Mastering Supply Chain Finance: Vendor-Sponsored SCF Solutions

Widely recognised in the realm of trade finance, Supply Chain Finance (SCF) refers to a set of solutions that enable companies to finance their supply chain and improve working capital cycles. These solutions emerged as an alternative to traditional loans, providing an additional avenue to bridge the trade finance gap, which currently exceeds USD 2 trillion[1].

Originally conceived in the 1980s, SCF has evolved significantly. It now extends beyond mere payment term management to encompass a comprehensive approach to working capital optimisation. Technological progress has played a crucial role in driving this evolution. While some market players continue to operate with limited technology, advanced tech is essential in today’s landscape. It enables superior solutions while meeting rising market expectations.

SCF products distinguish themselves based on various factors, including the involved counterparties, legal framework, compliance and credit monitoring procedures and program sponsorship. Programs can be sponsored either by buyers (Accounts Payable programs) or vendors (Accounts Receivable programs).

Accounts Receivable or Receivables-based programs allow vendors to anticipate their receivables, unlocking working capital and decreasing Days Sales Outstanding (DSO). Usually, these programs reduce the vendor’s financial debt and enhance their balance sheet, especially if they achieve true sale of the receivables. However, the recent increased scrutiny from auditors and rating agencies, now demanding greater disclosure of SCF programs in financial statements [2],[3],may appear as a significant challenge. Nevertheless, this challenge can be overcome through careful program structuring and the engagement of independent and technologically advanced third-party servicing.

In Factoring, for example, the factor advances payment for receivables to the vendor at a discount. These programs usually have limited engagement with the portfolio of buyers, who are often unaware of the programs. In these cases, a significant portion of program servicing falls on the vendor, including the reconciliation of buyer repayments. This increases performance risk and endangers the considerations for true sale by not externalising the receivables management.

Thanks to the tailored legal structure and continuous credit and compliance risk monitoring, the risk associated with these programs is substantially reduced. This solution enhances the vendor’s competitiveness and drives more sales from the enrolled buyers, whose working capital improves through the extended terms obtained.

Due to the typically large number of buyers involved, servicing these programs is a key function. Currently, many service providers still rely on simpler technologies that are not sufficient to operate complex, multi-jurisdictional programs. More advanced platforms improve the program’s performance and reduce risk through automated monitoring processes, alerts and notifications. Additionally, they include the capability for in-system dispute and dilution management, allowing buyers to promptly utilise their credits against the vendor.

Moreover, third-party servicing of the programs increases transparency for all parties involved, which positively impacts the rating and fiscal treatment of the programs. However, only very few providers offer the necessary flexibility and fully automated end-to-end processing for smooth administration, and currently, only a few are financially and operationally stable.

Our team at KS-TF developed a formula to navigate the complexities of these programs and stands ready to assist organisations aiming to establish or elevate their presence in the SCF industry.

If you enjoyed this piece about Accounts Receivable products, we invite you to stay tuned for our upcoming article on buyer-sponsored products.