The UK Prime Minister, David Cameron has announced a supply chain finance (SCF) scheme where the region’s largest companies are being asked to leverage their strong credit ratings to encourage banks of the smaller firms that supply them to lend against the invoices approved for payment.
Using the SCF scheme, a funder is automatically notified by a large company that an invoice has been approved for payment. Ideally, at that point the bank then offers a 100% immediate advance to the supplier at a lower interest rate, secure in the knowledge the corporate will eventually pay the invoice.
Cameron has also announced that the UK government will look to where it can, implementing this with its own suppliers, starting with the first UK government SCF scheme for community pharmacies in England. This would unlock up to GBP800m of new credit for 4,500 pharmacy businesses, many of which are SMEs. A number of large corporates have committed to the SCF programme, including Rolls Royce, Kingfisher, Siemens, Tesco and British Airways.
Governments around the world are recognising that SCF as a solution to liquidity shortfalls for large corporates and SMEs. In the US, the Export-Import Bank provides credit support for various SCF programmes in key industries such as aerospace and automotive. During the recent crisis the government in Germany provided guarantees to support SCF solutions, especially for sectors, which were affected by limited credit availability. On a more global level the International Finance Corporation (IFC), a member of the World Bank, underpins SCF programs with suppliers based in emerging markets.
While the recent announcement from Cameron has attracted press interest, SCF is not new to the UK government. In 2009 the Bank of England issued a statement of intent and commissioned the Association of Corporate Treasurers (ACT) to report on how SCF provides alternative funding to credit-starved small and medium enterprises (SMEs). Nevertheless, it took several years for the government to focus and push on SCF in the UK.
Since then, many enterprises businesses have failed – some of which could have been saved if SCF would have been in place for them. And those that did survive could have grown faster if the SCF liquidity had been available.
There are several UK government agencies, which are looking actively at SCF. The Society of Motor Manufacturers and Traders (SMMT) is one of the largest and most influential trade associations in the UK. The automotive industry is a vital part of the UK economy accounting for GBP40m turnover and accounts for more than 10% of total UK exports. Based on numerous economic constraints affecting the UK automotive supply chain and many complaints from the industry that banks are not lending sufficiently, the SMMT voiced concerns over a lack of available finance for automotive suppliers and are supporting SCF.
While the government is a prompt payer of its suppliers, prime contractors are often much slower in paying their suppliers, an average being 50 days. An Economist Intelligence Unit report on the largest 250 UK based corporates listed the financial stability of suppliers the third most important consideration for corporates when choosing a supplier, and after selection becoming the top concern for ongoing monitoring by the buyer.
“A key lesson learnt during the last years is that buyers cannot extend payment too far as it can result in higher risk within their supply chain if a crucial and strategic partner goes bankrupt,” said Oliver Belin, Business Development Executive at PrimeRevenue. “Today there is an ongoing shift in the management of the supply chain with buying organisation looking at a way to improve their working capital while providing short payment terms and liquidity to their suppliers.” He added: “We experienced very strong growth with SCF programs managed by PrimeRevenue worldwide and in the UK throughout the last years with more buying entities setting up their SCF solutions as well as more and more suppliers joining such facilities and making use of early payment terms.”
Belin went on to confirm that his organisation has been in contact with several UK government bodies regarding SCF. “The government understands that SCF delivers a wide range of benefits to suppliers. These include cheap funding based on the credit worthiness of their customers as well as having the option to sell 100% of their receivables whenever they need liquidity, compared to 70-90% in invoice-financing schemes currently available. If companies step into this discussion, it could lead to increased use of SCF solutions,” he said.
SCF has been around in the UK marketplace for around 12 years, but it has started to develop meaningfully only about six years ago, with enlightened retailers setting up SCF programs such as Sainsbury’s, B&Q and Marks & Spencer. In fact, during last years SCF has taken off considerably, with financing facilities implemented by other UK corporates in different industries such as aerospace, food and beverage, telecommunications, pharmaceuticals and construction.
“We have also seen that now after several years of experience corporates are becoming more aware that in successful supplier finance programmes, it is not only the pricing of the overall facility that counts, but also the capabilities for ongoing funding capacity, procurement education, and supplier on-boarding. As the financial performance of some banks deteriorated considerably during the last years, corporates having a SCF in place are increasingly looking at bank independent SCF platforms which are not limited in terms of jurisdiction of the suppliers and buyer entities as well as currencies and credit capacity,” says Belin, who pointed out that as globalisation on both buyer and supplier sides increases, so does the complexity of the supply chain.
The market is expected to grow continuously as a result of increased awareness in supply chain risk, and a demand in improving working capital as an important part of a corporate’s financial composition. As more providers launch SCF offerings, competition is set to increase. However, quality of services and ongoing support should remain the key determinant of client choice.
“We also see that there is much talk on the market about multi-bank setups for SCF programmes. Many financial institutions claim that they can provide multi-banking solutions. However, in most cases it is a lead bank buying the receivables from the suppliers and selling the respective assets in the secondary market. If the lead bank cannot support specific supplier jurisdictions, wants to reduce its credit exposure or decides to stop a SCF program, the buyer and the suppliers have no good solution in place. This is especially an important aspect with the ongoing difficulties in the financial market and new bank regulations such as Basel III. In addition, for multinational corporates with suppliers in multiple jurisdictions it is inefficient for them to log into ‘five’ different proprietary SCF platforms in order to process invoices and payments. Therefore, there is also strong demand from multinationals toward bank-agnostic SCF platforms,” observed Oliver Belin.
Not all observers were quite as enthusiastic, with one suggesting the SCF scheme was merely a tactic to cover up the fact that UK banks had not been forced to help struggling businesses.
Will Davies – the co-founder of co-founder of aspect.co.uk, a London property maintenance and refurbishment company, said: “We have to welcome any scheme that can improve the flow of capital into cash starved businesses and SMEs. But it is all getting a little tiresome; an endless stream of initiatives that are just designed to cover over the coalition’s obvious inability to make government owned high-street banks lend to small and medium sized businesses at sensible rates.”
Davies was an investment banker at Societe Generale before creating aspect.co.uk.“Cameron should have taken a big stick to the banks before now,” he added.