How to Fight the Credit Squeeze
by Robin Page, Chief Executive
Reports from Demica, the globally-respected consultancy specialising in the provision of working capital solutions, always make valuable reading for treasurers and the new one we publish in this supplement is no exception. With the title of ‘The Hidden Player’, it charts the rise of invoice finance in some detail, noting that in Europe this market – mainly composed of factoring and invoice discounting, supply chain finance and trade receivables securitisation – was altogether worth over EUR 11tr last year, five times the size of the European leasing market and some 8% of EU 27 GDP. The market continues to grow at a time when, as all our contributors note, traditional credit is undergoing a significant squeeze, and banks and corporates alike recognise its value “as the risk to funding is predicated not on the creditor’s company rating but on the aggregated quality of the outstanding debt and debtors, which is often better than that of the invoice originator”.
Anil Walia of the Royal Bank of Scotland points out the differences between financial supply chain management (FSCM) and supply chain finance (SCF), showing that the former refers to a wider concept of which SCF is just one part. By reverting to the original meaning, treasurers can improve working capital management, reduce processing costs and mitigate risk – all of which are particularly dear to their hearts at times of economic uncertainty but which as Walia emphasises, should also be top of the agenda during good times as well. “During difficult times,” he says, “FSCM, including techniques such as SCF and pre-shipment financing, offers vital access to liquidity and reduces supply chain risk”; but when conditions improve it can also be helpful as companies need to invest in raw materials and increase production capacity, which often produces even greater liquidity problems.
The article by Markus Wohlgeschaffen from UniCredit’s Global Transaction Banking is concerned with what he notes is “one of the most frequently recurring themes in global transaction banking”, namely the integration of cash management and trade finance products. His case study of a big multinational client working with his bank shows how this can be achieved and the tangible benefits it brings to both corporates and financial institutions. Cash and trade have started to converge under the influence of both external and internal factors: nowadays, he says, it is not uncommon to spot on organisational charts of large companies new titles such as ‘Working Capital Manager’, responsible for all the processes and projects that aim to improve the firm’s working capital position.
‘A Must Have in an Uncertain World’ is how Jon Richman of Deutsche Bank’s Global Transaction Banking sees financial supply chain solutions. Supply chains have lengthened and become ever more complex as globalisation increases, bringing greater risk awareness and acting as the catalysts for a growing appetite for FSC solutions. These are flexible and serve as an incremental source of credit “as they add to, rather than depleting, existing cash resources”. Major trade banks such as Deutsche Bank have invested in sophisticated global solutions that constitute a holistic ‘package’ that combine expertise and experience in the creation of credit structures plus state-of-the-art technology platforms “to provide maximum efficiency and rich functionality, and robust implementation, on-boarding processes and client support capabilities to cover global trading activities”.
There are several factors which combine to make companies hesitate before implementing a supply chain finance programme, and some companies who have actually done so, have found that the outcomes fell short of their expectations. Bart Ras, Head of Trade Supply Chain Finance EMEA for Citi, addresses these barriers, perceived and real, and provides in his article a blueprint for success, which he emphasises is achievable with the right approach. Making the programme work relies on close co-operation between the various business functions, and he points out that one benefit often overlooked or not exploited is that “SCF can be a catalyst for a more efficient purchase-to-pay process”. Ras visualises an SCF programme as “more of a journey than a product”, and his guide to the journey is extremely practical, including having a defined strategy, dedicating onboarding resources, and in particular choosing the right SCF partner.
Given the proven benefits of supply chain finance, why does it not triple every year, and what exactly does it take to reap the benefits? These questions are also addressed by Paul Vervoort of ConQuaestor Management Consulting. While FSC is certainly on the rise, there are several quite significant challenges to implementation – legal, technological, operational and organisational – which the author identifies, and he provides a useful guide to factors for overcoming them, including sound decision-making and executive board sponsorship, choice of the right bank partner and sufficient participation of qualified suppliers.