Amid reports of a dip in the payables finance market, Felix Thompson speaks with corporates across three vital sectors – food retail, metals and manufacturing – about their supply chain finance programmes and the impact of economic and regulatory pressures on their business.
During the onset of the Covid-19 pandemic, utilisation of supply chain finance (SCF) boomed as large businesses encouraged their suppliers – often SMEs – to join their reverse factoring programmes.
Buyers were able to dramatically extend their payment terms, thereby boosting their cash flows while also allowing their suppliers to access early payment. In a time of uncertainty, SCF offered larger firms welcome breathing room.
But in the past two years, with interest rates soaring, inflation spiking and growing regulatory scrutiny of the SCF product, there has been an apparent drop in buyer and supplier appetite for payables financing – depending on which party bears the costs.
In the US, there is direct evidence of major companies paring back their supplier finance programmes, including the likes of AT&T, Keurig Dr Pepper and Krispy Kreme.
As reported by the Wall Street Journal in July, AT&T slashed its SCF usage after its programme became more expensive when interest rates rose. By the end of Q1 2024, outstanding balances under its programme were US$2bn, down from US$5bn a year earlier.
Globally, there are reports of industry headwinds. In an April research paper, fintech firm Demica reported a drop in demand for buyer-led SCF, with suppliers withdrawing from programmes due to higher costs and external pressures. The findings, based on responses from nearly 200 professionals across 31 markets, also cited the potential impact of disclosure rules.
In the US, the Financial Accounting Standards Board (FASB) introduced rules in late 2022 requiring corporate buyers to disclose details of their SCF programmes in their financial statements. The International Accounting Standards Board (IASB), responsible for accounting standards globally, implemented similar requirements at the start of this year.
Against this backdrop, GTR spoke with corporates in various sectors about their SCF strategies and challenges limiting the usage of their programmes, including high interest rates and technology barriers.
The food retailer
ICA Gruppen is a major grocery retailer in Sweden, operating about 1,300 stores, and is active in pharmaceuticals through its Apotek Hjärtat subsidiary. The company also runs a retail chain in the Baltics, managing about 300 grocery shops in Estonia, Latvia and Lithuania under the Rimi Baltic brand.
Supply chain finance has become a ready source of liquidity for many of ICA Gruppen’s vendors since the firm launched a payables finance programme eight years ago.
In that time, the company has drawn in over 100 of its suppliers to use the product on a voluntary basis.
Vilhelm Otterheim, a sourcing manager at ICA Gruppen, tells GTR its SCF programme is mutually beneficial for the company and its suppliers.
“They use our balance sheet to get better financing, and we get improved cash flows. It is in both of our interests. A large portion of what we buy goes through the programme,” he says.
Suppliers range in size from SMEs to larger businesses. Many of those companies are based in Sweden, though ICA Gruppen also sources from markets further afield, such as the Netherlands, Greece and Spain. “We buy a lot of fruit and vegetables from Southern Europe,” Otterheim adds.
Payment terms are often renegotiated, but Otterheim stresses the arrangement has to be a “good deal” for its vendors.
Nevertheless, in recent years, the programme has faced new challenges, including high inflation and the impact of evolving EU legislation.
The unfair trading practices (UTP) directive was enacted in 2019 to ban 16 actions that can affect the “weakest actors” in the EU’s food supply chains, in a bid to protect smallholder farmers and smaller suppliers.
In one move, the EU instructed member states to implement legislation barring payments later than 30 days for perishable goods and 60 days for non-perishable agricultural goods.
Sweden adopted the UTP in 2021, taking a stricter line than outlined by the EU by mandating payment terms of no more than 30 days for both perishable and non-perishables.
The restrictions on payment terms have reduced the appeal of SCF for ICA Gruppen and its suppliers to participate, says Otterheim.
“There is nothing bad with having a regulated way of ensuring that our supplier is getting paid. But when it effectively removes the benefit for them to actually receive cheaper financing or having the ability to collect whenever it suits them, I think it’s hindering their development,” he says.
Inflation has been another issue, forcing companies, typically larger firms, to reconsider their participation in the programme.
“Every quarter, we have more suppliers telling us they are very tightly squeezed, so need to be cost-aware,” Otterheim says. “We try to find deals with them. We are talking to our funders about what is possible on the financing side. Can we change the rates? I’m unfortunately part of these discussions quite often.”
Despite these pressures, the SCF programme remains a vital source of liquidity for ICA Gruppen’s SME suppliers.
“Bigger companies with their own treasury departments can get good financing elsewhere. The ones benefiting the most and enjoying the programme are small and medium-sized suppliers. They’re still in need of cash and it’s not cheaper for them to borrow.”
In terms of sustainability, in May 2023, ICA Gruppen issued its first green bond, worth SKr3.5bn (US$339mn). The company is also exploring the potential use of sustainability-linked SCF to reward suppliers that meet ESG objectives.
In the coming years, Otterheim believes sustainability-linked SCF could help drive decarbonisation in the food retail sector.
“We have to invest in the value chain today as part of the green agenda,” Otterheim says. “It would be hugely beneficial if we could find ways to differentiate the financing. Some financiers are opening up the possibility to have green SCF programmes; that might also be a possibility.”
However, ICA Gruppen does not currently provide such programmes, citing technical challenges.
“When we buy from our suppliers, we have invoices coming in, and we have to somehow decipher what the ‘green’ part is,” Otterheim says. “And should we do that beforehand or in retrospect? The technical part is not easy to solve.”
The EPC contractor
Saudi Arabian company Alfanar operates as both an electrical goods manufacturer, as well as project developer and provider of engineering, procurement and construction (EPC) solutions.
Headquartered in Riyadh, the firm has built a portfolio of projects in the Middle East, Asia, Africa and Europe, covering sectors including energy infrastructure, water and health, as well as renewables.
Alfanar launched its first SCF programme five years ago locally with banks Saudi Awwal Bank and Standard Chartered, before extending the scheme to global suppliers of raw materials based in India and the UAE.
In the time since, the firm has incorporated additional lenders into its SCF programme, such as Saudi National Bank and First Abu Dhabi Bank.
It has also developed an SCF scheme alongside the Saudi Industrial Fund (SIDF) that gives local SMEs financing at competitive rates, says Mohammed Khattab, Alfanar’s chief corporate treasury officer.
During 2022, Alfanar executed approximately 400 SCF transactions worth SR1.7bn (US$453mn), with similar volumes recorded last year.
While a dozen SMEs are enlisted in Alfanar’s SCF programme, activity largely stems from six major commodities suppliers globally.
“These suppliers manage roughly 4,000 metric tons of copper each month. Considering the [monthly]London Metal Exchange average price is US$9,000, you are talking about US$36mn in monthly imported commodities, a mix of copper and aluminium,” Khattab says.
Alfanar’s SCF activity has not been dented by soaring interest rates as the product is more attractive than traditional trade finance, he tells GTR.
The Saudi company bears the cost and pays the discount fee under its broader SCF programmes, relieving its commodities suppliers from this expense. In contrast, with the SIDF scheme, it is the local SMEs that foot the bill.
“Getting SCF against Sofr financing, which is dollar-denominated, is much cheaper than the riyal financing we used to obtain under a simple trade financing arrangement. Instead of asking for a bank loan to pay suppliers, the SCF structure allows Alfanar to integrate the dollar financing at a lower rate. We have discovered two main value adds from our side. Sofr rates are much lower than Saibor [Saudi Arabian interbank offered rate], 40 or 60 basis points depending on the volatility; secondly, the margins on the dollar side are much lower than riyal.”
SCF has also been a vital source of liquidity for Alfanar’s SME suppliers based in Saudi Arabia, despite interest rate hikes, Khattab says.
“Through our SCF programme and the support of SIDF we have been able to offer deferred payments of up to 130 days with a very attractive rate to our local suppliers, without any recourse. It’s a win-win situation. The suppliers can access lower-cost financing than the commercial market rate previously available to SMEs,” he says.
Khattab says the impact of SCF disclosure rules has been negligible thus far. “It hasn’t affected the SCF processing,” he tells GTR.
Still, there are challenges limiting the growth of supplier financing in Saudi Arabia. One key issue is a limited understanding of SCF in the market, says Khattab.
“Adoption of SCF in the local market will take time. We are running some manual transactions with a limited volume of about SR100mn. But I believe, step by step, this concept will establish itself in the market, especially with the support of governmental parties interested in helping SMEs locally.”
Another hurdle to scaling Alfanar’s SCF programme is the lack of a comprehensive fintech solution.
Khattab suggests a digital SCF platform is needed that would allow the company to submit invoices daily and enable suppliers to notify financing parties immediately of the invoices they wish to discount.
Alfanar’s SCF scheme is currently processed manually, with the firm submitting invoices in batches to the financing bank, which then reviews the documents and decides whether to discount. The whole process can take three to four days to complete.
For transactions involving larger commodities suppliers, this approach is manageable. But for smaller suppliers with lower invoice volumes, the financing team is voicing “much concern”.
“It would be much better to have SCF integrated within our ERP. It will go to the bank, which will discount at the agreed rate and we’d settle the payment after 130 days, while suppliers receive their funds immediately,” Khattab explains.
The firm has already met “several fintechs” in the market, but digitalisation of its SCF scheme will “take time”.
Sustainability-linked financing is an “interesting subject”, but the firm is yet to create such a scheme, Khattab adds. “I’m sure SCF will be one of the key tools in implementing ESG, or sustainable development of the business, starting with our commodities suppliers,” he says. “But right now, it is a little bit early to push the market forward”.
The mining and metals company
A global mining and metals firm significantly grew its SCF programmes over the past seven years, using the product as a vital working capital tool during the Covid-19 pandemic.
The firm sources raw materials from suppliers globally, including in China, India and Europe.
“We implemented different programmes in payments and receivables finance, and in doing so, released more than US$1bn of trapped cash,” says a finance specialist at the company, who requested anonymity due to company policy.
“The size of our SCF programme was about less than US$10mn pre-Covid, but then the pandemic came, and everyone needed cash. This was a perfect solution. It ramped up to US$250mn.”
Yet, in the past two years, use of the firm’s SCF programmes has fallen as suppliers have increasingly opted out of discounting their invoices.
Payables and receivables activity has dropped, the source says.
“When we started our programme, the Libor rate – now the Sofr rate – was 0.25%. Today it is standing at about 5.335 – more than 20 times the margin,” they tell GTR. “In light of these economics, we are trying to convince suppliers not to walk away.”
While SCF demand remains popular among smaller suppliers, larger firms are increasingly turning to other forms of bank finance.
Many suppliers now prefer to hold invoices to maturity and receive full payment, without any discount.
“This trend is increasing,” the finance specialist says.“It is an individual question. For a lot of companies with a very strong financial profile, SCF is not attractive anymore, while it is still attractive for SMEs because they have limited debt capacity and funding availability. They would have a liquidity issue otherwise.”
The company is hopeful that as central banks lower interest rates, usage of its SCF programme will rebound.
“The demand will definitely pick up when rates are cut. But it will take some time, because you don’t see the high point for Sofr going down to 0.25% any time soon. It will be a very structured rate cut, so it will take at least a few years – unless there’s a severe recession or another large event causing another global financial crisis. As the interest rate comes down, there’s a really good correlation between the utilisation of supply chain finance and interest rates.”
The introduction of disclosure rules by the IASB is not a concern, they say, as the firm had already been transparent about its SCF exposures within its financial statements. There has only been a “minor change” with the company having to adjust to a specific reporting format.
Regulatory oversight of the sector would only be an issue were the IASB to reclassify SCF as a form of debt under the International Financial Reporting Standards (IFRS). In this scenario, SCF’s appeal may diminish, leading companies to reassess their SCF strategies. “That will be the challenge in the future; how are these regulations going to evolve?”
The mining and metals firm is also working to transition its SCF offering to a more sustainable approach, having partnered with a bank to convert one of its main programmes into a sustainability-linked scheme.
A third-party company draws on various data points – including but not limited to emissions – to calculate an ESG score for each of the firm’s suppliers. Those with higher scores are rewarded with cheaper rates, while laggards are penalised.
Roughly a third of the firm’s suppliers have already signed up to the scheme, though the difference in financing rates is relatively minimal.
“I foresee a growth in sustainability-linked SCF in coming years. It’s not just the 5-10 basis points, it is the optics that come along with participating in green financing rather than conventional financing.”
The source suggests there would be greater interest in sustainability-linked SCF if financiers provided greater incentives, for example by widening the differential from 5 to 50 basis points.
“This has to change if we want to attract more companies to make meaningful improvements in their sustainability journey,” they say. Though they accept banks “need to make money” and there is a question over how such incentives will be funded.
One solution could be for governments to redirect the proceeds of carbon tax schemes.
“As an example, the EU is going to make a lot of money through the Carbon Border Adjustment Mechanism in the coming years. Could they channel the funds through these types of programmes and encourage companies to improve their ESG scores?”
