Payables Finance as a Means of Securing Global Supply Chains

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These are interesting times for trade. Companies looking to provide high-quality products, assembled at the best possible value, have reaped the benefits of globalisation over the past few decades. And while this has profoundly impacted business for the better, it also leaves these enterprises exposed to major geopolitical or macroeconomic events.

As uncertainty became more widespread in recent years, this exposure has started to tell – putting a strain on supply chains that increasingly stretch across the globe. With corporates looking to ensure working capital efficiency, supply chain finance (SCF) techniques – and payables finance in particular – have become a popular means by which they can simultaneously protect their suppliers and improve their liquidity.

Mobilising payables

A form of buyer-led (SCF), payables finance allows sellers in the buyer's supply chain to access finance by means of receivables purchase. This sees a given buyer offer its sellers the option of receiving the discounted value of certain receivables prior to the due date, typically at a rate aligned with the buyer's favourable credit profile. While payables finance is typically arranged by large, top-rated corporate buyers, recent times have increasingly seen non-investment grade companies looking to set up their own programmes.

These payables set-ups offer all parties involved the flexibility and stability needed to maintain integrated and uninterrupted supply chains worldwide – enabling buyers to maintain favourable payment terms without squeezing the liquidity of their suppliers. Traditionally, working capital management was the primary benefit of implementing such programmes. More recently, however, corporates have also seen the benefits of using payables finance as a means of strengthening trading relationships and protecting their supply chain, with some even valuing this benefit above that of improving their own working capital.

Payables finance also offers opportunities for those companies in the so-called ‘long tail' of a buyer's supply chain – smaller suppliers (and suppliers of suppliers) that nevertheless make up an important part of the supply chain – enabling them to access much-needed financing, rather than falling back on credit card, overdraft or loan arrangements. Historically, payables finance has been dominated not only by large buyers, but also by their biggest suppliers. Both aspects are now changing as buyers see the benefits of onboarding a wider selection of partners along the supply chain.

Educating the market

While eyes are being opened on the buyer side, a similar awareness must also be fostered among suppliers. Those suppliers unaware of the workings of payables finance – or having participated in poorly structured programmes in the past – may see it as a technique that benefits only the buyer. Promoting awareness of the benefits on the other side of the equation is a critical part of the onboarding process for buyers and their banks.

Industry-led initiatives, such as the Global Supply Chain Finance Forum, have made extensive progress in this respect, promoting standardisation and awareness of the different techniques available, to foster adoption by all relevant market participants.

By extending throughout the supply chain and benefitting small and medium-sized enterprises (SMEs), for example, payables finance will play a role in reducing the much discussed ‘trade finance gap', which is currently estimated at US$1.5tr., according to figures from the Asian Development Bank.

Accounting treatment

The industry must also work to counter some of the threats to payables finance. Following the collapse of businesses such as British construction company Carillion in January 2018, for instance, the accounting treatment of payables finance has come under increased scrutiny. Partially through its ‘early payments facility', a form of payables finance, Carillion accumulated significant sums of debt off its balance sheet. From 2011 to 2016, Carillion's published net debt increased by only £11m, while its trade payables liabilities increased by almost £500m. The classification of Carillion's debt as trade payables rather than bank debt under the programme meant its financial troubles remained hidden until it was too late to act.

Such accounting practices are due to the industry using accounting standards that are adaptable to a multitude of different business models. This allows significant room for interpretation, making it uncertain how auditors would classify debt under a payables programme. While companies will typically prefer to see contracts classified as trade payables, the characteristics of some programmes could lead to them being reclassified as bank debt – with the associated balance-sheet and credit implications.

A negative spotlight has been shone on payables finance programmes, with reclassification coming from legitimate concern to avoid similar cases of misuse. To avoid any adverse impact on the provision of payables finance, while also ensuring any such programmes are stable from an accounting perspective, banks and corporates should work with auditors and regulators to structure programmes to minimise the perception and risks of debt-like features.

Stories such as that of Carillion should not act as a deterrent, however, but rather as a warning. Companies considering payables finance can reap many benefits, but they must implement their programmes in a responsible and appropriate manner.

Evolving technique

Challenges remain, and work is still needed to address issues such as SME onboarding and accounting standards. Yet payables finance remains a robust and highly useful technique for corporates seeking to strengthen and secure their trading relationships.

There is significant scope for the growth and expansion of payables finance to cover the whole supply chain, though all parties involved need to encourage awareness and education of the technique and its processes, and to ensure it is implemented in the correct way – benefitting both buyers and suppliers alike.