Dynamic Customer Finance: Supply Chain Support for the Covid-19 Age

Amid the pressures of a global pandemic – and the rise of sustainable finance – Jan-Martin Nufer, Vice President Treasury & Funding, Borealis, has collaborated with working capital giant C2FO to create a dynamic customer financing solution to supplement their C2FO dynamic supplier finance solution. As Nufer and Colin Sharp, SVP, EMEA, C2FO, explain, this innovation enables treasurers to strengthen customer relationships by accelerating, or extending, timelines for outstanding receivables – to suit both supplier and buyer. Intrigued? So are we!

Eleanor Hill, Editor, TMI: Before we talk about this exciting new financing solution, let’s touch on the pandemic. How did Borealis’ treasury and funding team cope with the market disruption caused by Covid-19?

 Jan-Martin Nufer (JMN): Like previous crises, the pandemic led many businesses to focus on risk management – especially around liquidity, working capital, and supply chain stability. This was no different for Borealis. As soon as Covid-19 was declared a pandemic, we implemented an overarching cross-functional programme to ensure that we could stay on top of the uncertainty caused by the virus.

This programme was built on a framework we had created after the financial crisis of 2008 – with the aim of minimising the impact of any future market disruption. Similar to our financial crisis response and notwithstanding an already extremely solid basis, we ensured additional cushions of committed liquidity were available and made use of the proven diversification strategy in our funding set-up.

We concentrated primarily on the funding avenues that were least impacted by market disruptions - as seen temporarily in the debt capital markets, for example. We closed a large 300m EUR foreign investment financing deal with the Austrian export credit agency OeKB, and a 250m EUR long-term research and development [R&D] sustainable financing arrangement with the European Investment Bank [EIB]. Like many other companies, we have also been exploring the government-driven Covid-support schemes offered in various countries.

Alongside this focus on funding, the risks associated with our customers and suppliers were also a major consideration. Certain industry sectors, and countries, have been seriously affected by the pandemic – and this obviously has an impact on credit risk. Borealis’ treasury and funding team is tasked not only with evaluating and mitigating credit risk, but also finding suitable ways for our sales colleagues to continue conducting business. In doing so, we’ve seen that although a crisis creates risk, it is also an opportunity to strengthen customer relationships.

Our approach has worked well: we have experienced very low default rates. But the crisis is not over yet. When the government support mechanisms end, we will likely see that many companies have been kept afloat artificially. We need to be prepared for that. But you can be prepared only to a certain extent; in any disruptive situation it is vital to have an adaptive organisation and a procedural set-up that allows the sharpest reactions.

EH: Colin, what are you hearing from other C2FO clients? In what ways is the pandemic challenging them most? And how is this impacting the financing of supply chains?

 Colin Sharp (CS): Jan-Martin’s view resonates with what many of our clients are experiencing, across different geographies and industries. In most cases, the first response has been to protect the balance sheet, getting as much cash as possible on board. If we think about supply chains, there have been some unintended consequences for them. Some companies have stopped their early payment programmes where they were using their own cash. This happened just at a time when their suppliers needed it most, either because they were able to grow due to increased demand, or because they were financially suffering. So that has been a challenge.

Elsewhere, clients are worried about the economic ramifications of a second wave of Covid-19. And as Jan-Martin mentioned, the scaling back of protective financial measures is also a significant concern. The situation is exacerbated by the fact that bank credit appetites are tightening, credit ratings are being lowered by the ratings agencies, and the availability of cash has been limited.

I’m proud that C2FO has been able to step in and help to ease the pain for clients, and their supply chain partners. We have assisted them to source additional funding across the globe – in a matter of days, not months – from banks and non-bank sources.

EH: It seems like a timely moment to be introducing this new Dynamic Customer Finance solution. Jan-Martin, tell us how this solution came about, and why you chose to work with C2FO on it?

JMN: I’ve worked with C2FO for several years now. Borealis has been using their dynamic supplier finance capabilities to give our suppliers the opportunity to be paid earlier, through flexible pricing, and it has been a great success. It is indeed the perfect time to now be introducing Dynamic Customer Finance – it’s very well-suited to the Covid-19 age. But the solution was in the works pre-Covid.

It came about because, on the back of our dynamic discounting success, I thought: ‘What is workable for suppliers should also work for buyers.’ I suggested to C2FO that we look at the customer side, to see if we could occasionally offer longer payment terms to carefully selected customers – with a revenue benefit for us.

With C2FO’s flexibility, Dynamic Customer Finance is something we can offer as required; it does not need to be a permanent arrangement. That’s important: it’s as much about maintaining relationships as it is about money – and it’s also important to note here that we maintain separation between commercial pricing discussions through sales or procurement, and the cost of the payment terms through treasury.

EH: Colin, how would you describe the potential benefits of Dynamic Customer Finance in a nutshell? And why was C2FO keen to work with Borealis on the pilot project?

CS: Through our Dynamic Customer Finance offering, treasurers can dynamically adjust the timeline of outstanding receivables, on-demand. As Jan-Martin said, it is possible to generate income by allowing customers to pay you later, in exchange for a premium. But it is also possible to accelerate receivables through various funding options, including early payment by your customers. Our dynamic model gives you full control over which invoices are included, their funding methods, and at what price.

All great innovations come out of supplier and customer collaboration – which is precisely why we wanted to work with Jan-Martin on this solution. The ability to offer payment terms tactically and dynamically to both customers and suppliers in the supply chain, treating them like an ecosystem rather than a linear progression, is an important part of our strategy.

We’re seeing unprecedented uptake for this idea because most clients understand supply chain finance. And, as Jan-Martin said, they can see it’s about winning more business and protecting their ecosystem.

EH: And Jan-Martin, how easy/difficult has it been to implement Dynamic Customer Finance?

JMN: We knew it would require effort to make the solution as automated as our payables process and the dynamic discounting we have in place there. But with our in-house credit system and fully centralised set-up we knew we could identify and apply limits to suitable customers. And working closely with C2FO, we quickly came to a working solution that takes away the pain points for treasurers, while opening up new opportunities.

EH: Finally, Covid-19 has been an inflection point for treasury. We are seeing greater focus on the environmental, social and governance (ESG) agenda, especially in relation to supply chains. What are you working on in this respect and where does C2FO’s offering fit in?

CS: We’re doing a lot of work now on the ESG agenda. It means different things to different people, but we are driving the joining of the world of finance and ESG. This might start by looking after small or minority businesses with inclusive finance. It might also be about rewarding a supplier improvement in sustainable practices with lower cost working capital.

A business can positively incentivise its supply chain through the use of flexible financing mechanisms.  We can help, perhaps by linking supplier performance data with differential pricing. It’s largely understood that the right mechanism can deliver bottom-line improvements, but some of the more informed businesses are now using our platform to invest in ESG or sustainability projects by supporting their supply chains and enhancing their own ESG score.  

JMN: We are clearly focused on recycling, sustainability and circular economy elements of our Corporate 2035 strategy. Taking sustainability into the supplier/customer relationship space is a great idea. It’s going to be part of a new norm where sustainable finance is viewed equally alongside traditional finance, but first we need to make sustainability ratings more transparent. 

Supply chain finance [SCF] could play a role here. As part of ACTA (Jan-Martin is founding Board Member of the Austrian Corporate Treasury Association) we see big discrepancies between corporates in respect to information and readiness for sustainable finance. Not surprisingly, our sustainability workgroup is one of the most active ones.

Many lack the information about which tools are available, and many more do not yet realise the possibility of linking supply chain financing and dynamic discounting with ESG. What’s more, when looking into sustainability performance-linked finance, we see that it can be a real struggle for smaller companies to access. But the flexibility of the SCF concept, through a platform like C2FO, could give all these businesses a stake in sustainable finance.

For me, what remains most important is to have the flexibility and the control that C2FO offers. Particularly now in a time of crisis, companies are resorting solely to the traditional ways of prolonging payables and shortening collections. Businesses are in a situation now where all the years of sitting on ample excess cash might come to an end. They should be thinking that now is the time to also consider using more external finance for the welfare of their supply chain.

But really, the whole area of working capital management needs much more holistic and dynamic thinking. It should be about exploring different areas, having a wider set of people – including ESG representatives – around the table, and having the right tools and partners available to make it happen.