Published: January 01, 2000
Supply chain finance (SCF) has become an increasingly important working capital tool for companies around the world in the past decade. It experienced a significant increase in use during the financial crisis, when liquidity for smaller companies dried up and many buying companies recognised that the stability of their supply chain was in jeopardy.
In Latin America, SCF has a mixed record. While its antecedents, forfaiting and factoring, took off in the region in the late 1980s and 1990s, it was not until the mid-2000s that SCF began to be used (most notably in Mexico and Chile). There were some notable successes with domestic schemes, but those involving cross-border supply chains – especially those including US companies – proved less successful.
Now, SCF is finally taking hold in Latin America. Banks have successfully adapted their supply chain offerings to take account of the nature of relationships between buyers and suppliers in the region, and its legal and regulatory diversity. As a result, SCF offers a compelling opportunity for a growing number of buyers and suppliers to strengthen their relationships.
While SCF was greeted with enthusiasm in Latin America when international banks first began talking to companies about it in the 2000s, adoption was slower than expected. Some international banks implementing programmes had strong relationships with large buyers (especially in commodities and retail) but found it hard to reach these companies’ supplier base effectively, making onboarding cumbersome and costly.
Conversely, those few banks with strong supplier relationships often had limited buyer clients. Some banks also ran up against limits on lending in Latin America: SCF depends on buyer credit limits (although it does not draw on them).
The complexities and diversity of Latin America presented a challenge for some banks implementing SCF. While Spanish and Portuguese are the dominant languages in the region, many US suppliers and banks use English. Equally, the regulatory and legal environment across the region varies widely, making documentation time-consuming and expensive to produce and administer. Practically, the size of Latin America raised challenges when onboarding and educating vendors and communicating the benefits of SCF to suppliers’ account managers at banks. In some cases, these challenges increased costs beyond the benefits of an SCF programme.
Perhaps the greatest challenge that faced SCF in its early days in Latin America related to the different credit characteristics of buyers and suppliers. In many regions of the world, buyers have superior credit quality (and can therefore borrow more cheaply than suppliers). In Latin America, the reverse was true as many suppliers were highly-rated US companies.
Ordinarily, SCF uses the superior credit quality of buyers to enable suppliers to get paid sooner than usual by financing their receivables below their usual borrowing cost. In return, buying companies usually increase payment terms, allowing them to extend their days payable outstanding. Without the benefit of lower financing costs, the only benefit to suppliers of taking part in a SCF programme is that it strengthens the relationship with the buyer, creating a potential opportunity to grow sales. For some suppliers, this was not a sufficiently compelling proposition to encourage them to adopt SCF.
In the time since international banks first started to introduce SCF into Latin America much has changed. Banks have successfully adapted their products and support to reflect the needs of buyers and suppliers in the region.
Some banks’ programmes now incorporate other providers to supply data or trade tools in order to create programmes that are flexible enough to meet the needs of a wide range of buyers and suppliers. Some international banks have introduced local currency SCF and are planning cross-regional offerings. Moreover, some banks have established trading companies to act on behalf of buyers (usually in the commodities sector). This arrangement enables the buyer to extend payables without having to directly request longer terms from suppliers. It also allows the buyer to more efficiently manage its balance sheet and eliminates the traditional role of other agents in the commodity market, lowering costs.[[[PAGE]]]
The most important change in Latin America in relation to SCF is that buyer/supplier dynamics have changed in recent years. US suppliers have increasingly established local supply operations in order to be closer to their buyers and improve customer service. In some cases, these supply operations also now incorporate local manufacturing. As a result, the contrast in credit quality between buyer and supplier is no longer as significant: it is now financially advantageous for a greater number of suppliers to take part in programmes.
The increased importance of relationships between buyers and suppliers as a result of the establishment of local supply operations has also increased uptake of SCF even when suppliers continue to have a higher credit rating. Suppliers are now more frequently willing to pay for discounting fees in order to take part in a SCF programme so they can strengthen relationships with buyers.
Banks have also sought to make SCF easier for both buyers and sellers. Latin America remains a diverse legal and regulatory environment. However, by committing resources, some banks have created uniform documentation (with some variation for local legal requirements) that reduces set-up times (a common complaint among suppliers in the past). Some banks have also ensured that documentation is flexible enough to meet the needs of suppliers to use electronic invoicing, promissory notes or even counter receipts.
Banks have made significant efforts to more effectively communicate how SCF works, and the benefits it brings to both buyers and suppliers. They have recognised that many companies in the region are used to open account trading (and have therefore not worked with a bank in this area of their business before) and adjusted their approach accordingly. In the past, the reputation of SCF was confused by misunderstandings. In some instances, suppliers equated SCF with factoring, which – unfairly – was often seen as a financing tool for companies that had liquidity problems. This stigma dissuaded some suppliers from taking part in SCF programmes.
Education initiatives among buyers and suppliers have helped to overcome the lack of knowledge that has hampered take-up in the past. Similarly, banks have stepped up efforts to help companies explain the benefits of SCF internally, such as its ability to improve financials. By doing so, it is possible to get buy-in from other functions, such as purchasing, that have direct relationships with suppliers: while it is the treasury that implements SCF, it cannot make it work alone. Similarly, banks now provide advice and support to senior management to enable them to put to rest concerns about jobs or the stability of a company taking part in a SCF programme.
Despite streamlined documentation, implementation of SCF can still take months. However, banks now provide sufficient support for both buyer and supplier companies during this period. Banks also recognise that both buyers and suppliers want more from the technology that facilitates a SCF programme: some banks have introduced systems that suppliers can use as a payment vehicle, enabling them to track payments, discounts and other parameters and deal easily with problems, such as returns. Ongoing support for suppliers and buyers has also been improved, with online and telephone assistance available in multiple languages, and at convenient times.
SCF in Latin America has experienced a number of false dawns, as banks with insufficient understanding of the unique challenges of the market have used programme templates developed elsewhere in the world. However, banks have learned from these mistakes and refined their SCF offerings to meet the requirements of the Latin American market, while still delivering the benefits derived from experience in other global markets, and their ability to reach global and large local corporates.
Corporates seeking to establish a SCF programme in Latin America need to select a bank with broad reach. SCF also requires complex technology for its support. Companies should choose a bank with a strong commitment to investment in SCF, and a robust platform that not only is flexible enough for both buyers and suppliers, but also can incorporate electronic invoicing and other forms of documentation. Banks should also offer flexible SCF programmes that can evolve as the region grows, by syndicating debt or working with other banks as funding requirements increase.
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