Competing For Success

Competition is the keen cutting edge of business, always shaving away at costs- Henry Ford

I’m often asked by organizations considering Supply Chain Finance whether they should utilize a single lead bank to fund their SCF program (either on balance sheet or through a syndication structure) or utilize an open, multi-bank SCF platform. If your SCF program is large enough to require multiple banks (e.g. $100 Million in financing requirements) you probably shouldn’t run it through a single bank. In addition, even if your SCF program is small, you should at least maintain the option to bring in other banks. Why? Competition. Competition among funders ensures the lowest supplier financing rates. Keep in mind that achieving the lowest financing rate isn’t the SCF objective for most companies, that’s usually improving supplier financial health, negotiating better payment terms or negotiating lower supplier pricing. However, lower rates are one factor that increases the value of SCF to suppliers. At PrimeRevenue we’ve seen how competition among funders helps provide additional value for suppliers through lower financing rates. For example:

• Like gas prices, financing rates in SCF programs seemed easy to rise when credit spreads were on the way up while rates were sticky when credit spreads were on the way down. In our SCF programs where we have multiple banks providing funding, financing costs came down much more quickly due to competition than in programs with only a single lead bank funding.

• On one of our programs, a large supplier to a buyer had access to financing that was at a lower rate than that offered by the SCF program. The supplier understood the advantages of SCF (eg on demand financing, off balance sheet, etc.) so the price didn’t need to match their current rates but it did need to be closer. The bank initially said it couldn’t lower their price so the buyer told them they understood but they were going move that supplier to another bank on the platform. The existing bank came back and not only lowered the price for that supplier but lowered pricing for the entire buyer program.

• On another program a large supplier wanted a certain rate to participate. The existing banks on the platform initially would not offer the required pricing to the supplier. The supplier then decided to have multiple banks bid on their SCF business and were able to get the price they wanted.

Most companies today realize the advantages, both short and long term, of utilizing an open, bank independent platform to assure competition among banks. While most banks follow their client’s lead and participate in open platforms there are a few ‰”last standers” left who will only fund only on their closed, proprietary SCF platforms. They may be enjoying the benefits of client lock in and freedom from competition today, but their numbers will continue to shrink as the SCF market evolves to open SCF platforms.