When faced with the choice of cash to fund a corporate finance strategy or cash to meet a 30-day supplier schedule, the revenue-generating activity will obviously be more alluring. However, while extending payment terms makes it possible to grow cash mountains, what happens if the supplier goes out of business while they wait?
Enter payables finance
In the late 1990s and early 2000s, bank revenues from payables finance (a buyer-led supply chain finance technique through which sellers in a buyer’s supply chain can access liquidity by means of receivable purchase) only represented a very small proportion of banks’ total trade finance business. Banks usually had to knock on their clients’ doors and explain the benefits.
Two decades later, the picture is quite different. Economic volatility and the lengthening of supply chains through globalisation has increased the challenge for corporates to remain financially sustainable. This has prompted an uptick in demand for this form of financing. Deutsche Bank’s payables finance business has become the fastest growing business line within the trade finance product family. The bank now has more than 600 active payables finance programmes, processing US$22bn worth of transactions, and 2.6 million invoices annually.
An increasingly complex ecosystem
As the payables finance business has matured and grown, new complexities, opportunities and challenges have emerged.
Today, in order to remain competitive, providers are expected to offer seamless global capabilities – yet there are additional regulatory, legal and operational challenges if a buyer and its suppliers are located cross-border and cross region.
In addition, as demand has surged, so has the size of payables finance deals demanded by corporates. Some programmes (particularly those of the largest multi-national companies), have become so enormous that they now outstrip the funding capacity of a single bank.
Then there is the fintech dimension. While payables finance dominance still largely resides with five or six global banks, a new generation of non-bank platform providers have significantly increased their share of the market – advertising enhanced digital interfaces, simplified implementation processes, and new business models (such as those focusing on smaller suppliers, offering auction-based solutions, and those incorporating dynamic discounting).
Where does this leave corporates? How should they decide which payables finance programme is right for them?
It is essential that corporates implement a payables finance programme that meets the exact needs of their business. They must consider: whether the payables finance programme is user-friendly and easy to set up; whether a specific provider can meet its required needs in the geographies where it does business; and whether a provider has the capacity to on-board the required suppliers quickly and efficiently.
A comment from Electrolux, the Swedish multinational home appliance manufacturer sums this up. “Today, when payables finance providers approach us, I look for evidence of global coverage. Can the provider support our global needs? Can the provider support our buying entity in North America and our suppliers in Asia? Can they respond in the same time zone and in the same language? This is very important to us.”
Given that most corporates tend to mandate one provider and use them for four to five years minimum, they have to be completely sure that their funding structure meets appropriate accounting standards. They need to be sure that the legal documentation is secure and enshrines all rights, duties and obligations of the provider. And last, but not least, they need to be sure that their programme is compliant with global, national and regional regulation, and in a reputable manner.
“If a German supplier is selling to a French buyer – and I am an English SCF provider – theoretically, every time I buy a trade receivable, I must make sure it was validly sold to me under German law, French law, and English law”, explains Geoffrey Wynne, Head of trade and Export Finance at the law firm Sullivan & Worcester.
Outlook for payables finance
Global Head Trade Finance and Chairman of ICC Banking Commission
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