by Bart Ras, Head of Trade Supply Chain Finance EMEA, Citi
The opportunities presented by supply chain finance (SCF) programmes have been met with interest and often enthusiasm by corporations globally. Despite this degree of interest, however, the proportion of companies that actually implement them has been relatively small until quite recently. Furthermore, the outcomes of SCF programmes have fallen short of expectations in some cases, not due to restrictions or flaws in the programme itself, but more often as a result of implementation issues. Through my experience of implementing a very successful SCF programme while I was working at Philips and driving many of the world’s most respected programmes since joining Citi, I have learnt a variety of lessons to ensure that SCF programmes achieve, and often exceed, companies’ working capital, efficiency and supply chain objectives.
Overcoming perceived barriers
In the past, one factor that discouraged companies from implementing an SCF programme has been the fear of being an early adopter. This inevitably resulted in slower take-up, which in turn led to misconception, and occasionally cynicism about SCF programmes. What seems too good to be true usually is, but an SCF programme, implemented in the right way, can be an exception to the rule. Before looking at some of the factors that contribute to a successful SCF from the outset, I want first to address some of the perceived barriers or issues with SCF, which in reality should rarely be cause for concern.
Effect on credit lines
One of the most common concerns is that credit lines will be negatively affected by the existence of an SCF programme. In fact, credit facilities can actually be enlarged. While ordinarily, a credit line extended to a supplier reduces a short- term credit facility on a like-for-like basis, short-term assets under an SCF programme are treated as being self-liquidating and are therefore additional to a company’s existing credit facilities. Furthermore, Citi will often sell SCF assets to other investors, opening up an investment community to which a company may not normally have access, and freeing up credit lines with Citi. We are finding that investors have a very keen appetite for short-term, investment grade assets that yield a good return, without settlement risk.