Given today’s technology and the increasing speed of payments why is there $2 trillion in financeable secure payables locked in the supply chain? McKinsey believes this could be worth potentially
$20 billion revenue pool.
One of the key answers is timely and comprehensive information arriving at the right time and for the right hands.
Banks and supply chain finance (SCF) companies provide credit to customers that show credit worthiness and good payment behaviour. Information on the business and payments needs to be with people making the credit decisions. The information needs to be constantly
updated so changes to the financials, both positive and negative, can be factored into an on-going credit facility.
This information comes from two areas, credit reporting agencies and payment records from banks, and increasingly from business networks such as Alibaba and Ariba. These areas need to be married up and artificially intelligence (AI) added to help police
the behaviour needed to support the credit criteria.
The period that creates the greatest need for credit is the time between the invoice being issued and when it is paid. At
48.7%, the UK had the highest proportion of overdue B2B invoices in Western Europe last year, 17% higher, according to trade credit insurance specialist Atradius. Basically one in two invoices in the UK are paid late.
SCF can help by using unsecured, restricted overdraft limits given to the buyer to pass onto the suppliers. The buyer is using its credit rating as collateral. This is fine until that buyer gets into financial difficulties.
In the case of Carillion, the UK outsourcing and construction company that went into liquidation a year ago, banks issued SCF, and the suppliers, rightly, took full advantage of the money. Its suppliers
could take their invoice to one of Carillion's lenders and be paid. Suppliers were receiving payment for work done on credit established under Carillion’s name. The banks would be reimbursed when Carillion made its payments, which did not happen.
Carillion’s financial concerns were well known with the shares being heavily shorted and figures looking overly optimistic. This information, as in the case of many corporates, is often opaque. What is needed is transparent information that shows where the
company is right now and an agile framework where action can take place to increase or decrease the level of credit available.
Let’s take the company and first see what sector it is in, for example, agriculture averages 13 days in receiving payment while consumer durables take 33 days. Then how is this company doing, its past payment history and analytics around the cash flows.
At this stage a framework can be created around data sets that makes the probability of payment much higher. At this stage credit can be awarded instantly.
Given payments can be initiated and paid in seconds, approving SCF unsecured overdrafts for short periods quickly needs to be a priority. These unsecured credits can be syndicated to spread the projected risk across many lenders. The higher the risk level,
the higher the fees charged.
By bringing information together from a variety of sources, the potential business criteria can be designed for specific SCF activities. This in turn speeds up the money flow which in turn can be used to accelerate growth of companies in the supply chain.