Supply Chain Finance for Working Capital Advantage

by Adeline de Metz, Head of Supply Chain Finance Solutions, Global Transaction Banking, UniCredit

Working capital optimisation is a priority for companies of all sizes, but the motivation of these companies can differ quite significantly. For smaller companies that lack ready access to liquidity, techniques such as factoring and receivables financing provide valuable sources of liquidity; however, in addition, supply chain financing solutions on both sides of the balance sheet are becoming an increasingly important part of larger corporations’ working capital strategy.

 

A customer-centred strategy

We work with a wide spectrum of clients, across geographies, industries and sizes of company, to understand their working capital needs and design solutions to meet their specific needs. Although smaller and lower-rated companies are often motivated by liquidity considerations, these are rarely as significant for larger corporations, given the high level of market liquidity. Amongst larger businesses, therefore, we see three broad drivers:

 

i) Working capital metrics

In many cases, achieving financial key performance indicators (KPIs) such as return on capital employed (ROCE) is a motivating factor, and receivables financing techniques are especially attractive during periods of low interest rates as the costs are low while the value can be significant; however, we may see a change in strategy when interest rates rise in the future. 

Many companies measure days payable outstanding (DPO) and days receivable outstanding (DRO) and benchmark these indicators against peers and competitors. Often, treasurers and finance managers identify opportunities for improvement as a result of this process, but it is neither feasible nor desirable simply to extend DPO, given the negative impact that this can have on suppliers, and therefore the resilience of the supply chain.

This is where supplier financing programmes come into play by enabling a company to achieve its DPO objectives without compromising the interests of suppliers: indeed, suppliers may benefit by gaining access to more cost-effective financing. 

All these programmes also present the opportunity to review existing contracts and understand the risks and cash flows. In many cases, there are unexpected outcomes, particularly in relation to the ultimate debtor (for receivables finance), so it can be a very useful exercise in improving contract discipline and managing risk, as well as optimising working capital.

 

ii) Aligning objectives

A second driver is to align priorities across the business more effectively. For example, procurement departments have traditionally been incentivised to structure contracts to reduce costs, but without necessarily considering the working capital implications; conversely, treasury’s motivation is often contradictory, with a greater focus on working capital. Implementing tools such as supplier financing aligns these two sets of objectives, enabling procurement departments to negotiate competitive rates for products and services with suppliers whilst also reinforcing the company’s working capital position.

 

iii) Supporting free cash flow generation

Supply chain financing can also be useful when free cash flow is under stress. For instance, some clients have large capital expenditure projects which will not generate a return for several months or years. Putting in place a working capital optimisation plan at the same time as investing in capex projects can help to offset the one-off negative free cash flow impact of those projects, and therefore be a key element in mitigating their financial impacts.

 

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A broader supply chain perspective

Although receivables financing solutions remain popular, another major area of growth is in supplier financing programmes. Many companies have tried to improve their working capital position in the past simply by extending supplier payment terms; however, both companies and regulators have recognised that this approach can be damaging to suppliers. Since 2013, companies in Europe have been obliged to comply with the Late Payment Directive, which has prompted many larger companies to embark on supplier financing programmes. By doing so, they improve their own working capital position whilst providing suppliers with the opportunity to seek early payment at a competitive financing rate by leveraging the company’s higher credit rating. This makes the supply chain more resilient, and enhances the relationship between the buyer and its suppliers. As well as private sector corporations, we are also seeing particular interest amongst companies that deal with public sector entities that are keen to demonstrate their support for local businesses.

 

Maximising success

Although supplier financing programmes have demonstrable benefits to both the originating company (by improving working capital whilst also creating a better negotiating position) and its suppliers (by providing access to financing at a competitive rate), they have achieved varying degrees of success. In particular, although companies – and their banks – have often invested in sophisticated technology and contracts, there has not been sufficient attention paid to onboarding suppliers. As a result, adoption has not always reached the target level, reducing the supply chain benefit.

At UniCredit, we have a specific focus on supplier onboarding to boost adoption and therefore maximise the benefits both to the buyer and its supplier community:

Firstly, we help clients to develop a detailed onboarding strategy that is tailored specifically to their business. This includes segmenting the supplier base into tranches of strategic and non-strategic suppliers, and developing specific approaches for each tranche, from individual meetings through to mass mailings.

Secondly, and just as importantly, as we support corporate clients of all sizes, we recognise that while the buyer may be a large corporation, its suppliers are often small and medium-sized enterprises. Consequently, we help to provide a connection between quite different corporate segments, and help our customers to engage in the right way with their smaller suppliers – thereby meeting the expectations of buyer and supplier alike. This includes local language communication and support, and recognition of local know your customer (KYC) and other regulations in the supplier’s home country.

This onboarding approach has proved highly successful in providing suppliers with greater confidence, building stronger relationships between the buyer and its suppliers and therefore increasing adoption. 

 

Customer-centric innovation

Supplier financing programmes are just one part of UniCredit’s comprehensive portfolio of supply chain solutions, which ranges from traditional factoring and receivables financing solutions through to sophisticated, structured programmes that are specifically tailored to a customer’s needs, combining skills and resources from across the bank. In addition to the innovations and solutions we develop internally, we are continuing to monitor third-party fintech opportunities and working with innovative providers where appropriate, to deliver customer-centred solutions that meet their working capital, risk and liquidity needs, both now and in the future.

 

 

Adeline de Metz Head of Supply Chain Finance Solutions, Global Transaction Banking, UniCredit Adeline de Metz joined UniCredit in Paris in January 2012 and for nearly five years has been responsible for a portfolio of large corporate clients as Senior Banker. Before joining UniCredit she was Head of Retail Industry Group and Deputy Head of Corporate Coverage at Natixis, having started her career as a relationship manager at the Banque Française du Commerce Extérieur.