The Positive Impact of Supply Chain Finance in a Post-Greensill World
By 4 minute read• Published August 30, 2021 •
The supply chain finance industry continues to feel reverberations of Greensill Capital’s collapse. Its demise has unleashed investigations from numerous regulatory and legislative bodies around the world, despite clear evidence nearly all providers have been scrupulous in running their supply chain finance programs legitimately and in a completely transparent fashion.
As a result of recent reviews, there is increased emphasis on the importance of transparency and accountability in trade finance as well as validation that supply chain finance – when properly implemented – is a force for good.
The True Nature of Supply Chain Finance
Greensill’s activities, which ultimately led to its collapse, have sparked outrage among supply chain finance providers. Claims that supply chain finance is inherently high-risk have been consistently debunked, and detailed reviews of Greensill’s actions indicate that the financing it was offering was hardly supply chain finance at all. In reality, supply chain finance is a low-risk way for buyers and suppliers to improve cash flow by leveraging the highest credit rating and value of cash in the trading ecosystem.
The last year has brought extreme challenges to buyers and suppliers as they all navigate sustained uncertainty. Alternative liquidity solutions such as supply chain finance and accounts receivable finance play an important role in improving the overall financial health of organizations, minimizing business disruptions, and increasing business resiliency for both buyers and suppliers.
True supply chain finance enables buyers to optimize working capital while offering their suppliers the option to accelerate payment on invoices (discounted based on the obligor’s frequently superior credit rating). This not only improves cash flow, but it also potentially reduces financing costs. To further illustrate this point, suppliers have a means to receive near-immediate payment at a fraction of the cost of maintaining balances on higher-interest lines of credit. Furthermore, supply chain finance transactions are considered a true sale of receivables and do not negatively impact the balance sheet.
When properly used and implemented, both buyers and suppliers can free up working capital that would otherwise be trapped in the supply chain. That liquidity can then be used to fund strategic initiatives like M&A, deleveraging, investment in innovation or sustainability initiatives, or simply surviving a historically disruptive period in business history. It’s truly a win-win for all parties involved.
Early payment options like supply chain finance will continue to be a useful tool for businesses as they navigate economic recovery and position themselves for future growth opportunities. However, it’s worth noting that supply chain finance programs must be implemented correctly, and the most effective programs are developed with significant benefits to suppliers front of mind.
Why Greensill’s Collapse May Be Good for the Industry’s Regulatory Outlook
Improper use of supply chain finance is a rare event. It is a shame recent headlines about Greensill’s collapse have caused anyone to believe otherwise. The overwhelming majority of supply chain finance programs are well-run and are fully above-board from both an accounting and transparency perspective. Fortunately, regulators are coming to a similar conclusion. The UK government found that Greensill’s situation was not true supply chain finance and there was no need for further legislation or regulation.
“We do not believe that the failure of Greensill Capital has demonstrated a need to bring supply chain finance within the regulatory perimeter for financial services.”
Other governments (such as the Australian government) are in the process of holding hearings now. Based on recordings, it is clear a lot of education is needed around what true supply chain finance is and how it works. We will continue to be a voice of education for the industry and for the buyers and suppliers who benefit from supply chain finance. We are optimistic that other governments will come to the same conclusion as the UK and agree that true, properly implemented supply chain finance programs can be a force of good for businesses of all sizes.