By Hilary Kabak
A solid supply-chain finance program can go a long way toward saving time and offer protection from overpaying vendors.
Supply chain finance programs have proliferated in recent years, with more and more corporates formalizing their programs and looking for technology to help. And a big help it can be. In fact, one of the key advantages, if not the key advantage, of having an SCF program is the amount of work that can be automated.
Because of this automation, the SCF market is expected to continue to expand, with more banks providing more services. In this regard, it’s important to be discerning when choosing a partner.
Additional elements to investigate include the level of experience being brought to the table, the geographic breadth of a partner’s operations and compatible technology for your systems. If your bank is also your SCF provider,
it is advisable to investigate willingness and ability to commit capital to your program.
Getting to automatic
According to Chris Bozek, global trade and supply chain product head at Bank of America Merrill Lynch, choosing the right provider is a critical step in setting up a supply chain finance program in which all transactions can be automated for straight-through processing.
In other words, after the terms are worked with suppliers, settling invoices, making payments and applying discounts will be auto-
mated.
Adrian Katz, CEO of Finacity, a company that specializes in the securitization of account receivables, echoed these sentiments, describing the automation one should expect as being like the four legs of a chair:
1) Taking data from ERP/TMS and integrating data from multiple constituents
2) Having a database to search
3) Applying algorithms as your “financial engine” to determine who gets what on any given day.
4) Daily reporting so that constituents can easily track current, future and past payments.
Mr. Katz noted that companies should expect all of these from the company’s relationship bank. However, in some cases, companies might not be comfortable utilizing one bank for all these functions. To fill that gap, third-party providers of these services can supply the technology and planning.
Making the right choice
With this in mind, how does a company pick the right provider? And should that provider also be the funding source?
A corollary to this last point is that the buyer needs to challenge providers to continuously expand the SCF program. “There’s no such thing as a mature program,” said Mr. Bozek. Both the buyer and the provider should be looking out for trends and opportunities for each supplier to maximize the program.
“There’s no such thing as a mature [SCF] program,”
— Chris Bozek, Bank of America Merrill Lynch
While many SCF providers are banks, they are not the only option, particularly if there is a need to decouple the SCF program from the SCF funding source. Mr. Katz noted that it is really up to the buyer to determine the terms of the SCF program and negotiate with vendors. If the company is using a third-party system or creating its own SCF program, it can then choose a funding source and put banks into competition for the SCF business.
Who should do what?
What should the provider be doing for the company, and what does it need to do on its own?
Mr. Bozek suggested the SCF program provider, not the buyer or supplier, should be doing most of the heavy lifting in terms of ERP/TMS integration, as well as comprehensive vendor documentation, which he called “the most important pillar in these programs.”
However, regardless of the level of service provided, it behooves the buyer to do the due diligence; to seek out service information and make sure it is as complete as possible. Both Mr. Bozek and Mr. Katz agreed on the importance of reporting, but it is up to the buyer to actually look at the reports.
In addition to these considerations, Mr. Bozek noted the importance of quantitative modeling that can be done to make decisions on vendors. “I can’t overemphasize thorough vendor modeling,” Mr. Bozek said.
BofAML’s vendor modeling system includes suppliers’ implied cost of funds, purchase history, payment terms, and numerous other variables, which are used to prioritize vendors and determine which are most likely to accept the terms of an SCF program.
For BofAML, this is done in close consultation with the buyer, but Mr. Bozek said qualified SCF providers should be doing these things for the client. He also noted the importance of targeting the vendors as soon as possible in order to give buyers and suppliers ample time to agree on terms and achieve their own related goals.
Vetting the vendors
Vendor outreach and actual establishment of terms are still in-person processes that help companies solidify their relationships with suppliers. While each buyer will have different priorities in incorporating vendors into the SCF program, there are a few different perspectives on where to begin.
On the one hand, companies are trying to make a profit, so they might want to start with a supplier who accepts the biggest discounts.
On other hand, companies also want to help their best suppliers stay financially healthy and keep up with companies’ demands. Therefore, extending credit to suppliers first could be in a company’s best interest. At the same time, if a foreign supplier has longer terms of service, they might also be good starting candidates for the same reason.
In a discussion of transparency in SCF programs, Mr. Katz emphasized the need to go through every single payable and decide what the company is and isn’t comfortable paying, negotiating down to the individual invoice.
However, this frontloading means that once terms are established, buyers are spared having to click and approve each invoice or transaction. There are also commercial, credit, size, geographic and other variables that can influence your decision to bring vendors into the program.
Pillars of picking a bank
BAML’s Chris Bozek outlined four pillars for picking a bank to provide an uncommitted line of credit and administer a new SCF program:
- Experience. Look for a bank with a long and successful track record in achieving program goals.
- A global network of SCF in-market experts. A provider with global capabilities can help reduce adoption barriers typically faced by local suppliers by offering them training, local language support, banking services and automation capacity. Finacity’s Mr. Katz also noted here the importance of currency flexibility. If a bank cannot operate in the currency of the desired supplier, or if the supplier’s currency cannot convert to the company’s operational currency, there will be a problem.
- A proven vendor segmentation, onboarding, and servicing program. The provider can have the most advanced technology, but if it is not overcoming adoption barriers, neither the buyer nor seller will achieve their objectives.
- Capital commitment for the long term. The bank should not only provide credit at the time the SCF program is created, but it will also need to be able to expand that credit as the company grows, either with its own capital or by bringing other investors to the table.”
Helpful considerations
While making the final decision can be hard, the following are some further tips from the experts.
Pay a little more for confidence. If you are using a bank as the SCF provider, it may make sense to couple some of the upstream SCF activities with that bank as well, such as purchase-order submission, invoice receipts and accounts payable. This may reduce competition for your business and be more costly, but depending on the complexity of the operations, it may be worth paying a bit more for a solid SCF program.
For transparency, “go through every single payable and decide what the company is and isn’t comfortable paying.”
— Adrian Katz, Finacity
Pick a champion. For internal buy-in, Mr. Bozek noted two common denominators of successful programs: a point person who has the power to make or influence decisions and a highly detailed model of outcomes. Like any other corporate initiative, having a senior SCF champion to work with finance, treasury, IT and procurement is extremely helpful. Also, providing a financial benefits model is also useful for establishing internal
enthusiasm.
Don’t get stuck in a rut. Mr. Katz also emphasized the need to be flexible in your programming, but also to make sure that your providers and funders are equally (if not more) flexible. Ultimately, it is your program, so it should work for you.