All for one and one for all: The win-win-win of distributor finance
Today’s modern treasurer plays a key role in creating structures and processes that ensure the continued availability of working capital across their supply chains
On the whole, the global economy continues to remain steady, with the World Bank predicting a 3.1% global growth rate for 2018. While developed markets are expected to grow by only 2.2%, emerging economies and developing markets are expected to strengthen to 4.5% growth in 2018, and 4.7% in 2019 . This continued strength in emerging and developing economies makes them even more attractive to businesses seeking international growth.
What does this mean for corporate treasurers? Much has been said about their increasingly strategic roles, expanding from captaining the firm’s core financial management functions – from short and long-term funding and operational treasury management to risk mitigation – to becoming a significant driver of commercial success, often by supporting their firms’ international ambitions.
Today’s modern treasurer plays a key role in creating structures and processes that ensure the continued availability of working capital across their supply chains, thereby strengthening relationships, building loyalty among their counterparties, and even driving sales.
Asia, with its continued economic growth, offers businesses the dual advantage of lower-cost sourcing coupled with an emergent, wealthy middle class. As firms go deeper into Asia, however, they face a variety of challenges – from unfamiliar local business practices and multiple regulatory regimes with different implementations and implications across markets, to extended payment periods that often result in longer working capital cycles. These protracted collection cycles can put undue stress on a firm’s supply chain and, consequently, its working capital. The 2018 Coface Asia Payment survey, for instance, noted that average payment terms in Asia lengthened to 64 days in 2017, up from 59 days in 2016. The study also noted that payment delays increased in 2017, when compared with previous years. The proportion of respondents who experienced payment delays exceeding 120 days increased to 16.5% in 2017, from 12.5% in 2016. Payment delays were longest in China and India; shortest in Malaysia, Taiwan and Japan.
A balancing act
Given this, treasurers have to perform a balancing act, ensuring that they provide sufficiently long payment terms for the distributors who need to stock and sell their products, while also ensuring that their firm maintains working capital to continue to manufacture enough products to meet market demand.
Local distributors are often much smaller, thinly capitalized businesses, with low open account credit limits or limited ability to provide collateral, and may thus struggle to secure affordable financing on their own merit. As corporations seek to gain and defend market share in key geographies, enabling their local distributors to increase volumes is critical. However, extending concessions such as elongated payment terms will have a direct impact on a firm’s credit risk profile, and its own working capital.
Distributor finance offers treasurers a means of providing their local distributors with access to affordable financing without impacting the firm’s own balance sheet or credit risk profile. The credit evaluation for the financing mainly considers the strength of the relationship between the firm and the distributor, rather than the distributor’s own credit rating. Simply put, distributor financing is a tripartite agreement among the corporate, the distributor and their bank. The bank makes financing available directly to the distributor, financing both its credit period and working capital requirements. Unlike traditional financing structures, the bank’s assessment is not based solely on the distributor’s financial worthiness, but on the strength and length of the commercial relationship between the corporate and the distributor.
A successful distributor financing programme offers clear benefits for both the corporate and the local distributor:
1. Lower cost of funds.
Distributors receive access to funds at a cost significantly lower than that they would get from traditional bank loans, without the need to post collateral. The facility usually covers the full working capital cycle, enabling distributors to more actively manage stock levels. They are also able to focus their efforts on the business of selling the merchandise, effectively driving up the firm’s sales.
2. Greater financial inclusion.
The provision of financing is more dependent on the strength of supply chain linkages rather than solely on the distributor’s own creditworthiness, and hence even smaller distributors can participate in the programme.
3. Flexibility of financing.
Financing is customized to the needs of both the company and the distributor. While the agreed structure will assure the distributor of coverage for a particular tenure, there remains the ability to make early or partial payments, or to easily extend the tenure of the financing period as required. This enables distributors to focus efforts on keeping customers happy, and building new relationships with additional corporates, rather than dealing with the distraction of constant negotiation and fund raising.
This flexibility also extends to the ability to customize financing to adjust to specific product considerations such as seasonality, market trends and even ad hoc initiatives such as marketing and promotional campaigns.
4. Operational efficiency.
Distributor finance programmes eliminate the need for the corporate to manage collections from across its distributor network, as the firm has effectively already been paid by the bank. The onus on collecting payment from distributors then transfers to the bank.
On its end, the bank monitors and reconciles payments and provides electronic reports to the corporate, directly into its Enterprise Resource Planning system. This reduces the operational burden of invoice matching and reconciliation for the corporate.
5. Sales growth.
As the bank does the collection activity, the sales teams of the corporate have more time for their core sales activity, thus boosting the sales for the corporate. The distributors also have the appropriate financing available to them so that they can provide the right credit period to the retailers, thus boosting sales.
While distributor financing may not be a completely new concept, new technology and an innovative approach to structuring the programme makes it fit for purpose for the evolving demands of today’s businesses. When selecting a banking partner for a distributor financing programme, firms should ask themselves the following questions:
Does the bank use an underwriting standard specific to their distributor financing programme?
Most providers simply use a single set of standards that they apply to all small and medium-sized enterprises (SMEs), regardless of market. A bank that tailors underwriting standards to local market conditions and considers the strength of supply chain linkages will be able to offer better terms and higher funding limits for your local distributors.
Does the bank have the risk appetite, commitment and local presence in your key geographies, particularly in more complex developing markets?
Geographical reach and local market knowledge are critical to optimally servicing all the participants in a distributor financing programme. Another critical success factor is for the bank to have the appetite to maintain relationships across businesses of all sizes. For corporates operating in multiple markets, the ability of the bank to offer the same offering and platform across the markets is essential. Finally, a long-standing commitment to the firm’s key markets ensures that the bank has a better understanding of the risks involved, which will result in more optimal pricing for the programme.
Does the bank have a holistic approach to the ecosystem of parties, with the ability to understand the underlying physical and informational flows of data between the players?
As businesses evolve, driven by technological advances and business model innovation, a bank that is able to integrate financial, physical and informational flows is better able to provide a customized offering. Data-driven insights would enable the bank to gain a better understanding of the distributor’s business, and its relationship with the firm, enabling it to extend funding on this basis, rather than relying on balance sheet strength. In addition, better insights enable the bank to help all parties plan for – and accommodate – the natural peaks and troughs of sales cycles, whether from seasonality or ad hoc marketing programmes.
About the Author
Ashutosh Kumar heads the Transaction Banking business for Standard Chartered Bank in ASEAN and South Asia, responsible for the overall Transaction Banking strategy, sales and product management across 12 countries. He also leads the Banking the ecosystem initiative globally, developing integrated propositions targeted at servicing clients’ end-to-end requirements across the value chain. Ashutosh was previously Standard Chartered’s Global Head of Cash. Before that, he was based in India as the Regional Head of Transaction Banking, South Asia, driving the business across India, Bangladesh, Sri Lanka and Nepal. Prior to this, he led the global product strategy and development agenda across the Bank’s network as Global Head of Corporate Cash & Trade, based in Singapore. Before joining Standard Chartered in 2005, Ashutosh held various positions in ABN AMRO’s Global Trade business in the Asia Pacific region.
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