. At present, we might make 1 per cent interest per annum on our bank account. The interest earned on EUR 1,000 for 20 days at 1 per cent, would reward us with EUR 1.11 – or, put in other words – EUR 18.89 less than if we paid early.

Why offer a discount?

• The supplier wants to lower their banking costs and improve their ratings
• The supplier needs the money
• Banks are not willing to lend money to the supplier
• The supplier is worried about their level of exposure to credit risk and counterparty risk
• It gives a supplier a useful insight into the business practices of their clients – if they calculated the advantage of taking the discount and declined, could there be inherent problems with the financial health of the client

Also, generating your own internal supply chain finance operation lessens the reliance you have on external funding from banks or factoring agencies.

A more modern adaptation of this practice is the development of discounts that are truly dynamic and work on a sliding scale. The highest discount is given for the fastest payment, and then progressing down in stages till the original invoice settlement date. This gives buyers an opportunity to still receive a discount, but not being tied down to the original 10 day period.

Irrespective of the financial gains offered by discounting, a more important aspect is positive growth in the working relationship between supplier and client. By supporting each other the bonds of trust increase and can lead to new and better opportunities together.

If you are interested to know what the effect of these changes can be on a coupon payment and calculation, please contact us for more detailed information.

Lionel Pavey

 

Lionel Pavey

Cash Management and Treasury Specialist

 

The PAYPERS releases the B2B Fintech: Payments, Supply Chain Finance & E-Invoicing Guide 2017

| 13-6-2017 | The PAYPERS | treasuryXL

Like last year The PAYPERS releases a dedicated guide with global insights on the transaction banking, B2B payments, supply chain finance & e-invoicing market. The pages of this year`s edition keep the vibrant and dynamic atmosphere of the banking & payments industry they shared with you in previous editions.

The 2017 Guide

The fresh pages of 2017 Guide offer its readers eye-opening information and valuable insights from experts who shared  their thoughts with PAYPERS. The ink just dried mapping different approaches that banks vs vendors have in relation to payments innovation and underlines the main aspects of the changing role of banks in the financial supply chain market. The guide offers you an overview of how the financial supply chain ecosystem is evolving and what structures you need to strengthen in order to keep a robust architecture within your supply chain finance programmes.

More than that, the guide puts together pieces from the global e-invoincing space pointing at the peculiarities per region, experts share their thoughts on this, offering you relevant and up to date information.

Also, considering the changes that are taking place in the regulatory environment, the Guide will help its readers understand the impact of the upcoming regulatory developments (PSD2, KYC & the 4th AML directive, 2014/55/EU Directive, etc.) and how they will shape the future of the European payments industry.

 Highlights of the report

The Guide introduces its readers to digital transaction banking and the ways it is shaping the industry;

  • In this edition they will present you the most challenging aspects of implementing APIs for the corporate segment and how is this going to transform the banking industry;
  • PSD2 and Open Banking, currently one of the most discussed topics in the European payments industry, received as well valuable insights;
  • You can also find dedicated pages to subjects such as the most recent innovations in payments, all about commercial payments, the continuous rise of fintech, e-invoicing market characteristics and latest trends.

The guide offers valuable information for industry professionals, associations, analysts, industry solutions providers and fintech enthusiasts via a thoughtfully structured journey into the dynamic world of B2B payments, supply chain finance and e-invoicing. Also, the guide is completed by a detailed online company profiles database with advanced search functionality.

Download here your free copy of the B2B Fintech: Payments, Supply Chain Finance & E-invoicing Guide 2017.

treasuryXL – The PAYPERS

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Blockchain and Supply Chain Finance: the missing link!

| 19-5-2017 | Carlo de Meijer | treasuryXL |

Our expert Carlo de Meijer is our blockchain specialist and publishes his articles on a regular basis. We present his latest article about blockchain and supply chain finance in a shorter version.
Carlo writes: Whereas the focus on the use of blockchain long time has been on payments and securities, an important but still undervalued use case has been supply chain finance. But that is changing. The complexity and scale of existing supply chain finance solutions has posed major challenges in ensuring adequate funding and efficient operations. According to some blockchain technology has the potential to be a game-changer for supply-chain finance. Let’s have a look.

Present state

Supply chain finance (SCF) is a generic term for a wide variety of financing instruments, used to finance various parties in a supply chain. SCF refers to the use of short-term credit to balance working capital between a buyer and a seller, thus minimising aggregate supply chain cost. Businesses can use supply chain financing to build stronger relationships with suppliers, decrease currency risk and ultimately improve liquidity.

Financial institutions offer supply chain financing solutions aimed at improving the purchaser’s working capital, and the supplier’s liquidity, by providing an efficient payables platform to streamline the payment process. Compared to the “old-fashioned” Letter of Credit, SCF now also encompasses new trade finance instruments including factoring, reverse factoring, payables financing, and dynamic discounting. Reverse factoring is the most popular and most widely used supply chain finance instrument. In reverse factoring, receivables are sold to a bank at a discount as soon as they are approved by the buyer. The bank then commits to pay the company’s invoices to the suppliers.

It is important to understand that supply chains are complex by nature; various parties are involved from raw goods supplier, producer and distributor all the way up to the consumer. This has posed major challenges in ensuring adequate funding and efficient operations.

Blockchain and supply chain finance

The question is: what can blockchain mean for supply chain finance and how could it be applied?

A blockchain-based supply chain finance solution more specific via so-called smart contracts will essentially enable all parties in a supply chain finance solution to act on a single shared ledger. A supplier and manufacturer, along with every other participant, will solely update their parts of the transaction, enabling efficiency and an “unprecedented” level of trust and transparency on a ledger record that is immutable.

“If you talk to supply chain experts, their three primary areas of pain are visibility, process optimization, and demand management. Blockchain provides a system of trusted records that addresses all three.” Brigid McDermott, vice president, Blockchain Business Development & Ecosystem, at IBM

Blockchain technology can offer great potential for both corporates and banks in terms of increased control, speed and reliability of their supply chain and at a fraction of the cost of their current infrastructure. Payments made via this digital system can be monitored by both parties, meaning that suppliers are no longer at a disadvantaged positon in the buying process while they wait for processing. Blockchain will speed up the process, giving the two companies more control, and in the long-term would ultimately create more robust supply chains.

Because the bank can see both the original contract as well as the order placed with “Company B by Company A”, it can verify both authenticity and provenance. Further, if the contract tracks manufacturing or transportation events, the bank can also know the state of fulfilment at any given time. What should be quite clear is that the visibility and auditability that are main characteristics of blockchain technology allow financial collaboration across supply chain echelons, not just bilaterally.

The time required from initiation to payment can therefore be dramatically reduced. In addition to the reduced transaction time, other benefits for importers and exporters include reduced bank fees (due to less manual activity on the part of the banks), reduced time for loan approval, and reduced risk of fraud. This way of financing a supply chain is radically cheaper and more efficient than the current way of doing business.

Blockchain: the missing link

Using blockchain may provide a simple system of secure record keeping that allows the bank redeeming CFS “to ensure that the CFS presented by the holders has been used to finance appropriate supply chain smart contracts”. At the same time suppliers using the blockchain system may retain the privacy that is need in their financial transactions with their sub-suppliers.

There are still challenges to be dealt with, too, such as the need to implement paperless trade, issues of data privacy, and how to get all members of a supply chain to participate. If global supply chains are to gain the full benefit of this technology for managing payments and related data, all parties that play a role in global trade must be involved!

By providing this missing piece of the information and supply chain management puzzle, blockchain may become the missing link!

Blockchain SCF projects

Since early this year the number of blockchain projects to improve supply chain finance is growing firmly. Especially IBM is very active in this area and partnered with companies in China and India to work on new blockchain-based solutions. IBM also teamed with Danish logistic and transport company Maersk Line, to create a new solution to digitize the global, cross-border supply chain using blockchain technology. Start-ups are at the same time popping up to help bridge the gap to this new technology, such as blockchain-based financial operating network Fluent, which aims to streamline supply chain finance.
“Blockchains built into supply chains can offer trust and accountability, as well as compliance with government regulations and internal rules and processes, resulting in reductions in costs and time delays, improved quality, and reduced risks,”Arvind Krishna, IBM Research Senior Vice President and Director Yijian Blockchain Technology Application System

 

Carlo de Meijer

Economist and researcher

 

 


You can read more about the different SCF projects in the complete article of Carlo de Meijer on LinkedIn.

 

 

The Corporate Treasurer and Blockchain

| 17-08-2016 | Carlo de Meijer |

blockchain

 

While it has been widely reported that – despite its disruptive character – the majority of banks think that innovations such as blockchain technology will positively impact their business and are exploring how they can use blockchain to their advantage, it is still largely a grey area for many corporate treasurers. But given the various challenges that corporate treasures are facing today, they also need to pay attention to this ‘cutting-edge’ blockchain technology. 

Complex environment

Today’s business environment for corporates that are internationally active can be highly complex from a treasury point of view. The treasury includes basic tasks like cash management, bank relationship management, payments, and corporate investing.

The corporate treasurer strives to achieve optimal working capital utilization to ensure that the financial supply chain efficiently and effectively supports the physical one. It does this by monitoring global cash positions and managing credit facilities across all bank accounts of the group companies to move cash to where and when it is needed.

“Cash management and forecasting are more challenging because of increasing business complexity.  The level of complexity is likely to get worse over the next two years”

In the digital era, real-time insight into a company’s global cash positions and cash requirements and the ability to move monies intraday is increasingly needed to support this changing business environment.

Today’s model of international correspondent banking however does not easily facilitate the ability to manage cash in a real-time environment.

Challenges

Corporate treasurers thereby face various challenges.

A first one is to obtain in a timely manner consolidated information of group-wide multi-currency positions across a fragmented banking network. This is needed to optimize the financing mix and duration of funding against expected and actual enterprise cash flows.

A second key challenge is optimizing the automation of “order-to-cash” and “purchase-to-pay” cycles with an optimal rate of straight-through-reconciliation (STR) of cash to accounting.

Need for …..

Cash management and forecasting are more important than ever for a company’s financial success, but they have also become more difficult to execute. And the pressure to provide insightful and proactive cash reporting and forecasting is only likely to grow. Management outside of treasury needs a better understanding of a company’s cash positioning and forecasts.

To execute in this environment, treasury functions will need to find ways to provide management with information on cash positions and cash forecasts faster and with deeper insight.

So where should treasury start, in order to improve forecast quality despite increasing internal and external forces that adverse impact reporting?

Blockchain enters the stage

But there is a technology available to take the pressure off the modern cash management professional: Blockchain. This technology could fundamentally affect the various areas of corporate treasury  as it could transform how financial transactions are recorded, reconciled and reported.

The potential applications of blockchain technology for the treasury are vast. They may  range from cash management and correspondent banking, to trade finance and documentation, supply chain management, commodity financing and account opening.

Especially for treasury relevant payments, when applying blockchain, these could be executed instantly between the various participants. As the ownership and provenance of transactions can actually be embedded in the blockchain data, blockchain has the potential to be used for mainstream payments, thereby providing  a robust and secure framework for verifying transactions.

Benefits

Blockchain  could have a number of positive impacts on the transparency, efficiency, cost and risk issues currently associated with corporate treasury. This may bring them various benefits.

  • It will allow for improved liquidity management. Blockchain has the potential to enable real-time/instant insight in a corporate’s liquidity position and how quickly they can provide liquidity to their corporate.
  • The transparency brought about by blockchain technology between the various players could bring benefits especially for those activities that need multiple controls such as transfer of payments. Such transfers can be done much quicker and in some instances even instantly.
  • It will also allow for improved risk management. As the credibility of debtors and creditors is supposed to be known at all participants blockchain will also contribute to more security.
  • Treasurers are nowadays under pressure to reduce costs. Blockchain may allow much lower trading costs for banks because much less parties are involved for reconciliation purposes. Some even say it could save banks billions of euros. And if banks could provide their services to corporates at lower costs that might be of great help for treasurers.
  • And what about the use of smart contracts, in which lawyers and accountants essentially act as coders. When two parties enter into a transaction together, the accountant/lawyer/coder inputs into the blockchain what the event they have all agreed on. This event will occur automatically. That might contribute to much greater efficiency.
  • But also from a financial and business strategy issue, blockchain could bring great benefits. Having a clear picture of assets and cash flows, finance has the ability to make strategic investments in shorter period of time, helping to capitalize on potential investment opportunities and evaluate important future transactions.

Take a longer view

Blockchain has the potential to fundamentally change the treasury function at corporates. For some blockchain is even going to be a game-changer for treasury. The change might not be here yet, but it is coming, and treasurers need to take the long view on it.

carlodemeijer

 

 

Carlo de Meijer

Economist and researcher

 

B2B Fintech: Payments, Supply Chain Finance & E-Invoicing Guide 2016

| 14-06-2016 | treasuryXL |

The B2B Fintech: Payments, Supply Chain Finance & E-Invoicing Guide 2016 has been released by the Paypers. The guide is a map of the complex and dynamic world of Fintech. Carefully documented, the guide keeps readers informed about the latest developments and opportunities in B2B payments, SCF, and e-invoicing.

The guide offers valuable information for industry professionals, associations, analysts, industry solutions providers and Fintech enthusiasts via a thoughtfully structured journey into the dynamic world of B2B payments, supply chain finance and e-invoicing. Also, the guide is completed by a detailed online company profiles database with advanced search functionality.

Highlights of the report:

  • the future of banking innovation from two leading banks (Deutsche Bank, UniCredit);
  • the most interesting use cases for blockchain in B2B payments and supply chain finance (Aite Group, Innopay, Orchard Finance);
  • how to reinvent the correspondent banking model as we know it today (SWIFT);
  • the challenges for international payments & financing projects (sharedserviceslink, KAE, NAPCP, Token, Future Asia Ventures, INTIX);
  • supply chain finance: a significant new proposition in the financing of trade and supply chains, but what’s next (ICC Banking Commission, Windesheim, Magnus Lind – The Talent Show, Anita Gerrits);
  • the steps needed for successful open & cross-border e-invoicing (Comarch EDI, Fraunhofer Institute, simplerinvoicing);
  • the regulation helps or hinders innovation and growth: up to date insights on PSD2, Directive 2014/55/EU, Prompt Payment Code, etc. (Brendan Jones, EESPA, Asset Based Finance Association, IAAF)

The guide opens an eye on the unique factors that puts the scene in a forever changing game, with new actors, new rules and impediments that require constant innovation and original ideas. The inner architecture of the guide follows closely the most important issues of the moment, trends and developments in payments & financing.B2B payments Report 2016_Cover_The Paypers
Don’t miss out the most comprehensive and up-to-date overview on the global B2B Fintech: payments, supply chain finance and e-invoicing ecosystem. Download your free copy of the Guide here.

Share your thoughts on the topics developed in the B2B Fintech: Payments, Supply Chain Finance & E-invoicing Guide 2016 by commenting on this article or maybe share your thoughts in an article about one of the topics.