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The Bankers Association for Finance and Trade (Baft) has released a series of guiding principles to define the essential criteria for the use and structuring of payables finance.

Produced by Baft’s Global Trade Industry Council (GTIC), which is made up of heads of trade from 19 of the world’s largest trade banks, Payables Finance Principles lays out a framework for delivering and building payables finance supply chain finance programmes, as well as providing clarity to rating agencies and other stakeholders to avoid confusion around what payables finance actually entails.

Demand for payables finance – along with other types of supply chain finance (SCF) – has soared in the wake of the pandemic, as liquidity pressures drive firms to seek out working capital tools. Though this surge in take-up is a boost for the industry, it is still dogged by the spectre of high-profile business collapses that have been attributed, at least in part, to the misuse of the product as a means to obscure payment obligations and artificially boost balance sheets.

As a result, there have been growing calls from regulators, ratings agencies and auditors to redefine such programmes as bank debt on balance sheets, leading to concerns that the reputation of SCF could be under threat.

With these principles, Baft hopes to draw a line between what is, and isn’t, a legitimate payables finance programme.

The principles document starts with the definition put forward by the Global Supply Chain Finance Forum (GSCFF) in its 2016 Standard Definitions for Techniques of Supply Chain Finance document, which says that: “Payables finance is provided through a buyer-led programme within which sellers in the buyer’s supply chain are able to access finance by means of receivables purchase. The technique provides a seller of goods or services with the option of receiving the discounted value of receivables (represented by outstanding invoices) prior to their actual due date and typically at a financing cost aligned with the credit risk of the buyer. The payable continues to be due by the buyer until its due date.”

It then goes on to define the key elements of the programme structure, buyer agreement, supplier agreement, and contractual terms.

Speaking to GTR, Geoffrey Brady, chair of the Baft GTIC and head of global trade and supply chain for Bank of America, explains why this document is needed today, and what its impact will be upon the supply chain finance industry.

GTR: What is the impetus behind this release?

Brady: As supply chain finance has matured in recent years, we have seen it portrayed in a number of different ways, often with somewhat subjective assumptions being either directly or indirectly ascribed to it.

There isn’t a codified set of rules that clearly and specifically define what would be representative of something that would generally be considered trade payables versus debt, and it would be hard to find something that specifically defines what this technique is and what it is used for.

If we are going to have a discussion around this topic in a meaningful way, we need to be clear about what we are talking about.

In this document, the banks that are the largest practitioners of this specific technique have laid out how we view this product and how we define it. It will help us and other banks to identify whether a structure adheres to the principles and subsequently whether the structure should be considered traditional payables finance.

GTR: Why is this clarification important?

Brady: Banks are not looking to be involved in accounting conversations about how supply chain finance should be treated or how a company should represent a programme in its financials. However, we do think there’s value in banks coming together to create a clear definition as to what supply chain finance is and is not.

By doing this, we can help our clients get on the right path in conversations with auditors, for example. And in conversations with the broader industry, be that in the media or elsewhere, we can also articulate that the principles in the Baft GTIC paper are the ones we can hold true.

GTR: Are the ratings agencies and regulators in agreement that these principles describe a structure that is not debt and is therefore in fact a legitimate payables finance programme?

Brady: We provided copies of the letter to the Financial Accounting Standards Board (FASB) in the US and to the International Financial Reporting Standards Foundation (IFRS) but I think it’s fair to assume that they will continue to review the treatment of supply chain finance on a case by case basis.

The hope is that over time, any overseer might be able to start with this document to ascertain whether or not a programme aligns with the payables principles as defined by the Baft GTIC paper.

GTR: Were regulators and auditors involved in the consultation process?

Brady: We solicited input and opinion from many stakeholders around the industry, and we did use that input.

GTR: Liquidity squeezes due to the pandemic have led to an uptake in SCF programmes around the world. Do you think that these principles will go any way towards helping banks to continue to put in place these programmes?

Brady: Absolutely they will. Through this pandemic as well as the global financial crisis, supply chain finance acquitted itself well as a viable source of financing, particularly for SMEs. These principles will build on that momentum, providing an important educational aid for new entrants, allowing them to get internal audiences informed and comfortable before approaching a bank. When SCF is demystified and clearly defined, we’ll be able to have and facilitate better conversations with clients.