Corporates finance supply chains to juice cash returns
In a possible further sign of disintermediation, corporates are deploying their excess cash in their self-funded supply chain finance programmes to assist their suppliers downstream.
Cash-rich corporates are looking down their supply chains to see how they can provide financial assistance to their suppliers to make a return on their excess funds.
International courier firms DHL and FedEx have established supply chain programmes to provide advice and assistance to the companies they work with to maximize their capabilities and reduce their outgoing costs.
The decision to enter into any supply chain facility is being assessed beyond the treasury department and becoming a key strategic decision.
Business has horror stories of large corporates that do such a good job
on the procurement
contact that they’ve
broken the suppliers
Jonathan Richman, head of trade finance and financial supply chain, Americas, Deutsche Bank, says: “Companies recognize the complexity of rolling out a supply chain finance solution and the need for a senior level mandate within their own organization.
"It requires a number of different functions across their own organization, including treasury, procurement and often right up to the C-suite, to ensure organizational alignment of goals and proactive engagement with suppliers.”
There is also a quiet increase in the numbers that are looking at how they can provide financial assistance to their supply chain through deploying their own cash. Some large and liquid corporates are doing this, but they are choosing to be discreet over which companies they are deciding to assist, and the reasons for it.
Stephen Baseby, associate policy and technical director at the Association of Corporate Treasurers (ACT), says: “We expect this process is being undertaken discretely. The buyers can select which companies offer the best value and will provide them with the discounts.”
Although there is some interest in testing the self-funding route, the viability of the option is still dependent on the individual corporate, and the strength of the client relationship.
Deutsche's Richman says: “There are some sophisticated clients – those who understand the attractive risk and return dynamics of the product and who have excess cash – that are exploring self-funded supply chain finance solutions.
“But there are lots of issues which need to be figured out before this route can become viable. It is a complicated subject which will evolve over time, but it is not there yet. Deutsche Bank is having some discussions with clients in this regard.”
Eric Riddle, Kyriba
Eric Riddle, executive vice-president of supply chain finance solutions at Kyriba, says he has been seeing corporates stepping in to use their own liquidity, but only to a level they are comfortable offering. They will still be looking to access funding through third parties, whether banks or alternative sources such as insurance companies.
“These [supply chain] solutions are not completely risk free, but the sophisticated corporates assess and understand the risks and forge ahead and implement these solutions from various motivations including generating income, reducing cost of goods sold or reducing risk,” says Riddle.
ACT's Baseby explains the process works by selecting suppliers with established relationships and long payment terms, and looking to reduce the latter temporarily. Supplying financing in this way can influence a treasurer’s overall strategy to manage cash.
“Companies will have strategic reasons for holding cash, despite low returns in the deposit market," he says. "Supplier discounts for early payment could exceed the maximum deposit returns of 30 to 40 basis points, which is a material cost of carry against the buyers’ cost of debt.
"Smaller suppliers down the chain could be paying several percent more for their loan facilities than their buyers.”
Baseby adds: “By doing that, suppliers are funding themselves with the buyers’ cash. It puts the buyers in a position to negotiate discounts which they would not get if they enabled a bank to offer invoice discounting to their suppliers.”
Taking the approach to self-fund can address concerns on the strength of the suppliers in the chain. Directly assisting with financing can also remove risk from the corporate’s side if they find their suppliers are in a difficult position and struggling with conventional funding sources.
“It is rational for the larger corporates to offer assistance to their supply chain," says Baseby. "They can look at the payment terms and contracts with suppliers on a bilateral basis.”
There are good business reasons for assisting suppliers that might be struggling with obtaining financing, as losing them from the supply chain could have greater ramifications for the corporate overall.
“The big corporates have to respect that a lot of the smaller companies are under extreme pressure to get access to money," says Baseby. "If the larger companies extend payment terms too far, they can find they have no supplier. They need to be amenable to the process.
“Business has horror stories of large corporates that do such a good job on the procurement contact that they’ve broken the suppliers and been forced to buy them out to keep them in business.”
Aside from juicing returns from excess cash, corporate treasurers' motivation to self-finance their suppliers is, in part, down to the disappointment that banks have not compensated them from the supply chain product.
“The banks have pushed heavily into supply chain financing, which has benefits to their capital adequacy management, but corporates may not fully share the benefits," concludes Baseby.
The availability of alternative financing sources for suppliers is surely another blow to banks.