Companies that have to rely on a highly complex delivery chain should deal with their suppliers carefully. This also includes ensuring their liquidity – for example, with supply chain finance (SCF). In principle, this is a reverse form of factoring or ABS, which is why it is also referred to as reverse factoring or reverse ABS. In contrast to traditional factoring, in SCF it is the buyer, not the supplier, who takes the initiative.
"Significant added value for everyone involved"
The main motive for this exchange is rating arbitrage. Corporate finance specialist Fabian Blumer from LBBW explains: "Normally, the buyer's rating is better than the supplier's. The supplier therefore gains more favorable conditions for financing. This creates significant added value for everyone involved." Based on the better risk profile of the buyer, the supplier is consequently financed at an interest rate that is generally somewhere between the two credit ratings.
In the wake of the financial crisis that began in 2007, companies increasingly extended their payment periods for suppliers, giving them some room for maneuver in the short term. But many suppliers still came under pressure – which put companies at risk of disruptions in their supply chain.
According to a study by Capgemini Consulting, the market for supply chain finance is experiencing strong growth. However, the experts are still observing "a high level of uncertainty with regard to terminology, application scenarios, and the benefits of the solutions".
Supply chain finance at a glance
"Normally, the buyer's rating is better than the supplier's. The supplier therefore gains more favorable conditions for financing. This creates significant added value for everyone involved," says Fabian Blumer, corporate finance specialist at LBBW.
Less debt – lower interest
The benefits are obvious. With supply chain finance, the supplier gains:
- direct payment of the discounted purchase price
- an improvement in its liquidity
- a reduction in interest expenses and financial debt
- a closer customer relationship
For the buyer, supply chain finance means:
- an extension of payment dates that is acceptable for the supplier
- a reduction in interest expenses and financial debt
- retention of and support for strategically important suppliers
- a better negotiating position in advance, as the supplier is offered immediate payment
- an improvement in key financial figures
In this case, supply chain finance is set up and structured by the buyer together with the bank in cooperation with a platform provider (FinTech). The linchpin is a digital platform on which the transaction is processed. The supplier's receivables are uploaded and approved by the buyer here. In doing so, the buyer also undertakes to pay the receivable in full and without any objections at the agreed payment date.
The supplier receives the discounted purchase price directly from the purchasing bank. All information and payment instructions required for the bank-to-supplier and buyer-to-bank payment flows when the receivables fall due are also processed by the platform provider and made available electronically.
Cooperation between bank and FinTech
The high level of digitalization is a key feature of supply chain finance, meaning that the corresponding FinTech platform is an important partner in this case. In order to safeguard the processes, interfaces and information are standardized and automated. The buyers, as well as the suppliers if necessary, provide the relevant interfaces in their ERP systems. The banks are also connected to the FinTech platform via corresponding interfaces so that they can process relevant payment information directly here.
LBBW's platform partner is currently CRX Markets. Alexei Zabudkin, Chief Financial Officer of this established FinTech, which is regulated as a financial institution, points to additional benefits of the system: "By automating the processes in the buyer's and supplier's materials management systems, the platform considerably simplifies the companies' internal processes while keeping integration expenses very low and providing a high level of data security."
For major customers and large SMEs
There are essentially two different models for supply chain finance. Either a bank purchases the receivables directly, or different investors join together to form a special purpose entity that purchases the receivables centrally and finances them by issuing debentures to the investors. The second option was also chosen by Lufthansa in its collaboration with CRX Markets and LBBW.
Supply chain finance is aimed primarily at major customers or large SMEs with sales of at least EUR 1bn and a purchasing volume of at least EUR 250m per year. Rapid technical implementation depends on the use of SAP as the ERP system. If a different system is used, the preparatory phase for the integration will take longer. And of course the credit rating has to be right.
LBBW is receiving a growing number of inquires from companies about supply chain finance. The Bank has therefore laid the foundations to support customers successfully in this business area, too. If you would also like to find out more about this topic, please contact Florian Pierer, corporate finance specialist at LBBW, directly:
Am Hauptbahnhof 2
70173 Stuttgart, Germany
Phone: +49 711 127 49718