Transactions on the PrimeRevenue supply chain finance platform are classified as trade payables, not debt – and that’s pretty spectacular. It’s also one of the main reasons why companies choose supply chain finance over commercial-based lending and other financing options. Improved cash flow without adding debt to the balance sheet? Yes, please.

In order to make sure supply chain finance transactions retain trade payables classification, the following precautions should be taken:

  • Funding from the financial institution must be uncommitted. This implies that the financial institution can reduce its credit line or, in the worst case, withdraw funding completely at any time.
  • Maintain contractual separation between buyer, funder and supplier. The buyer should not be a party to the arrangements between the funder and the supplier.
  • The buyer cannot replace its obligation to a supplier with an obligation to a funder. The buyer maintains its payment obligation to the supplier and is not released from its obligation to pay the supplier.
  • Keep payment patterns steady. If the payment patterns before and after the introduction of the supply chain finance program are significantly different, or significantly different from payments handled outside of the program, it may indicate bank financing.
  • Don’t negotiate funding rates and terms on behalf of the supplier. If the buyer is selecting which suppliers should be part of the supply chain finance program, and negotiating interest rates and terms on their behalf, it could lead to a reclassification of trade payables.

When it comes to ensuring transactions are classified as trade payables rather than debt, there is a lot of grey area. Twenty years after the initial implementation of the first supply chain finance program, current accounting guidelines (IFRS and US GAAP) still lack qualitative guidance.

At PrimeRevenue, we take a very conservative, yet effective approach. To date, PrimeRevenue has had a 100 percent success rate in this area with the Big 4 accounting firms all confirming trade payables accounting treatment for their clients’ supply chain finance programs on the PrimeRevenue Platform.

Remember – not all supply chain finance programs are created equal. Despite best intentions, some programs and providers find themselves on the wrong side of the balance sheet. It’s important to work with a solution provider that employs a conservative, proven approach and can demonstrate a strong track record.

VP, General Counsel

Published April 09, 2018