Global multinational companies continue to streamline working capital management to make every dollar work harder and more efficiently. And one way they’ve been doing it over the last few years is mastering the supply chain.
In the fall of 2014, members of the NeuGroup’s second group for Treasurers of Large MNCs, the T30-2, took a look at how they can improve their supply chain finance. Retailers in the group indicated they’re looking at the supply chain for both financing and driving greater efficiency. But complicating the picture for this sector is the drive toward omni-channel distribution where they are selling online and in stores, delivering to and servicing customers as they the customers choose.
For others in the group, the complications are getting the ball rolling. And many should as soon as possible. That’s because there’s a lot of money sloshing around in this particular area waiting to fall under the control of working capital management. According to a pre-meeting survey, accounts payable balances are a substantial component of the capital deployed for the T30-2 meeting participants approaching almost 40 percent of the outstanding debt and almost 10 percent of total assets. On receivables side, trade receivable balances also are a substantial component of the capital deployed approaching 35 percent of the outstanding debt and almost 10 percent of total assets.
Given the above and the sizeable and highly predictable cash collections on these trade payables and receivables, it would be natural to assume they would form a key component in various financing initiatives for the T30-2 participants. And the tools to do it are becoming cheaper to use. Depending on the firm’s credit profile, trade-backed financing are becoming competitive to the cost of bank revolver financing (being driven up by bank regulation, which also favors collateralized financing) and even commercial paper, for A2/P2 issuers (exacerbated by money market reform).
Even stellar credits may want to consider a program, as one “stellar” member has, in the context of contingency funding. To ensure ample liquidity when access to other funding sources is unavailable ABS financing using trade receivables can fill gaps.
There’s also the added benefit it of trade finance being a counterparty-credit risk mitigation tool. Trade-backed financing programs can be used to transfer the concentration risk or other unwanted exposure to suppliers to the investors in the paper.
As cash-rich multinationals, some of the aforementioned ideas may make trade-backed or supply chain financing programs more interesting.
Still, part of the problem with trade-backed financing and supply chain finance discussions is that they get focused solely on the working capital improvement argument, which is important, but not the sole benefit to be won from such programs. And there are challenges to setting up trade-based finance programs, including onboarding and accounting treatment, but the more upside opportunities created by them, the more working to overcome these challenges make sense. Plus, onboarding is only getting easier as these programs proliferate and suppliers, for example, become comfortable participating in a program sponsored by one of your industry peers. In the end, benefits will only grow and outweigh the negatives as innovation in trade-backed structures continues and non-bank investors provide the funding.