Supply Chain Finance: A Force for Good in a World of Disruption
By 6 minute read• Published March 5, 2021 •
Supply chain finance has gained considerable momentum over the last several years, especially given the recent economic landscape. Buyers and suppliers around the world rely on supply chain finance as a tool to improve working capital and navigate widespread volatility. For many companies, it has been a lifeline during a time of unimaginable disruption.
Whether it’s a small business using early payment as a catalyst for growth or an enterprise leveraging trade finance to inject stability into the supply chain during industry-wide disruption, there are endless examples of how supply chain finance can powerfully and positively impact businesses of all sizes around the world. We know firsthand the power of these programs to strengthen businesses because we watch our clients (and their suppliers) benefit from supply chain finance every day.
However, as with any financial tool, there have been rare occasions when supply chain finance has been mismanaged and misrepresented. Recent headlines have exposed how improper handling of funds can have a disastrous impact on an inherently positive solution – and it’s a shame that the few bad apples overshadow all of the good.
Supply Chain Finance Defined
Unfortunately, negative news is often followed by misinformed assumptions. There is a lot of noise around the ethics and risks associated with supply chain finance; however, many of the grievances are not even related to the actual concept of supply chain finance. Many of the popular stories of “supply chain finance gone wrong” are actually highly structured, opaque loan programs that don’t resemble the legitimate version of supply chain finance used by millions of companies globally as a tool to more efficiently run their businesses.
I want to provide a clear and accurate explanation of what supply chain finance is and how it works. In its proper and true form, supply chain finance allows buyers to optimize payment terms while simultaneously giving suppliers the option to get paid early at competitive and efficient rates. Funding is provided directly by a bank or other financial institution, and transactions are considered a true sale of receivables, meaning suppliers face no risk of recourse once the invoice has been advanced for early payment. When deployed ethically, supply chain finance will accelerate cash flow for both the buyer and the supplier while reducing the overall financing costs for both parties. This strengthens the sustainability of the supply chain because both businesses are financially stronger.
Supply chain finance should always be mutually beneficial and low risk for all parties involved, especially for the buyers and suppliers that rely on it as a material source of liquidity for their businesses. I want to make it clear: any arrangement that is not what I described above is likely not a true supply chain finance program.
Transparency and Reliability: The Cornerstone of Supply Chain Finance
PrimeRevenue has always championed and implemented supply chain finance programs that are properly run and well-funded. Our top priority is making sure all our customers, especially smaller businesses who may be more vulnerable, are not exposed to unnecessary risk. Our solutions are ingrained with several best practices to ensure our customers have a sustainable, reliable working capital solution. At the core of these best practices is a multi-funder approach.
The recent news about the unraveling of a major supply chain finance funder is a case study example of why a multi-funder approach is an absolute necessity. A company should never have to rely on a single bank for funding – it’s simply too risky.
Funding in a true supply chain finance program is uncommitted, meaning a bank can pull out at any point in time for any reason. Whether it is changes in the economy, a strategic decision to exit a specific market or jurisdiction, or – like most recently – dissipation of a funder all together, there are a multitude of scenarios when a bank could halt funding. The important thing is to have alternative options so you can seamlessly swap out funding as needed. Multi-funder supply chain finance provides a funding safety net for companies, ensuring uninterrupted funding for the companies that need it most.
It’s important to note that swapping out funders doesn’t always have to be for a negative reason. For example, if a company is looking to expand their supply chain finance program into a new region that their existing bank doesn’t cover, a multi-funder approach allows you to simply supplement funding with an additional bank that will cover that jurisdiction. Another example is if the program has grown and hit the funder’s maximum credit facility. With a multi-funder structure, a second (or third, fourth, etc.) bank can be added to contribute additional liquidity as needed, providing virtually no limit to a program’s potential.
Aside from the inherent risk in single-bank supply chain finance, reliance on one funder can also lead to murky waters regarding the source of funding. Many single-bank programs utilize funding models like syndication or a special purpose vehicle (SPV), which essentially divvy out receivables to either subsidiaries or partner investors. These all funnel through the lead bank, which can abstract the view of the businesses utilizing a single funder program. This can make it difficult for companies to know exactly who or what is funding the program. Supply chain finance is a solution built to increase transparency and aid companies in better controlling cash flow, so any providers that obscure this visibility should be approached with caution. Responsible providers favor complete clarity for both buyers and suppliers.
All of PrimeRevenue’s programs follow a direct funding model, meaning each funder is directly purchasing the receivable without involvement from any other parties. This structure provides buyers and suppliers complete funding visibility with respect to who is providing funding, what the cost is, and what parties are involved. There is no one “behind the curtain” manipulating the funding of the program. Each party has a clear understanding of who they are doing business with.
Hopefully, the recent unraveling of bad actors will be a learning lesson for companies moving forward. Your choice of provider is just as, if not more, important as your decision to implement a supply chain finance solution in the first place.
Over the past nearly two decades, PrimeRevenue has helped companies across the globe invest in critical business initiatives, weather economic volatility, and create stronger, more resilient supply chains. We stand behind the power of supply chain finance as a reliable working capital tool, and we promise to deliver effective working capital solutions in a transparent, ethical, and sustainable way. Our clients, both existing and forthcoming, can confidently trust that we have their best interests at heart and have time-tested safeguards to provide responsible solutions with longevity.