What the supply chain industry can learn from the Greensill Capital collapse

The pro­vi­sion of work­ing cap­i­tal against receiv­ables is one of the world’s most endur­ing­ly pop­u­lar finan­cial ser­vices. As a worka­day form of com­mer­cial fund­ing, with pri­vate, tai­lored arrange­ments and low default rates, sup­ply chain finance (SCF) has tend­ed to oper­ate well below the radar – until the col­lapse of Green­sill Cap­i­tal made it front-page news. 

The recent fail­ure of the Anglo-Aus­tralian SCF provider, which had been advised by the for­mer prime min­is­ter, David Cameron, has raised ques­tions about whether this form of finance is tru­ly ben­e­fi­cial to every­one involved.

What is supply chain finance?

In its widest sense, SCF is a range of solu­tions that pro­vide work­ing cap­i­tal to aid the cash flows of com­pa­nies that are both buy­ing and sell­ing. So says Lionel Tay­lor, co-founder and man­ag­ing direc­tor of the Trade Advi­so­ry Net­work, a provider of SCF con­sul­tan­cy and train­ing ser­vices.

And it’s big busi­ness. The Inter­na­tion­al Cham­ber of Com­merce (ICC) reports that SCF is respon­si­ble for most mar­ket growth in trade finance. Near­ly two-thirds (64%) of glob­al banks offer such ser­vices. 

But the ICC also notes that this mar­ket is beset by a lack of com­mon under­stand­ing about what it deems “appro­pri­ate prac­tice” in SCF. There is no defin­i­tive guid­ance on account­ing treat­ments and report­ing require­ments either, which can lead to “bound­ary-push­ing prac­tices or even out­right abus­es”.  

Green­sill advanced funds against what it called “future receiv­ables”, but the firm implod­ed because those receiv­ables did not exist.

The big, bad buyer

The Green­sill affair puts the spot­light on how small play­ers in the sup­ply chain are treat­ed by their big­ger cus­tomers. Any busi­ness will typ­i­cal­ly need to finance its pur­chas­es and oth­er over­heads before it has been paid by its cus­tomers. That is not a prob­lem for large com­pa­nies with invest­ment-grade liq­uid­i­ty lines from big banks, but a stut­ter­ing cash flow can hit SMEs hard. They may find it dif­fi­cult to bor­row to cov­er their out­go­ings while they await pay­ment, or have access only to high-cost cred­it. 

“This cash flow gap can become more chal­leng­ing as these busi­ness­es grow. It’s not uncom­mon for a banker to hear that a com­pa­ny that had pur­port­ed to be doing well has over­trad­ed and run out of cash,” Tay­lor says. 

SMEs inevitably get the rough end of the deal, as slow pay­ments are an ingrained prob­lem, observes the nation­al chair of the Fed­er­a­tion of Small Busi­ness­es (FSB), Mike Cher­ry. 

“Our mem­bers long for a world where SCF doesn’t exist,” he says. “Rather than forc­ing firms to bor­row against invoic­es or sell them on for a cut of their val­ue, we should focus on achiev­ing a cul­ture change, with the aim of final­ly putting our poor-pay­ment cri­sis to bed.”

The FSB is work­ing with the Small Busi­ness Com­mis­sion­er, a pub­lic body estab­lished by the Depart­ment for Busi­ness, Ener­gy and Indus­tri­al Strat­e­gy in 2017, to have 30 days set as the new max­i­mum pay­ment peri­od in the UK. 

Are big com­pa­nies delib­er­ate­ly wring­ing out their sup­pli­ers? Tay­lor says that they would rather pay lat­er when­ev­er pos­si­ble to pre­serve their work­ing cap­i­tal. But the exis­tence of SCF does not nec­es­sar­i­ly mean that their sup­pli­ers will suf­fer as a result. 

“As an exam­ple, a small com­pa­ny could get its cash after five days at a rate that reflects the cred­it rat­ing of a large invest­ment-grade com­pa­ny rather than their own,” he says.  

What’s going on

To make this pos­si­ble, banks will set up a payables finance pro­gramme for large buy­ers. Each pro­gramme requires much analy­sis of dif­fer­ent areas of the buyer’s organ­i­sa­tion, all of which are keen to ensure that any pro­gramme does not harm the rela­tion­ships the buy­er has with its sup­pli­ers, says Tay­lor, who adds: “It takes months to set up the right arrange­ment.” 

One rea­son why the process is com­plex is that there are few rules gov­ern­ing it. The ICC wants to see a co-ordi­nat­ed effort to decide on the right approach. This, it says, should involve stake­hold­ers such as cred­it rat­ing agen­cies, account­ing firms and insti­tutes, reg­u­la­tors, trade bod­ies, finance providers and com­pa­nies of all sizes.

Even with a set of clear rules to fol­low, SCF wouldn’t become a sim­ple process. For instance, banks are required to ensure that funds aren’t used for activ­i­ties such as mon­ey-laun­der­ing, but this becomes more dif­fi­cult if they’re deal­ing with SMEs on the oth­er side of the world.

And small firms can be hap­py to join an SCF pro­gramme even if they find some aspects of it uncom­fort­able. For one thing, it makes them an inte­gral part of the buyer’s pro­duc­tion process – some­thing that a big com­pa­ny with a just-in-time sup­ply chain will work hard to pro­tect. Fun­da­men­tal­ly, it will try to pay its sup­pli­ers on time even when liq­uid­i­ty is tight.

Transparency and sustainability

The sup­port­ive rela­tion­ship that a good SCF pro­gramme offers small firms should also enhance ini­tia­tives to improve sus­tain­abil­i­ty. 

The FSB wants cor­po­rate audit com­mit­tees to be grant­ed full over­sight of their firms’ pay­ment prac­tices. This is part­ly so that boards adopt­ing an envi­ron­men­tal, social and gov­er­nance agen­da would have a way to ensure account­abil­i­ty when it comes to nur­tur­ing the sup­ply chain. 

Greater account­abil­i­ty is required to focus minds. But get­ting sus­tain­abil­i­ty right depends on hav­ing all the right data to hand. 

“One les­son from Green­sill is that it’s incum­bent on fun­ders to do their home­work and under­stand what they are financ­ing,” Tay­lor says.

That has always been a long, cost­ly process. But, as the inter­net of things enables the real-time col­lec­tion of sup­ply-chain data, SCF providers should find it far eas­i­er to track per­for­mance in many areas.

This could sup­port the nur­tur­ing rela­tion­ships the FSB wants to see. The Ger­man Bank­ing Indus­try Com­mit­tee, for instance, recent­ly not­ed that tokenised com­mer­cial bank mon­ey could allow the use of auto­mat­ed ‘smart con­tracts’. These could trig­ger an imme­di­ate pay­ment when, say, a ship­ment has been sent. On-the-ground data could also take liq­uid­i­ty right up the sup­ply chain to the small­est firms that SCF cur­rent­ly doesn’t reach. 

What is clear is that SCF is unlike­ly to go away. Small­er firms will always face the threat of liq­uid­i­ty gaps. Done right, SCF can ben­e­fit every­one in the chain and sup­port sus­tain­abil­i­ty. The lat­est tech­no­log­i­cal advances promise to make all this pos­si­ble.