The Global Supply Chain Finance Forum (GSCFF) – comprising BAFT (Bankers’ Association for Finance and Trade), FCI, the International Chamber of Commerce (ICC), the International Trade & Forfaiting Association (ITFA) and the Euro Banking Association (EBA) – released a paper in response to growing concerns regarding the use of supply chain finance (SCF) and, in particular, payables finance programs. The report, Ensuring payables finance remains a force for good, aims to address criticisms across three key areas: the potential adverse impact on suppliers, issues relating to financial reporting and transparency, and overall program risk.
“When used in an appropriate manner, payables finance programmes enable buyers and suppliers to optimise their working capital and strengthen their relationships with each other. However, reports relating to the misuse of payables finance programmes, notably around suppliers being forced into accepting unfavourable terms, are extremely worrying. As such the GSCFF has taken the initiative to address these concerns head-on, to promote understanding of the technique and its use,” says Christian Hausherr, Chair of the GSCFF, as well as European Product Head of Payables Finance, Trade Finance & Supply Chain Finance at Deutsche Bank, says
The report addresses topics ranging from the alleged “bullying” of small and medium-sized enterprises (SMEs) to join payables finance programmes, to issues around financial disclosure, to impact of Covid-19 on the use of the technique.
Key conclusions include:
- SMEs should never be “bullied” to join such programs. Reports of such practices are highly concerning and taken for the GSCFF. They also ignore the balance that can be achieved through well-structured payables finance programmes, which not only help buyers and therefore assure the health of the overall supply chain, but also provide prompt access to funds for suppliers on an affordable basis, addressing the systemic SME cashflow challenge.
- Suppliers should feel that there is absolutely no obligation to participate. If they are not in urgent need of cash, they can opt to receive payment in full on the original due date. The report strongly encourages finance providers to follow accepted industry practice in considering extensions of terms.
- Liabilities rising from SCF programs do not create additional financial risk above and beyond those that arise from trade between a buyer and a seller. Negative outcomes can be avoided by implementing strong credit analysis of a corporate’s balance sheet before engaging in a SCF program.
- Transparency of financial reporting relating to the usage of SCF programs is desirable but requires developing parameters for disclosure in corporates’ financial statements in coordination with accounting standards bodies.
- Covid-19 may have resulted in increased use of SCF, yet this does not create increased risk within the system as it would be counter-productive and inappropriate for banks to swiftly withdraw credit lines.