The Perfect Match: Combining Working Capital Solutions for Comprehensive Supply Chain Support

By Adeline de Metz, Global Head of Working Capital Solutions, UniCredit

In today’s challenging economic environment, liquidity has become central to corporates’ working capital strategies. For buyers in a relatively strong position, supporting their supply chains is also a key imperative. To do this they can draw upon a range of options – from traditional supply chain finance programmes through to cutting-edge, digital dynamic discounting tools, says Adeline de Metz, UniCredit’s Global Head of Working Capital Solutions.

The ongoing global economic downturn caused by the coronavirus outbreak has resulted in supply chain disruptions, payment delays and, in some cases, payment defaults.

With many businesses facing a dip in revenues over the short and perhaps medium term – while still contending with fixed costs such as payroll and rent – buyers will rightly be thinking about the measures they can take to extend support down their supply chains. This is not just a social good – the notion of supporting loyal partners in their hour of need – it is also a critical imperative from a business continuity perspective.

Making the right decisions as to which techniques are the best will, as ever, require a considered and nuanced analysis – with today’s financial challenges unlikely to be resolved with a single silver bullet. Buyers looking to achieve the best results will need to think carefully about the unique needs and constraints of their situation and determine the best course of action for themselves and their suppliers, given the circumstances.

Achieving supply chain stability

Buyers have a number of options to support their suppliers at their disposal, depending on their financial situation and size.
Traditionally, this has been done through supply chain finance (SCF) or ‘reverse factoring’ programmes. These represent a compelling option for supporting suppliers without having to compromise on existing payment terms and days payable outstanding (DPO). This technique sees a bank commit to paying a buyer’s invoices to its suppliers, at an accelerated rate, in exchange for a discount. This solution strengthens the supply chain, helping buyers meet their payment terms and suppliers accelerate collection on their receivables – typically at a lower cost than if they were to simply factor the invoice.

This is something several UniCredit clients have taken advantage of in recent weeks. For example, in March, Italian retail store chain Esselunga extended additional financial support to its suppliers by expanding its pre-existing reverse factoring facility to €530m. This programme accelerates payments to Esselunga’s suppliers, offering them liquidity in advance of invoice due dates.

This approach helps inject significant amounts of critical liquidity into supply chains as and when it is needed. However, the rigorous onboarding process means that it is best used for a relatively small number of suppliers – typically the largest in order to maximise impact. With this in mind, buyers with the requisite liquidity on their own books can consider supporting smaller suppliers directly, by offering to fulfil payments early, in exchange for a scaled discount in a technique known as dynamic discounting.

Digitising to support remote working

However, dynamic discounting programmes require careful monitoring and management, often involving the exchange of numerous phone calls, emails, and documents – a process that is particularly challenging when working from home.

The Covid-19 pandemic has had a huge impact on this process, with businesses around the world moving quickly to seek out innovative tools that fully digitalise treasury processes to ensure business continuity. The digitalisation of working capital management solutions is already well advanced in this respect and a number of possibilities are available, including digital platforms for dynamic discounting.

UniCredit  offers a mobile and web-based dynamic discounting solution that enables suppliers to select the invoices they would like paid early, with buyers able to choose which of these they would like to approve. Tools like this simplify administrative processes for both buyers and suppliers, removing barriers for businesses to ensure timely financing support.

Combining payables and dynamic discounting

Italian luxury leather goods company Furla is a good case study as to how companies can use reverse factoring and dynamic discounting in a complementary way.

The company was seeking a working capital solution that could enable early payments not only to its biggest suppliers but also to smaller suppliers that are typically left out of bank-led SCF programmes. As is so often the case, they found their complex needs couldn’t be solved with a single solution.

To meet this challenge, Furla worked closely with UniCredit to devise a two-layer programme. The first layer involved an efficient reverse factoring programme to finance early payments to a limited number of large suppliers. The second used a digital dynamic discounting platform to enable Furla’s smaller suppliers to request early payments at any time up to the due date in exchange for a scaled discount.

By combining this digital dynamic discounting tool with traditional SCF, Furla was able to onboard a broad range of suppliers in an efficient way. Indeed, this combined approach is often the most effective – providing corporates of all sizes with the tools they need to support their suppliers and, in turn, strengthening the supply chain from end to end.

In view of today’s uncertain economic environment, it is crucial that businesses optimise their working capital strategies as soon as possible to ensure business continuity and put in place the foundations for ramping up activities once the global economy opens up again.

Reverse factoring and digital dynamic discounting, which is seeing increased adoption during the crisis period, are just a couple of measures that can be taken today to effectively streamline SCF processes.

There are many more, depending on the circumstances and goals of the business in question. Whatever approach is necessary, swift action and the rapid adoption of digital innovation will be key for corporates looking to bounce back quickly.   

Adeline de Metz is UniCredit’s Global Head of Working Capital Solutions, a role she assumed earlier this year, having previously served as Global Co-Head of Trade and Working Capital Solutions and before that, Head of Supply Chain Finance Solutions. Prior to joining UniCredit in 2012, Adeline 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. Adeline has been quoted widely across the trade press, writing features for publications such as Global Trade Review, TRF News, and the World Supply Chain Finance Report 2019.