Published: October 10, 2014
UniCredit found the right recipe to break a long-lasting constraint in the discipline of supply chain finance: this innovative, technology-intensive financing product can now also be used effectively in the SME corporate segment.
The recent deal between UniCredit and a German food wholesaler provides very concrete evidence of how a successful supply chain finance programme can be centred around a small buyer, with a total turnover below 50m euros and a proportionally smaller purchasing volume.
The basic idea of supply chain finance is that a bank facilitates the business interaction between a buyer and his suppliers via a web-based platform, which is used to share the information on which invoices have already been validated and approved for payment. Based on this data, the suppliers can send an online request to the bank to finance the approved invoices, thus immediately receiving a discounted payment. The bank then debits the buyer automatically with the full invoice amount at maturity, according to the instructions present on the platform. Thanks to this mechanism, the suppliers can finance themselves at the rates that would normally be applied to the buyer, since the confirmed invoices allow the bank to fully allocate the risk against the buying organisation.
The typical approach of all major banks, so far, has been to look first for very large multinational buyers, whose credit rating is significantly better then the one of the respective suppliers.
The case study of the German wholesaler is a different story, though. The company is a small-sized trader of imported food, located in Munich, Germany. The enterprise would be categorised in the small-cap segment by any global or regional bank, because of its lean structure and turnover figures.
However, the Chief Financial Officer wanted to initiate a supply chain finance programme with a bank and persuaded the CEO. “We know we have a good credit rating,” he said, “and we wondered whether we could use it to offer some help to our most important suppliers”.
Back in 2009, the financial crisis hit hard all industry sectors in Germany, including the food business. The customer received warning signals from his supply chain, where some of his key suppliers were clearly in danger of running out of liquidity. Although the whole sector did eventually manage to emerge from the negative cycle without permanent damages, the criticality of the situation triggered a complete re-thinking of the way the main participants in the supply chain manage and distribute the risks among themselves. The buyer understood that it was in his own interest to protect his suppliers and reduce the financial hazard of the entire supply chain set-up.
Out of all the possible options analysed, the supply chain finance solution proposed by UniCredit emerged as the most convincing one:
The deal structure would leverage on the buyer’s solid credit standing, in order to provide the suppliers the much needed liquidity with a very unbureaucratic, intuitive and – most importantly - on-line and on-demand process.[[[PAGE]]]
Thanks to supply chain finance, the suppliers have flexibility in deciding if and when they will assign their invoices to the bank by the means of a click on a web page, keeping full control of the process and adjusting their financing requests real-time, based also on their own seasonal business cycles.
At the same time, the buyer’s commitment to pay at maturity became 100% reliable, thanks to the automatic direct debit mechanism that is a built-in component of the supply chain finance solution. The convoluted collection process suddenly became a streamlined workflow, with great efficiency gains for both the buying and the supplier side. Furthermore, as a nice side-effect, the suppliers on boarded in the programme started to increase their business volume with the food wholesaler. Supply chain finance elevated the business relationship to a much higher level of trust and comfort, thus eliminating the mutual need to cap the trading volume with the other party to manage financial risks.
None of this would have been possible if UniCredit hadn’t invested a considerable amount of brainpower in packaging its supply chain finance solution into a small, easy-to-implement product.
Three factors contributed to the success of the deal:
Considering the high level of client satisfaction, UniCredit is now offering supply chain finance on a broad scale to all small and medium enterprises.
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