Improving liquidity through supply chain finance: working group report published

Supply chain finance can play a major role in improving liquidity available to small and mid tier companies

The Association of Corporate Treasurers (ACT) has today published the report of the supply chain finance working group. The supply chain finance working group (SCFWG) was set up at the request of the Bank of England and chaired by the ACT. The SCFWG began its work at a time when bank lending to smaller companies was described by the Bank of England as constrained and asked the SCFWG to look if there were alternative ways of providing additional capital to this important part of the economy. In the past six months there is no doubt that lending conditions have improved but there still remains a key role for supply chain finance (SCF). One of the primary aims was to assess whether there is demand for an expansion of the supply chain finance market. The SCFWG identified that supply chain finance structures have developed to suit a variety of needs and that no one structure should be singled out as the preferred option. However, in current market conditions where credit quality has become a key issue the SCFWG believes that buyer driven receivable programmes (BDRPs)1 can and will help ease funding conditions. The two key benefits of BDRPs that are attractive to lenders are that: The funding is based on the credit standing of the buyer and not the supplier The buyer (not the lender) takes the responsibility for the supplier, for example dealing with adjustments for goods returned or faulty. As a result a BDRP is less complex than other SCF structures2. The lending market is benefiting from supply chain finance structures and should continue to do so. Stuart Siddall, Chief Executive of The Association of Corporate Treasurers said:

 Companies with good credit standing can play a significant role in improving liquidity for their supply chain by facilitating buyer driven receivables programmes that their suppliers can participate in. We are very pleased to see banks that have in the past not participated in supplier driven SCF structures starting to fund buyer driven programmes. The SCF market would benefit from a co-ordinated industry focus on increased transparency and standardisation and we are calling for all parties involved to take this project forward. Stuart Siddall, Chief Executive of the ACT

Jennifer Gillespie, Head of Cash Management, Legal & General Investment Management said:

 As a major UK investor we welcome developments in the UK SCF market and support the initiatives that, in the longer term, should lead to non-bank investors entering the UK SCF market. There are a number of investors who have substantial capital that they would be prepared to make available to this market provided the right structure/investment vehicle can be developed. Jennifer Gillespie, Head of Cash Management, Legal & General Investment Management

Paul Fisher, Executive Director, Markets and Member of the Monetary Policy Committee, Bank of England said:

 The UK SCF market is highly fragmented and has been undervalued as a funding source for firms that cannot access the public debt markets. This report is a useful first step towards a wider understanding and acceptance of the importance of SCF to such companies. Paul Fisher, Executive Director, Markets and Member of the Monetary Policy Committee

The full report is available at www.treasurers.org/scf Should editors wish to commission an article from the ACT, please visit the ACT Press Room.

• 1. In a buyer driven receivables programme a company that has a good credit standing sets up an arrangement with a bank or other financial party to provide funding to the company's suppliers. The programme allows suppliers to sell or discount their receivables from their sales invoices and get immediate cash payments. The funders look to the credit worthiness of the buyer company rather than the supplier. The main benefit for the suppliers is getting funding that might otherwise not be available to it and at better rates assuming the buyer is a better risk than the supplier. The buyer company has the benefit of an enhanced relationship with its suppliers and through helping the supplier gain funding is strengthening the reliability and financial viability of its own supply chain. The ability to provide this sort of supply chain finance rather than the traditional invoice discounting originated by the suppliers is very much dependent on the IT systems for recording deliveries, invoices, approvals and payments and for communicating between the parties. Powerful web based systems are now readily available.
• 2. SCF programmes initiated by the buyer company achieve economies of scale in that one credit assessment and one set of documentation can be used to bring multiple suppliers into the scheme. Starting at the supplier end, on the other hand, requires multiple credit assessments and possible a range of agreements