There appears to be a major gap in the market when it comes to providing multi-tier financing for the suppliers of suppliers. Two years ago, a workshop at the SCF Forum focused on multi-tier financing, with a total of 23 banks and fintechs invited to talk about what they could do towards its development. In 2016, the topic for discussion moved to supplier onboarding.
“So, last year we asked what we could do with smaller tier suppliers and how we could best finance them,” said Steven van der Hooft, founder of SCF management training and consultancy firm Capital Chains, who moderated an afternoon workshop session at this year’s Forum.
“Supply chain partners need to be able to finance their operations. We’ve now moved to looking at the suppliers of those suppliers and asking how do we help them? It’s a nice follow-up to the topics of the past two years.
“We conducted a survey and unfortunately came back empty on finding providers of multi-tier financing for this group. Why is no one offering it if it’s the way to go? Is it purely driven by sustainability? If so, how can we get others to help these suppliers?”
Van der Hooft noted that while a variety of prompt payment initiatives had been launched across various countries, the challenge remained of providing access to liquidity for upstream suppliers. “We don’t want a one-off deal just for an individual supplier, but a way of doing it for all of them,” he added.
First panellist to present was Farzin Mirmotalhari of the International Finance Corporation, which is part of the World Bank Group. IFC invests in private companies across emerging markets, with most of its funding via long-term loans, although it has expanded more into short-term financing over the past 10 years.
IFC’s reverse factoring products are offered to suppliers of all sizes. “We differentiate our pricing based on their performance on sustainability,” said Mirmotalhari. “How is their environmental and social compliance, including safety?
“The pricing comes down as their performance improves, which works for large corporates that have sustainability as part of their operations. For a company such as Puma, it’s central to their business.”
Among the companies that IFC lends to is MAS, a major Sri Lanka garments supplier. In 2013 MAS joined the Global Trade Supplier Finance programme to finance their accounts receivable from approved buyers and the following year IFC issued a US$28m loan to MAS for investing in capacity expansion.
“Suppliers that perform better on environmental and social parameters actually make more money,” added Mirmotalhari. “They pay their workers higher wages and they also pay them earlier.
Puma and sustainability
Puma’s group treasurer, Frank Waecheter, described how the sportswear group had been brought onto the IFC programmes. Puma has a trading entity that acts a central point for purchases, involving a mass of data and trading volumes and uses GT Nexus’ SCF platform to connect with its suppliers.
“We had a newly-established company and suppliers asked us to use it for developing SCF,” he said. “We’ve been applying social and environmental ratings on sustainability for the past 20 years and have now onboarded nearly all our suppliers.
“While we weren’t the first, we were among the first in Europe to develop this programme with the IFC and also brought BNP Paribas onto the platform. Suppliers can be funded from it on a very flexible basis.”
Van der Hooft asked whether the programme extended to smaller and second-tier suppliers and how important sustainability was in reaching out to this wider segment.
“A good average level must be achieved for inclusion, but we’ve found companies that have gone beyond meeting the minimum requirements in their efforts and investments,” said Waecheter. “We wanted to create an additional incentive for them in going further down the road, so we offer the best ones a reduction in their financing costs.
“Sometimes it’s a family-run business, so these requirements must be explained to them. There’s always a danger that the smaller guys will be left behind because of their volume size and they need to be on the same technique in order to successfully participate. Connecting our suppliers to the GTNexus platform helps this to be done easily.”
Farsi added that IFC’s sustainability advice teams took an interest in the smaller supplier companies and gained an easy connection to them. “In many companies, sustainability was a separate department,” he said. “More companies have moved to integrating it, as part and parcel of all decisions, including pricing. Companies are also aware of the reputational risk if they’re not sustainable.”
Waecheter admitted that the adoption rate in the early days of Puma’s programme was “worryingly low”, which led to a crisis meeting on whether the initiative could work. “But we’re now seeing a very good uptake,” he added.
Did that mean an SCF programme should focus initially on making liquidity accessible, rather than sustainability?
“We don’t regard sustainability as a side issue, but one that should come out of the business,” said Waecheter. “We’re also obviously keen to avoid reputational risk. It’s a long chain, but it’s the right direction to move in; Asian suppliers also want to pursue it in addition to those in Europe and the US.”
“We’re trying to team up with non-governmental organisations to develop a more standardised approach. We hope that the NGO’s role is changing to more of a designing one- and less a complaining one.”
An audience member agreed that rewarding suppliers for complying with sustainability was laudable, but asked Mirmotalhari how the IFC responded when they lacked the liquidity for improving their performance
“That depends on the costs involved from moving from B to A,” he responded. “We often find they do have the working capital needed to make the improvement and in certain cases, we can offer them a long-term loan. Smaller suppliers tend to make a series of smaller, incremental improvements and we need to recognise that.”
Supply and demand
A panel discussion then considered the issue of why vendors are not yet offering multi-tier solutions and financing. For Enrique Jimenez of Demica there are three basic reasons: “We don’t yet see enough demand from the market; you need a lot of data to identify any opportunities and we also don’t see enough demand from corporates.”
For Thomas Dunn of Orbian the need to distinguish between multiple tiers of suppliers is often not pursued by many SCF programmes. “Orbian believes that all levels should be eligible, and all should be involved. But how do you get suppliers of suppliers into a programme such as Puma’s? It’s very difficult.”
The supply chain of a business the size of Vodafone may involve as many as 20,000 suppliers, added Markus Ament of Taulia, “although sometimes you can extrapolate information from certain suppliers to others in the same tier.”
So risk appetite and a lack of information are major disincentives to developing funding sources for lower-tier suppliers. “You need data – plus the word we haven’t mentioned, which is ‘blockchain’,” suggested Johan Dillerop of GTNexus.
Could these challenges be overcome for the ‘long tail’ of suppliers, asked van der Hooft? “There’s certainly a lot of value in the long tail, which in the past hasn’t been covered by the banks,” suggested Jimenez. “Purchase order finance is now being used by some suppliers, driven by the buyer.”
Dunn added that a lot of interesting work is being done on pre-approval financing, for which a set of protocols is being established helped by artificial intelligence (AI).
“Banks still struggle with long tails and don’t really want to do it,” he agreed. “Companies like Puma care about their suppliers doing things sustainably, but how do these suppliers go about managing their own supplier relationships?”
Noting that data assists faster decision-making, van der Hooft asked how far down the chain it could be used.
For Peter Cook of PrimeRevenue, there is often a lack of trust that acts as an obstacle “but if there’s enough visibility further down the chain you can introduce some sort of scoring system.” Distributed ledger technologies and blockchain can help with this, but Ament cautioned that this wouldn’t happen overnight and would probably take between five and eight more years.
“At the end of the day, blockchain is a super-secure database,” added Dunn. “Data analysis and credit analysis will underpin the success of second tier financing.”
So blockchain and/or AI appear to be the most likely solutions, but who emerge as the driving force behind it – corporates, banks or the think tanks, asked van der Hooft? For Dillerop it requires a combination of various parties. “You need to have transparency, and this must extend to every level down the chain,” he suggested
“I see demand coming from the corporates such as Puma,” PrimeRevenue’s Cook. “If our clients were coming to us demanding it daily then we’d develop a solution, but we’re not yet seeing this demand. If I can see trust and visibility along the value chain, then I can be persuaded to inject some liquidity.”
Ament agreed. “Yes, once there’s that trust in place it will be opened along the chain, but corporates need to see a way that’s meaningful.”
And should the IFC and NGOs get involved in facilitating it to achieve a faster lift-off – or should we wait for the corporates? “It would be great if they could facilitate it, which would provide both credibility and liquidity,” said Dunn.
Discussion turned to instant payments and unapproved invoices as part of a complete working capital solution, the risk involved and whether either is suited to second-tier suppliers. “Develop a suitable credit scoring system and you can extend it to all of those involved in the chain,” suggested Cook.
Van der Hooft concluded by asking panellist what the main driving force in SCF over the next 12 months will be – and likely to feature at next year’s SCF Community forum.
For Demica’s Jimenez, it depends on fintech, but supplier onboarding and FX solutions are its top priorities. Dunn predicted: “By next year there will be advantage in applying AI and in 2018 we’ll also see the impact of rising interest rates reflected in changing monetary policy.”
Ament believes that the year ahead will be distinguished real blockchain applications, instead of just pilots and for Cook “we’ll see more supplier adoption than now going into long-tail and adoption of the sub-investment grade.”