There is no question that supplier finance as a product is back in the spotlight. It is generating a far greater level of media attention than it has done for quite some time, and as a result more and more companies are looking at what might be involved to develop a successful programme. The UK government has itself recognised the important role that supplier finance has to play in supporting the small-to-medium sized enterprise (SME) sector, and is currently reviewing their own supply chains to identify suitable opportunities. They estimate that supplier finance could give access to as much as £20 billion of as yet untapped liquidity.
Supplier finance is also a great way to demonstrate tangible support to your supplier base. It can help alleviate cash flow concerns, and injects valuable liquidity into the supply chain helping smooth things through the cycle. It can help foster much closer working relationships with key suppliers and if managed successfully, can deliver a genuine win-win scenario for both parties.
It does need to be managed sensitively, however, and close co-operation with experienced practitioners is a key element necessary for success – some can feel put upon if you don’t bring them with you.
Experience shows that after an initial period of suspicion and uncertainty, buyers and suppliers that have seized the supplier finance opportunity and successfully embedded a programme have been pleased with the results, and can become advocates if they have been treated well and not merely as a cash cow.
When it comes to rolling out a supplier finance solution there is no silver bullet, but there are a number of key areas that must be considered to avoid sub-optimal results.
Is There Broad Support for the Programme?
Right from the outset it is important to ensure a joined up approach at the company level. In a modest SME business this might be relatively easy to achieve, but with an increase in size comes an exponential increase in the challenge of reaching consensus. Conflicts in the need to balance working capital improvement with the availability of funding lines, all the while managing the buyer/supplier relationship can lead to significant disagreements between finance, treasury and procurement people. It is therefore critical to ensure that these issues are fully debated before making the decision to proceed.
Being clear about the objective is equally important. Barclays has found that well-structured programmes can generate at least a 10% uplift in working capital via a combination of term extension and supplier finance.
While most supplier finance programmes seek to protect the off balance sheet treatment of the trade payables, if the buyer is cash rich, then perhaps placing a cash deposit down as collateral with their bankers might reduce the funding cost to their suppliers even further.
Whether you are aiming at improving supplier turnover rates, improved days payable outstanding (DPO) or reduced purchase costs, you must ensure that there is on-going commitment to see it through. There are many examples of companies losing their way and determination on the journey. Having invested time and effort in implementing the programme they then fail to realise the benefits; almost as though they have merely gone through a tick box exercise.
How Will A Supplier Finance Programme Impact Credit Availability?
The supplier finance proposition is classically structured around the arbitrage between the credit strength of the buyer, as compared with the typically weaker credit ratings of their suppliers. While this is fine in principle, it can severely impact on credit availability for the buyer, and where credit lines are tight, or might be required for example to support future expansion, this can be an issue.
Managing this availability either with a single bank or collective of banks can be an important step for a treasurer, and the relationship with the group of banks and how they perceive the relative merits of supplier finance, versus say term facilities, is an important area for consideration.
Once agreed, facilities are uncommitted, and although short term in nature, if a supplier has ‘signed up’ and become used to the support that supplier finance provides, the last thing that a buyer typically wants is to have the programme cancelled by their bankers, leaving their suppliers exposed. It is unlikely that any bank would formally commit to a programme, but this is where the relationship element comes into play, and in most instances one would hope that discussions would have been had well ahead of any decision to withdraw or reduce availability.
Do It Yourself or Use a Partner?
Most supplier finance platforms are fairly generic in terms of functionality and therefore on the face of it the decision comes down to either using your existing bank’s platform, using one of the proprietary platforms available from external software providers, or developing something in-house.
The first option can stretch availability of credit limits unless syndicated into the market. However, the second and third options offer the potential to manage the process more tightly and source funding from a variety of your bank relationships, thereby spreading the value amongst them and sharing the burden of credit support. A key consideration in all scenarios though is the amount of involvement and input that will be required from you should you need to tap into credit availability from more than one organisation.
If you choose the bank option it is likely that under your direction they will happily manage engagement with other investors, and may even suggest possible new investors, whereas the other options might require a higher level of involvement by you to manage the syndicate, although this does give you as a treasurer control.
How To Find The Best Programme Design
Although a number of successful programmes have been delivered using a ‘big bang’ single implementation approach, there have been a much larger number of projects that have failed to achieve their full potential by trying to do too much too soon, or by losing focus.
When considering a supplier finance programme it is imperative to decide exactly which suppliers are to be included and its extent: global v geographic; single buyer v group of buyers, etc. To help inform the decision-making, good visibility of data about the current supply chain and specifically existing relationships and terms within it, as well as the time taken to process invoices is vital. Armed with this information, early engagement with your chosen provider should help identify the likely take-up, and potential interest savings or working capital liquidity that could be unlocked both for you and your supplier base.
In our experience the most successful are those where a more cautious approach has been taken. We have recently been working with a multinational £5bn plus turnover business, with over 400 eligible suppliers and multiple buying entities in multiple locations. The key issue for them included automated straight through processing (STP) of invoices, working capital benefit and a strong corporate social responsibility (CSR) element to support their suppliers. The partner could easily have pushed for a big bang approach. However, after close consultation they agreed to initiate the programme with a couple of discrete buying entities and their related suppliers. This has enabled full testing of the end-to-end processes and validation of anticipated benefits for all concerned.
Making It Happen
So you have decided to move forward; you have chosen the system and partner to work with and identified the suppliers that you will invite to participate in the financing initiative. Now comes the challenge of making it all happen.
At the heart of any successful programme is a meticulously planned implementation plan, following best practice project management principles. These include good support at a company level, and an accountable senior executive who is influential enough should priorities need to be changed to move things forward. You should also be able to ensure that key stakeholders within the company remain fully engaged throughout the process via effective communication.
The real key is the successful on-boarding of the supplier base. In most instances, although the spend file may include many hundreds or even thousands of suppliers, in reality a very small number could account for up to 95% of the purchases. The first steps to bring the system live will need engagement with these key suppliers before then moving to the second tier suppliers.
I have found from past experience that during the implementation period and early stages of supplier on-boarding, weekly update calls have been invaluable to ensure that all parties are aware of progress and early remedial action can be initiated if timelines are threatened.
Any experienced supplier finance practitioner will need to provide ample training opportunities and hands on help for key personnel in the buyers business, as well as access to supplier support during the ‘go live’ stages of the programme. This covers not just the principles, but more specifically the key elements of the web-based platform and file upload processes, as well as information data flows and helping suppliers to manage the discount element.
Ultimately, whether you choose to embark on a programme or not, there are certain fundamentals that must be absolutely enshrined to be successful: Make sure that you have senior support and commitment to see it through to conclusion – you will only realise the full benefits by adopting a consistent approach; and ensuring that whoever you choose to partner with, is committed to providing the right level of transactional support to ensure success.
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