|By Ugur Bitiren, Director, Corporate Advisory, RBS|
EU late payment concernsThe EU sees late payments in commercial transactions as a major problem, in particular what the commission regards as large buyers forcing SMEs to accept payment terms detrimental to their working capital and cash flow. These concerns have risen in recent years as the level of working capital has increased. In the UK, for example, money owed to suppliers rose by 27 per cent in the two years to the end of 2011, reaching GBP113.1 billion (see chart above).
Effects of the EU Payments DirectiveThe Commission estimates its Directive will free up the equivalent of an extra GBP150 billion for businesses across Europe by improving cash flow and reducing SME exposures to late payment negotiations with larger customers. The downside will be felt by corporates which currently benefit from extended payables but which may now experience disruptions to operating cycles and a drop in liquidity. Also, few companies are likely to admit to such behaviour. Some may look at using suppliers from outside the EU, beyond the reach of the Directive.
Supply chain finance as a solutionSupply chain finance promotes efficient working capital management to purchasers, frees up liquidity for suppliers, and incentivises purchasers tocontinue to source from the European area. While supply chain finance has not been referred to as a clear solution within the EU Directive itself, and we expect there will be differences in interpretation between countries, the UK Government example shows supply chain finance is certainly being considered as an alternative solution to decreasing payment terms. As shown in the graph above, supply chain finance is a structured receivables discounting program that allows suppliers the option to discount receivables against a buyer. Suppliers can obtain liquidity at an earlier date frequently at a rate of interest far superior to the suppliers own. Compare the situation of two suppliers: Supplier A sells to the Buyer at 60-day terms as stipulated by the EU Directive. It has to finance itself from its liquidity sources at an interest rate of 8 per cent p.a. Supplier B also funds at 8 per cent p.a. and joins the same buyers supply chain finance programme. By taking part in this programme, supplier B agrees to 90-day payment terms, but then also elects to receive their cash in five days, discounted to the buyers superior funding cost of 3 per cent p.a. Though supplier B has longer standard payment terms, the ability to discount receivables at a better rate means it is much better off than supplier A in this case by about 0.5 per cent of notional. Supply chain finance also removes the payment risk from the suppliers balance sheet, and in addition reduces the need for expensive insurance cover. In fact, we have experienced a number of cases where a supplier has applied for bankruptcy, the court has allowed the funds received under a supply chain finance program to remain separated from the pool of assets while restructuring the company out of bankruptcy. Further, our experience in the business has revealed that suppliers who are part of a supplier finance transaction often enjoy a preferred status. We believe that there is sufficient room to suggest that the treatment of supplier B in its commercial relationship with the buyer cannot be seen as grossly unfair. With this reasoning, buyers should be able to maintain payment periods beyond 60 days and yet comply with the EU Directive.
How RBS can helpRBS can help you to structure the best supply chain financing solution for your organisation and your suppliers. With a team of supply chain finance advisors and specialists dedicated to supply chain finance for implementation, system integration, supplier on-boarding and processing, the bank is at the forefront of the business. The industry acknowledges our position: RBS has been named Best Supply Chain Finance Bank in Europe for the last three years in a row, and has won the Global Best Implementation of a Supply Chain Finance Deal award twice in this period. RBS also offers a full analysis on how to optimise your companys working capital, from cash-to-trade solutions, and can help find the best solution for your organisation.
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