The trade finance industry encompasses a range of financial products all with a single goal in mind: Promote global trade and the financial well-being of traders. But there are multiple products available, and some have multiple names, leading to some confusion for both corporate traders and financiers.
The Global Supply Chain Finance Forum, comprised of the Bankers Association for Finance & Trade (BAFT), Euro Banking Association (EBA), Factors Chain International (FCI), International Chamber of Commerce (ICC), and International Trade and Forfaiting Association (ITFA), is aiming to bring standardization into the sector through a series of guidance papers for the sector to provide clarity and consistency.
The Forum’s first paper, “Market Practices in Supply Chain Finance: Receivables Discounting Technique,” offers guidance on invoice discounting in which a vendor sells outstanding invoices to a finance provider at a discount. That finance provider makes money when the B2B customer pays off the full amount of the invoice, while suppliers are able to accelerate their cash flows amid longer payment terms in the global trading environment.
“Our hope is that this guidance will lead to an industry-wide, uniform adoption of the receivable discounting technique,” explained Christian Hausherr, the Forum’s chair, and Deutsche Bank’s European product head of supply chain finance, in a statement. “When all parties use similar techniques and terminology, it makes for a more streamlined and efficient process.”
The Forum plans to introduce similar guidance papers on accounts payables financing, forfaiting and other processes within supply chain finance moving forward.
Addressing the lack of standardization in the supply chain finance industry could promote efficiencies among banks and other financiers as the sector works to close a $1.5 trillion gap in available trade finance, as estimated by the Asian Development Bank.
But it’s not the only challenge the sector faces.
Reports in Global Trade Review said Tuesday (July 16) that supply chain finance has also become the subject of controversy and criticism in the U.K. in the wake of high-profile corporate collapses. Some analysts and critics argue that some failed corporates were able to misuse supply chain financing and force vendors into a supply chain financing program in order to delay payment, boost their balance sheets and potentially abuse their vendor base.
The 2018 collapse of U.K. construction giant Carillion brought this issue to light.
“Instead of helping its small suppliers, Carillion used the scheme to flatter its own cash flow at their expense,” wrote Frances Coppola in a Forbes article in January 2018. “Now, its failure has left them in desperate trouble.”
According to Coppola, Carillion’s use of the government’s Supply Chain Finance Scheme, a program designed to address corporates’ lengthening vendor payment terms and accelerate cash flow for suppliers, represented a large corporate's ability to misuse a government system that was originally designed to provide affordable financing to small businesses.
“It was never intended to help giant corporations rip off their suppliers,” she wrote. “But that’s how Carillion used it.”
The IFTA previously released guidelines to help businesses recognize when a supply chain financing program is being misused, and when supply chain financing should be reclassified as debt, the Global Trade Review noted.
The reclassification of supply chain finance as debt is also a hot, controversial topic in the sector today.
Fitch Ratings recently reignited that debate when it issued a warning about a corporate accounting loophole in the U.S. and Europe that could promote longer supplier payment terms.
The firm published its report, “What Investors Want To Know: Supply Chain Finance,” last August, arguing that by not classifying third party supply chain financing as debt, organizations are allowed to pass that financing off as “other payables,” potentially limiting transparency of their finances and propelling firms’ ability to pay vendors on later terms.
“We believe the magnitude of this unreported debt-like financing could be considerable in individual cases and may have negative credit implications,” Fitch stated in its report, also pointing to the collapse of Carillion as the potential for supply chain financing to have “a large impact on vulnerability to default for specific issuers, making awareness critical.”
In an interview with Global Trade Review, Stacey Facter, senior vice president for trade products at BAFT, acknowledged recent criticism of the supply chain finance space.
“Clearly, we will reiterate that any institution doing any of these programs with their customers will need to obtain accounting guidance from their own internal or external accountants,” said Facter. “It is a very delicate matter, and we just want to make sure we address the negative press that the programs have received, because while there are very few bad apples, we want to refocus on the good apples, if you will.”