Why do so many supply chain finance programmes fall short of expectations following implementation? In some cases, it’s because not enough suppliers have been successfully ‘onboarded’ onto the programme. So what exactly makes it so difficult?
Under the classic model for supply chain finance, a buying organisation extends payment terms with its suppliers, achieving an immediate working capital benefit, which can number in the hundreds of millions. Simultaneously, suppliers can mitigate the effect of the payment term extension and accelerate their own cash flow by opting to be paid early by a funder (ordinarily as soon as an invoice has been approved by the buyer). Typically, these suppliers achieve a lower cost of funding by financing their invoices at the buying organisation’s financing rates (often investment-grade).
It’s a true win-win scenario. Yet, achieving an optimal outcome is largely dependent on the ability to successfully onboard as many suppliers to the programme as possible. Left unmitigated, longer payment terms can have an adverse impact on supplier health and put strain on longstanding supplier relationships.
Supplier onboarding is an area that many providers (and banks in particular) continue to find difficult, whether in offering their own supply chain finance propositions or funding through third-party platforms. Under the current regulatory and capital regime, trade finance assets do not receive particularly favourable capital treatment. This means that banks are usually required to hold significant capital to support supply chain finance assets, resulting in a lower return on capital. In addition, banks generally treat an onboarded supplier as if they are a full customer of the bank – including subjecting them to various onerous Know Your Customer and other compliance-related procedures, which consumes significant time and resources.
The result of all of this is that a bank will usually only be willing to onboard the largest, best-rated suppliers onto a programme leaving a large tail of thousands of suppliers unaddressed. Ironically, it is often smaller suppliers that would benefit from the programme the most that are excluded from joining it. Meanwhile, buying organisations are left with programmes that fall well short of what they were led to believe would be achieved on implementation.
This conundrum is precisely why PrimeRevenue is so deeply invested in the onboarding process – from educating buyers’ procurement groups and suppliers’ decision makers – to funder process facilitation. PrimeRevenue has an outstanding track record in reaching much deeper into a buying organisation’s supplier base to drive highly successful programmes. We achieve this focus in two ways.
Firstly, a dedicated team of specialists focuses on and works with suppliers, understanding their own business strategy and objectives in joining a programme. The team is aided by a world-class, cloud-enabled onboarding platform with multi-lingual capabilities, streamlined online documentation and a proprietary solution to onboard suppliers that may have pledged receivables to other lenders.
Secondly, PrimeRevenue has the ability to onboard to a programme not only the largest suppliers, but also the long tail of smaller suppliers via PrimeRevenue Capital Management. PrimeRevenue Capital Management is able to tap capital markets funding from non-bank entities such as insurance companies, pension funds, hedge funds and other capital markets investors. These entities are not regulated like banks and typically have simpler compliance requirements, meaning suppliers can be onboarded faster and in greater number.
As companies explore supply chain finance as a way to optimise working capital, it’s important they understand what makes a programme successful. Onboarding is an area that cannot be overlooked in this regard. It has a direct bearing on programme performance. Depending on how it’s addressed, it can be the difference between a lacklustre supply chain finance experience and one that can truly transform the business.
By Peter Cook
Published February 14, 2017
