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The quest is on for adaptable funding programmes that support trade partnerships in established markets, says Rene Chinnery, Head of Supply Chain Finance, Lloyds Bank, and equip UK corporates to create stable supply chains in the world’s new growth territories.
In today’s volatile global trading conditions, finance directors and treasurers are right to expect their bankers to play a pivotal role in enhancing the integrity of their supply chains.
And banks are responding with funding techniques for ‘sheltering’ strategically vital but operationally vulnerable suppliers by giving them privileged access on preferential terms more reflective on the credit standing of their major corporate buyers. It’s an exercise in mutual protection.
The baseline motivation is the growing intensity of high profile trading uncertainties. These stem, in the first place, from the plain evidence of low or nil growth in the UK’s top traditional trading Eurozone and US markets; and secondly, the strategic challenge of finding entirely new cheaper sources of procurement to remain competitive and push products into higher-growth Asian, South American and African economies.
In both cases, UK corporates have become increasingly sensitive to their heightened supply chain exposures, and for quite distinctive reasons – because of the financial pressures imposed on strategically vital suppliers in ‘flat-lining’ traditional economies; and, conversely, because of the need to cement important new supplier relationships in expanding but unfamiliar geographies.
It is inevitable that, with key suppliers of all sizes, major corporates are increasingly turning to banks to help limit and manage these vulnerabilities. This isn’t new, although some of the emerging techniques are.
In their approach to supplier finance, banks are now quite accustomed to the demand from corporate FDs and Treasurers for ever more sensitive approved payables programmes – using the strong credit standing of investment grade corporate buyers, effectively to underwrite the payment terms of a typically smaller, more stretched supplier.
For the supplier, what is important is the cash flow benefit of accelerated settlement on an approved invoice. For the corporate buyer, there is typically the advantage of facilitating an extended 60 to 90-day settlement term which would otherwise have increased the burden on an already hard-pressed
The main idea behind the launch of these programmes a few years ago was the understandable drive among corporate Treasurers to retain cash and working capital. The focus on price has since become much sharper, with buyer Treasurers pushing their suppliers for cheaper pricing to reflect the privileged’ facility they’ve leveraged with their banker.
Now, though, there’s another operational trade-off as corporate Treasurers see new opportunities to gain a further competitive advantage by effectively ‘ringfencing’ key strategic suppliers with these tailored financial mechanisms.
The key supplier secures an earlier cash flow injection on better-than-normal credit terms. The corporate buyer reduces the risk of supplier failure, secures longer settlement periods – and gains an element of ‘exclusive’ supplier loyalty with some imaginative banking.
And there’s another side to this. Banks are also helping to finance receivables in ways that assist corporate to maximise their own sales and retrieve payment as quickly as possible. There’s real treasury interest in innovative techniques under which banks share the risk and fund the credit facilities inherent in their corporate client winning additional purchases from, say, a captive network of accredited distributors.
These bank-funded receivable purchase programme – often secured these days on a non-recourse basis - are increasingly valuable to corporate FDs and treasurers seeking to enhance cash flow and strengthen the balance sheet.
Supplier funding mechanisms like these are becoming more relevant than ever as banks’ corporate clients push into new and emerging markets abroad – particularly where the availability of working capital to local suppliers may be less developed than here.
The quest is on for flexible and adaptable funding programmes that not only support corporate trade partnerships in established markets, but will also equip UK corporates to create stable supply chains in the world’s new growth territories.
Technology and communications have made the world smaller. It’s become easier to access unfamiliar markets. The paradox is that it’s also simultaneously become trickier, riskier to buy and sell in those markets. That is the real challenge for all banks in servicing those corporate clients now evaluating the opportunities in areas of the world they’ve never traded in before.
As UK companies work to exploit opportunities in new growth markets, appropriate supply chain funding has become the key to their international business success. What they need most are trade finance facilities to help secure the operational viability of their most important strategic suppliers. Banks are helping in three critical respects:
Suppliers can access invaluable working capital to produce and ship goods when there’s a confirmed order from a quality buyer backed by a documentary credit. Access to both pre- and post-shipment finance for new higher value export contacts aims to help UK exporters grow.
Short-term finance linked to a company’s trading cycle means suppliers can be paid promptly – and there’s still time to re-sell the stock. Advance payments can be made when goods are shipped to a customer, so there’s no waiting for settlement.
Since 2011, the Bond Support Scheme has provided important banking guarantees designed to boost UK exports. The government’s Export Credits Guarantee Department (now UK Export Finance) typically guarantees 50% of the value of the bond and up to 80% for advance payment and progress payment bonds.
This article appeared in Trade Finance magazine October/ November 2012 edition.
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