Supply-chain finance: A new spin on prehistoric concepts

The Australian financier, behind the now-defunct Finance Group’s Greensil Capital, has built its business as an agent of “technological disruption” with the goal of “democratization capital”. But what Lex Greensil Bronze Age Mesopotamia actually had a new spin on a form of financing at least 4,000 years ago.

The business of shipments by intermediaries helped mediate medieval European trade, the expansion of the British Empire, and the twentieth-century U.S. textile industry. Now a modern incarnation in the form of supply chain finance – verification-sorting by following March Greensil failure.

For centuries, financial intermediaries – usually banks – have lent to product suppliers who do not expect their customers to pay for several weeks until the final products are sold on the open market.

For example, a merchant who buys his cotton will not be paid until he produces and sells tailor-made garments. Instead of waiting for payment, merchants would sell their shipments to a bank or other donor and receive a little less than the value of cotton. The mediator will collect the full amount from the tailor at a later time.

Supply Chain FinanceWhich has grown in popularity over the last two decades. Switching the donor relationship.

In this model, the product buyer, for example a supermarket, provides suppliers with access to the supply chain finance provided by his bank. Instead of waiting for payment until the milk supplied to the supermarket is purchased, the dairy farmer can submit the approved invoice to the bank and receive more timely but slightly less payment than the full value of the order after the bank collects the full amount from its client, the supermarket.

Since the bank is extending credit to the supermarket rather than the dairy farmer, it evaluates the loan on the credit rating of the supermarket, which is likely to be stronger as a larger business. The risk is therefore considered low and the cost of money is low.

Pushing from the epidemic

According to consultant Oliver Weiman, 80 percent of the supply chain financing is borne by large banks, most of which is disbursed to domestic clients. But growing specialist non-bank businesses like Greensil are running the market and their income is higher in their sights.

Interest in supply-chain finance also grew last year as the epidemic threatened and put their suppliers at increasing risk.

“Covid cut off many industries and pressured cash flows – so it was a very important tool for small and medium-sized enterprises to do business,” said Eric Lee, head of banking at Coalition Transactions, which monitors banking trends. “Supermarkets weren’t going bankrupt, but that’s not the case with small dairy farms.”

Most large banks provide supply-chain money to their largest customers, usually blue-chip firms with investment-grade ratings. By the bank itself, it is a low-margin business that is considered relatively risk-free because default rates are generally lower than other types of nding payments.

According to the coalition, the industry has grown slowly over the past decade, reaching $ 20 million worldwide in 2010. Global stood at $ 2.6 billion last year from billions of dollars. More than half of it was from Europe, the Middle East and Africa.

While supply chain finance provides some protection for chain supply, another advantage for customers is that it can be discontinued when they return the bank. Instead of settling after 30 or 60 days, they usually make more than 180 days payment with the supplier. In some cases, the payment terms have been extended to 350 days.

Global supply chain finance shows revenue pools $ bn's column chart

This could be a problem for analysts to look at the level of the bank because from an accounting point of view, supply chain finance is not treated as a debt.

“If the bank materially extends the payment date, we see this as getting a line of credit from your bank,” said Frederick Gates, group credit officer at French Rating Corporations. “Revelation has never been very good.”

Problems publishing

Rating agencies, regulators and auditors have long complained about this Lack of expression On supply-chain finance debt. In 2019, the Big Four audit firms wrote a joint letter to U.S. accounting watchdog FASB asking for a “greater transparency and continuity”. But so far little has changed.

“It simply came to our notice then [from accounting bodies] That means people cross borders, “Gates said.” It’s possible to identify, but not always easy. “

He pointed to the collapse of high-profile corporates in Carilion, NMC Health and Abengue, where businesses went bankrupt after realizing how much they had used supply-chain finance.

But despite the fall of Greensil and the increased focus on this particular financing model, banks are less likely to exit the market.

“It meets a demand and banks are very comfortable with what they are doing,” said Kevin Day, chief executive of HPD Landscape, a financing technology provider. “It operates within perfectly secure parameters and has extensive experience in funding levels and risk diversification for proposals.”

In fact, when Greensil filed for involuntary, there were quite a few global ones Enter the bank To offer funding to its former customers, which includes large healthy businesses such as Vodafone and AstraZeneca.

At the same time, according to Oliver Wyman, several expert, non-bank groups have grown and now 20 percent of the market is not controlled by the big banks.

Like Greensil, they are optimistic about using AI and other technologies to build more profitable, low-end businesses into more profitable ventures.

Greensil has entered into agreements with clients that make little resemblance to conventional supply-chain financing, providing more long-term terms of payment against previously received receivables, and advancing funding.

Unlike banks, which use their balance sheets to supply-chain financing, Greensil Swiss groups also used investors’ money in products produced by GAM and sales, and Swiss credit.

Day warned that, like Greensil, those trying to disrupt the industry often took the risk that banks and other traditional rivals would feel uncomfortable.

Lots Fighting organizations The supply-chain is attracted to finance because the rules of accounting disclosure make it easier to mask this type of masonry.

Most of the new entrants are looking for “quite high returns,” the day says, supply-chain finance providers. “But this is not a field of high returns.”

“It simply came to our notice then. If you expect high income, you will take high risk. . . People use structures that are actually complex for very simple things. ”

Gates said Greensyl’s demise put pressure on regulators and accounting firms on the need for rules and transparency for supply-chain financing.

“Greensil was a small part of this larger industry, but they’ve become poster children for it,” he said. “Many new entrants are less regulated. They were pushing the boundaries of the strategy so that it could be used. ”

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