Robert Parson, Partner at Squire Patton Boggs, outlines the reasons why regulators and standards authorities may consider holding back on further intervention in trade receivables and payables financing.

 

There is general consensus that buyer-led supply chain finance programmes which allow funds to get through earlier to cash-strapped vendors are essential tools in unblocking supply chains in the post-Covid market.

In emerging markets the need is even clearer. It’s here where the apparently widening trade finance gap is concentrated according to IFC research, with around 75% of the US$1.7tn trade finance hole that needs to be filled amid a global cost of living crisis.

The inevitable backlash from the Greensill collapse and the clamour from some investors for action by regulators is now in danger of preventing money from flowing to where it is needed most. Increased disclosure obligations (introduced by the International Accounting Standards Board) are already raising fears that some financiers will put the brakes on rolling out programmes in corners of the world that present challenges in terms of visibility, accounting standards and governance.

As often happens with regulatory reaction to seismic industry events, by the time regulation is introduced, the market has moved to find solutions which satisfy investor concerns and improve the offering. The period since the Greensill collapse and the various trading company failures that rocked Singapore and the Gulf in 2019/20 has seen an acceleration in activity in the technology space surrounding logistics, supply chains and the financing of trade receivables and payables. It has to be hoped that regulators and standards authorities will draw breath and see how that new market operates before intervening further.

 

Challenges remain consistent

The essential risk factors and legal challenges of supply chain finance for providers, customers and third parties dealing with those customers have not really changed over the years despite the noise surrounding Greensill, Carillion, etc:

1. Prospective financiers rely on the financial statements of the borrower/buyer in assessing credit worthiness. A lack of consistency in the way that certain transactions have been accounted for has made some lenders wary of over-reliance on audited accounts;

2. The dividing line between supply chain finance and debt can sometimes be blurred. If the terms extended to a customer’s supplier far exceed the normal payment terms enjoyed then that can distort the customer’s accounts;

3. Over-reliance by a customer on a single source of supply chain finance particularly one charging high fees and interest margins may signal a vulnerability in the company’s finances;

4. Although the supply chain finance provider is taking a credit risk on the seller, it needs to check the supply is real, otherwise it is simply engaging in unsecured lending;

5. Customers need to be aware that supply chain finance arrangements are typically liable to be wound up by providers at very short notice if they wish to exit the arrangement – reliance on SCF for longer-term financing can therefore be hazardous. It is not a one-size-fits-all product.

Despite these challenges, supply chain finance programmes have enjoyed huge success and growth over the past decade. To sustain that growth in emerging markets will require excellent information flow and the ability to analyse that information in real time.

Technology providers now offer a bewildering choice of products – but that in itself is problematic as parties and their accountants struggle to interpret them. However, choosing the right technology partner with a model that genuinely matches the customer’s business can open up untapped reserves of working capital. It can also address some of the key concerns that supply chain finance financiers, customers and would-be regulators may still have relating to invoice veracity, double financing and risk concentration as well as local concerns on governance and accounting standards, which will be increasingly picked up by the best systems. There are also huge opportunities to harness technology to discern both socio-economic and sustainability triggers that some classes of investor are increasingly drawn towards.

Local networks with greater visibility have further enhanced the reliability and attraction of supply chain finance revenues in emerging markets as an asset class. The right structures/technology mix can therefore provide considerable investor comfort – and attractive returns.

If regulators can take a deep breath, some real good can be done at a time when it is needed the most.