As new far-reaching disclosure requirements for supply chain finance programmes emerge, Steve Lauricella, Head of Business Development and Partnerships, Previse, looks at how CFOs and treasurers can prepare to respond.
Regulators are implementing wide-ranging disclosure requirements for supply chain finance (SCF) programmes. The changes, being driven globally by the International Accounting Standards Board (IASB), Financial Accounting Standards Board (FASB), UK-based rating agency Fitch, and others, will require companies to publicly disclose the size and scope of their SCF programmes.
Here is what you need to know about the coming changes and alternative models for funding essential supply chain initiatives.
Supply chains have faced incredible stress and scrutiny over the past 18 months. From semiconductor chips to the Suez Canal, global trade is, and will continue to be, under a fierce spotlight. And, in the wake of high-profile financial failures, it is no wonder the industry is undergoing regulatory change.
At the core, demands for increased disclosure about SCF programmes call for more clarity and transparency. This is a good thing. But the new disclosure requirements will have consequences for SCF programmes that have been instrumental to buyers and suppliers for decades.
What are the key facts CFOs and treasury leaders must know?
- New regulations will force you to change how you fund SCF programmes
- Your Promise-to-Pay obligations risk being reclassified as debt
- Consequences include loss of working capital, increased borrowing costs, supply chain disruption and higher compliance costs
- There are alternative models to maintain the essential benefits of SCF while eliminating the Promise-to-Pay
- The new disclosure requirements will force companies using SCF programmes to make tough choices: reduce programmes, eliminate Promise-to-Pay, accelerate payments or take on debt
These options have hard consequences – with implications on innovation, growth, financial performance and more. Consider the outcomes:
- If you accelerate payments or reduce SCF programmes, the loss of working capital will affect day-to-day operations such as research and development (R&D) investment, customer acquisition, market expansion, and valuation.
- If your SCF programme is reclassified as debt, your ability to raise money, secure favourable interest rates, meet contractual obligations, and maintain high credit ratings will be hampered.
- Your supply chain stability and resilience will take a hit as suppliers and supply continuity will be constrained.
- Your operational and compliance costs will rise as tracking, management, and reporting will require additional administrative work.
What’s the alternative?
There is a better way to finance supply chain programmes: eliminate the Promise-to-Pay obligation that you give for an invoice funded by SCF.
What supply chain partners really need is clear. For buyers, the need is for an efficient, quick, and simple way to pay suppliers that doesn’t require obligations to financial institutions. For suppliers, the need is for a simple way to get paid sooner.
The solution lies in machine learning-enabled technologies that eliminate the need for Promise-to-Pay.
Machine learning (ML) technology analyses corporates’ enterprise resource planning (ERP) data to predict the few invoices that are unlikely to get paid. The rest can then be paid instantly by a funder, such as a bank. The buyer then pays the funder back on its normal payment terms.
This delivers what SCF promises: buyers support suppliers with access to cost-effective early payments without creating new financial obligations. The result is easy, seamless payments that lower risk for all parties, optimise margins, and strengthen supply chains.
Forward-looking finance leaders are not waiting for the regulatory agencies to hammer out SCF disclosure requirements. They are acting now to put their organisations and supply partners in a better position, financially and operationally.
The window remains open for CFOs and treasurers to expand the options they have for financing supply chain programmes. By adopting a model that relies on artificial intelligence rather than lending, organisations can keep supply chain relationships strong, fund innovation, and build value for stakeholders and shareholders alike.
Change is coming, and the technology is ready to pave a new future for SCF. It is no longer a question of ‘if’, the time to analyse the potential impact on your business and proactively make changes is now.