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Trade Finance has existed in one form or another for almost as long as trade in volume has existed – with forms of discounting being recorded as being in use in Mesopotamia (broadly aligning to modern day Iraq, Syria and Kuwait). Supply Chain Finance is a more modern form of financing which was first introduced into the marketplace in the 1980s, with the first use of the term being recorded in a 1982 interview in the Financial Times.

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What is Supply Chain Finance?

The terminology around Supply Chain Finance often varies, but at Crossflow we provide the expertise and infrastructure to deliver Seller-led Supply Chain Finance programmes. In practice this means that the finance is offered to the Seller of the goods once the invoice has been accepted and approved – creating an obligation to settle the invoice upon the Buyer who would typically be a large Corporate or Multi-National Company. The provider of finance (the Funder) receives an Assignment of the right to the payment from the Corporate for that invoice in return for a small discount which is agreed by the Seller. The Funder receives payment for the full value of the invoice from the Buyer on the date the invoice was originally due to be paid to the Seller. In short, the Funder offers to buy the right to the entire payment due to the Seller for a discount.

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Credit Risk

Whilst from a cash perspective the Funder is providing liquidity directly to the Seller, the payment obligation and hence credit risk, is against the Buyer. From a Funder perspective, Supply Chain Finance can provide an alternative mechanism to organically build up exposure to a credit.

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Benefits to Corporates and their Suppliers

Supply Chain Finance is attractive to Corporates primarily because it enables them to maintain their own working capital for longer periods without damaging their supply chain by withdrawing liquidity. Seller-led Supply Chain Finance programmes can often be represented on the balance sheet as Accounts Payable obligations (because the arrangement is cash neutral for the Buyer), as opposed to other forms of financing which may impact leverage ratios and incur financing costs for the Buyer.

Suppliers will often have access to a variety of ways to fund their business, but these may be less transparent or only available on punitive terms. It may also be the case that the Supplier is smaller or perceived to be a greater credit risk than the Buyer, and so a Supply Chain Finance programme enables a Supplier to access funding whilst benefiting from pricing closer to that which may be offered to a larger, better rated entity.

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Rate of Adoption

Supply Chain Finance programmes are operated on a bilateral basis which means that transparent data about the usage of these programmes is difficult to source in aggregate. However, since 2017 the UK Government has required the largest companies to report on their payment practices and performance. Companies are required to report semi-annually if they meet two or all the following thresholds:

  •  £36mm annual turnover
  •  £18mm balance sheet total
  •  250 employees

Based on this reporting, around 7% of these entities operate a Supply Chain Finance programme, demonstrating the scope for growth within the space.

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Key Programme Features for Funders

As a Funder with Crossflow you can tailor your exposure according to your own risk profile. We can tailor:

  • Name specific selection – Funders can choose which Corporates to take exposure to
  • Maximum exposure – set notional limits
  • Yield targets – set minimum and maximum pricing
  • Tenor – specify how long funds may be committed for on an individual Assignment
  • Currency – select which currencies to fund
  • Sector – choose not to fund Suppliers that may not be aligned with ESG mandates.

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