Policy makers recognise that any means to inject liquidity into the Small and Mid-Size Business (SMB) sector needs to be pursued. The BIS task force in the UK identified Supply Chain Finance (SCF) or Reverse Factoring as one of the ways to increase cash flow availability to SMB supplier base.
Unfortunately, credit capacity is a big hurdle post 2008 and many large corporates have found banks less willing to set up inexpensive and convenient SCF programmes for them.
In addition to the corporates own borrowing capacity, banks are also concerned with concentration risk (effectively, a bank cannot place more than a percentage of its overall lending with any one customer). Combining this with the work needed to set up a conventional SCF programme, take up has been lower than the industry envisaged. This is slowly changing, mainly due to clever use of e-invoicing.
A recent white paper released by working capital hub Bilbus summarises the opportunity to make commercial lending and borrowing easier by using e-invoice data. Where in the past, lenders struggled to find sufficient information to assess SMB credit risk, the data set surrounding e-invoicing can be enhanced to create a snapshot sufficient to make decisions in principle and smoothen the commercial lending experience for both borrower and lender.
Some invoice networks have spotted the opportunity within their payables relationships and are exploring supply chain financing options between a large buyer and its supplier base using the corporate’s banking relationship. Given that a large percentage of suppliers may not wish (or have difficulty qualifying) to pursue buyer-driven financing, a collaboration between invoice providers and working capital platforms/hubs could be the solution.
In addition to traditional ‘Supply Chain Finance’ (SCF), one of the areas explored in the BIS Task Force BIS recommendations, the area of corporate discounts is also being touted by some to be part of the liquidity injection to SMBs.
This ironic supplement to conventional SCF is when a corporate looks to hoard cash and earn investment returns from its suppliers by asking for discount on ‘early’ payment. Instead of the bank lending to the SMB supplier on the strength of the corporate’s balance sheet (reverse factoring), the bank lends to the corporate (or the corporate uses its own cash instead of putting it on bank deposit) to pay the supplier early.
As the UK government and many think tanks ask, what if the corporate actually paid the supplier on time? Some suggest that channeling some of the cash said to be hoarded by corporates toward business lending. Whether the associated risks of SMB lending can be managed by corporate treasurers will be seen in practice. For now, conventional SCF and supplier-centric SCF can dramatically ease liquidity pressures within supply chains and the overall SMB segment.
SCF, in its broader sense, does not have to be buyer-driven. If the buyer’s (corporate) balance sheets are stretched, or the lender has concentration risk concerns, the lender focuses on whether the borrower (SMB) is able to service the debt by looking at the SMB’s overall business customers and performance.
By connecting to the working capital hub, suppliers in the invoice network have access to a network of lenders able offer suppliers a menu of financing alternatives ranging from invoice finance and general lines of credit to purchase order financing, leasing etc. Cash management and collection tools also help drive up supplier reliance on e-invoicing, indirectly solving the invoice network’s supplier adoption challenges.
In the UK, the e-Invoice Advocacy Group is currently engaging the public and private sectors on the benefits of e-invoicing, a major one being liquidity and access to finance.
e-Invoicing may in de
ed be the key to unlocking supplier (SMB) working capital. And the locksmiths that design these keys will be supply chain financing partners and the working capital hubs that combine simplicity and financial choice with SMB focused functionality.
A copy of the white paper produced by Bilbus in collaboration with Fundtech, another member of the UK e-Invoice Advocacy Group can be downloaded from the Bilbus site.