Supply Chain Finance - ACCA Paper

8/20/2019 Supply Chain Finance - ACCA Paper

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A study of the business case forsupply chain nance

ACCOUNTANTS FOR BUSINESS

A report produced for ACCA by the Aite Group.


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This report is aimed at CFOs andFDs considering the business casefor supply chain nance. Itprovides a checklist of costs, risksand complications to beconsidered, and a breakdown ofhow the benets from suchfacilities are distributed.

AUTHOR

Enrico CamerinelliSenior Analyst EMEA, Aite [email protected]

FOR MORE INFORMATION CONTACT

Emmanouil SchizasSenior Economic Analyst, [email protected]

© The Association of Chartered Certied Accountants,June 2014

About ACCAACCA (the Association of Chartered CertiedAccountants) is the global body for professionalaccountants. We aim to offer business-relevant, rst-choice qualications to people of application, ability andambition around the world who seek a rewarding careerin accountancy, nance and management.

Founded in 1904, ACCA has consistently held uniquecore values: opportunity, diversity, innovation, integrityand accountability. We believe that accountants bringvalue to economies in all stages of development. We aimto develop capacity in the profession and encourage theadoption of consistent global standards. Our values arealigned to the needs of employers in all sectors and weensure that, through our qualications, we prepareaccountants for business. We work to open up theprofession to people of all backgrounds and removearticial barriers to entry, ensuring that our qualicationsand their delivery meet the diverse needs of traineeprofessionals and their employers.

We support our 162,000 members and 428,000 studentsin 170 countries, helping them to develop successfulcareers in accounting and business, with the skills neededby employers. We work through a network of over 89ofces and centres and more than 8,500 ApprovedEmployers worldwide, who provide high standards ofemployee learning and development.

About Aite GroupAite Group is an independent research and advisory rmfocused on business, technology, and regulatory issuesand their impact on the nancial services industry. Withexpertise in banking, payments, securities andinvestments, and insurance, Aite Group’s analysts delivercomprehensive, actionable advice to key marketparticipants in nancial services. Headquartered inBoston with a presence in Chicago, New York, SanFrancisco, London, and Milan, Aite Group works with itsclients as a partner, adviser, and catalyst, challengingtheir basic assumptions and ensuring they remain at theforefront of industry trends.


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A STUDY OF THE BUSINESS CASE FOR SUPPLY CHAIN FINANCE 3

Glossary of terms 4

Foreword 5

1. Introduction 6

2. Methodology 7

3. A checklist for SCF 8

4. The market for reverse factoring in numbers 14

5. Impact points 16

Appendix 17

References 18

Contents


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AP : Accounts Payable AP is money owed by a business to its suppliers and shown on its balance sheet as a liability.

AR : Accounts Receivable AR is money owed by suppliers to a business and shown on its balance sheet as an asset.

COGS: Cost Of Goods Sold COGS represent the direct costs attributable to the production of the goods sold by acompany. This amount includes the cost of the materials used in creating the good along withthe direct labour costs used to produce the good. It excludes indirect expenses such asdistribution costs and sales force costs.

DPO : Days Payable Outstanding DPO= (Accounts payable/COGS) x 365

DSO : Days Sales Outstanding DPO= (Accounts Receivables/Net sales) x 365

Full-time equivalents The number of employees equivalent to one full-time employee. 1FTE = one employeeworking full time

KYC: Know Your Customer Refers to relevant information obtained from a bank’s clients for the purpose of doingbusiness with them. The objec tive of KYC guidelines is to prevent banks from being used,intentionally or unintentionally, by criminal elements for money laundering activities. Relatedprocedures also enable banks to know or understand their customers, and their nancialdealings better. This helps them to manage their risks prudently.

Receivable Finance Receivable Finance allows suppliers to nance their receivables relating to one or manybuyers and to receive early payment, usually at a discount on the value.

Recourse (with/without) ‘With recourse’ is a legal agreement that provides protection to lenders, as they are assuredof having some sort of repayment – either cash or liquid assets – in the event that theborrower is unable to satisfy the debt obligation.

In a ‘Without recourse’ agreement, If the borrower defaults, the issuer can seize the collateral(usually property), but cannot seek out the borrower for any fur ther compensation, even if thecollateral does not cover the full value of the defaulted amount.

SCF: Supply Chain Finance The use of nancial instruments, practices and technologies to optimise the management ofthe working capital and liquidity tied up in supply chain processes for collaborating businesspartners. SCF is largely ‘event-driven’. Each intervention (nance, risk mitigation or payment)in the nancial supply chain is driven by an event in the physical supply chain. Thedevelopment of advanced technologies to track and control events in the physical supplychain creates opportunities to automate the initiation of SCF interventions.

Spread An amount that each bank decides to add to the base rate as its revenue. The bank buys themoney at a price (exchange interbank rate) and resells it to it s customers recharged with aprot margin (spread).

WACC: Weighted Average Cost of Capital As a company’s assets are nanced by either debt or equity, WACC is the average of thecosts of these sources of nancing, each of which is weighted by its respective use in thegiven situation. By taking a weighted average, we can see how much interest the companyhas to pay for every dollar it nances.

Working Capital The amount of day-by-day operating liquidity available to a business. In mathematical terms,working capital is calculated as WC=(AR)+(Inventory) – (AP) + (Cash)

Glossary of terms


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I come from a background in small business and understand how important good

cash ow is to allowing businesses to thrive. Constraints on cash ow can limitinvestment and growth and in the worse cases result in insolvency.

A strong cash ow is also essential for enabling UK businesses to continue to raisenance, with 48% of declined nance applications over £25,000 in 2012/13 beingrejected on ‘affordability’ grounds.

Supply chain nance offers a solution to this problem. Around 80% of business tobusiness transactions are undertaken on credit terms of some form, and tradecredit constitutes about 37% of total business assets. Although, as this reportstates, supply chain nance only represents 4% of the total global receivablesnancing market, increasing use of receivables as assets to secure nance presentsa strong alternative to more traditional forms of nance.

I therefore welcome this publication by the Aite Group and ACCA, on a subject thatrequires greater attention and debate. There is a vibrant and innovative alternativenance market being created and we need to ensure that businesses are aware ofall options when applying for nance.

The UK Government has taken a number of signicant steps to increase the supplyof capital through non-bank lending channels and, in the longer term, to help todiversify the sources of nance available to businesses, including:

• investing through British Business Bank programmes in non-traditional lendingchannels that lend directly to small businesses, including mezzanine nancefunds, supply chain nance schemes and peer-to-peer lenders;

•

increasing funding for a range of British Business Bank venture capitalprogramme, including the Business Angel CoFund, which co-invests alongsidebusiness angel groups in high growth potential early stage SMEs; and

• committing to the future of the Seed Enterprise Investment Scheme andEnterprise Investment Scheme to increase investment in new and growingbusinesses.

While there will likely be great debate on the content of this report and the placefor Supply Chain Finance, I welcome any efforts to make businesses more aware oftheir nance options and to make the UK the best place in Europe to start, nanceand grow a business.

Foreword

Matthew Hancock MP,Minister of State for Skills andEnterprise


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In November 2011, the UK government

announced the creation of an industrytaskforce to examine the potential forcreating better access to alternativecredit channels for SMEs and mid-market companies. The taskforce,chaired by Tim Breedon, published itsreport (Independent Taskforce onNon-Bank Lending 2012) the followingMarch, naming the UK professionalaccountancy bodies, including ACCA,as the British government’s naturalpartners in accelerating the adoption ofsupply chain nance.

In February 2014, ACCA’s Global Forumfor SMEs cited supply chain nance asone of the most promising tools fornancing small businesses around theworld, and noted the potential forfurther innovation in the sector, whichcurrently makes up only 4% of theglobal receivables nancing market(ACCA 2014).

This report, prepared by Aite Group,was commissioned as part of ACCA’scommitment to the promotion of supply

chain nance at the global level. It isaimed primarily at senior nanceprofessionals and is meant to functionas a learning resource and a referencetext.

A BRIEF INTRODUCTION TO SUPPLY

CHAIN FINANCE

Globalisation has created internationallydispersed supply chains as productionhas been relocated to emergingmarkets, logistics have become morecost effective and globalcommunications easier and pervasive.Large buying organisations are muchmore sensitive to the inherent riskswithin, and the resilience of, their supplychains, as critical product componentsare frequently dependent on third-party suppliers. For chief executiveofcers focusing on protable growth,working capital control has become akey metric. Working capital representsthe amount of day-by-day operatingliquidity available to a business.

Supply chain nance can be dened(EBA 2013) as the use of nancialinstruments, practices and technologiesfor optimising the management of theworking capital and liquidity tied up insupply chain processes for collaboratingbusiness partners. The development of

advanced technologies to track andcontrol events in the physical supplychain creates opportunities to automatethe initiation of SCF interventions.

This report addresses the following

research questions.• How can the costs and benets from

supply chain nance best bequantied for buyers and suppliers?

• What is the total ‘pot’ of value to bedivided between these threegroups?

• How are the nancial gains fromsupply chain nance typically splitbetween buyer, suppliers, nancialinstitutions and service providers?

The ndings of the research projectprovide:

• a simple conceptual framework anda checklist for chief nancial ofcers(CFOs) or nance directors (FDs)trying to make or assess thebusiness case for supply chainnance

• two alternative estimates of thebusiness potential of SCF,

extrapolated from the availableempirical data

• a reasonable, ‘broad-stroke’estimate of the benets sharedamong SCF partners, the typicalshares of benets accruing to eachparty, and a probable range ofvariation.

1. Introduction


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To conduct this project, Aite Group

leveraged its extensive knowledgebase, existing publications (EBA 2013;Aite Group 2010a, 2013), a proprietarycontact database, and publicly availableinformation. Aite Group analystssourced primary information fromselected senior employees in banksproviding SCF services, senioremployees at SCF software vendors,and corporate treasurers withexperience of SCF (See Appendix).Feedback was collected using aquestionnaire attached to anintroductory email.

Given the variety of nancialinstruments that fall under the term SCF(see Figure 2.1: Varieties of SCF ), theresearch focused on the most popularand most widely used: reversefactoring.

Reverse factoring (also called approved

payables nance) allows a supplier toreceive a discounted payment of aninvoice due to be paid by a buyer (ie anaccount payable). The buyer approvesthe invoice for payment and nance israised separately against the payable bythe supplier from a bank or othernance provider, who relies on thecreditworthiness of the buyer. Thebuyer pays at the normal (or another,mutually agreed) invoice due date,whereas the supplier receives adiscounted payment through thenancing facility. The funding providerrelies on the creditworthiness of thebuyer and the attraction to the supplieris based on an ‘arbitrage’ between thehigher credit rating of the buyer and thetypically higher cost of nancing for thesupplier, as well as the attraction of theavailability of the nance. Because it isthe ordering party – usually a large

company with a high-quality credit

rating – that starts the process, it is thatparty’s liability that is engaged andtherefore the interest applied for thededuction is less than the one thesupplier would have obtained on itsown account. Figure A1 in the Appendixprovides a more detailedrepresentation of the process ows ofthis SCF instrument.

Owing to the nature of SCF and thenancial institutions involved in suchservices, the study had a globalperspective. Nonetheless, the studyfocused on the European market bydefault when specic ndings wereimpossible to obtain without ageographic specication. To encourageparticipation, prospective participantswere given an overview of ACCA’sidentity and background as well asACCA’s interest in the subject matter.

2. Methodology

Figure 2.1: Varieties of SCF

Source: EBA (2013)


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3.1 FEE STRUCTURE

The structure of a funding fee istypically composed of two elements:• interest rate• spread (see Glossary).

The interest rate usually depends onthe country where the SCF arrangementis structured and can be either:• Libor• Euribor• Federal Discount Rate• Other country-specic rate.

For reverse factoring (ie SCF)programmes, the discount is usually at30 or 60 days. The value of the spread isthe main point of negotiation on whichnance providers compete anddepends on commercial decisions,customer relationship strategies, andopportunities for cross-selling. AiteGroup’s research has identied someaverage values, depending on whetherfunds are sourced directly from a bankor through a service provider 1 of theSCF electronic platform, and the region

where the SCF programme is arrangedTable 3.1 1).

1. An electronic invoicing service provider (orthird-party business-to-business (B2B) platform)provides services to the buyer and suppliers using

an electronic platform (ie a portal). Approvedinvoices are displayed in the e-invoicing portal andappropriate messages are generated between theparties involved. The portal presents anaggregated demand for nancing to potentialfunding providers.

When a company that has entered an

SCF agreement later experiences poorresults it is very likely that the mainreasons for failure are a lack of properplanning and the limited visibility of allthe elements necessary to build aconceptual framework for assessing thecase (Aite 2010b). Below are shown theelements of a ‘total cost of ownership’checklist for planning a successfulbusiness case for SCF. For each, moredetailed information is provided in thenext chapters.

Fee structure: access to nancecomes with a service cost. It isimportant to understand itscomponents.

Transfer of title: funds are disbursedagainst a title that ensures that fundswill be repaid. It is advisable to knowthe legal aspects tied to this transferbefore entering any SCF agreement.

Limits and thresholds: not alltransactions can be nanced. Banksimpose limits and constraints that

must be known to plan any SCFprogramme properly.

Payments: while the transfers of SCFfunds follow normal paymentchannels, there may be somelimitations on the currenciesavailable, electronic systems to use,and the need to open dedicatedbank accounts.

Dates: the time-based nature of SCFschemes allows suppliers to be paidin advance while buyers extend theirpayables for working capitaloptimisation. Any SCF arrangementstarts with an approved invoice andthe ow of correlated actions mustbe properly scheduled.

Risk: SCF schemes are all based ontransferring risk from one party – thesupplier – to another – the buyer,who is expected to be presumably‘safer’ for the party supplying theintermediate nance. Before signingany SCF contract, therefore, players

must know their liabilities.

‘The average gure of applied spreadto the Reverse Factoring schemes wesee is around 65 bps’.EXPERT INTERVIEWEE, PREMIUMTECHNOLOGY

‘The platform software licence feesare generally embedded in a bank’srisk margin’.EXPERT INTERVIEWEE, BARCLAYS

‘We see average bps gure ofapplied spread to Reverse Factoringschemes up to 200’.EXPERT INTERVIEWEE, GTNEXUS

3. A checklist for SCF

Table 3.1: Spread values for funding fees

Source offunds

Spread Value Notes

Bank directlythrough itsown platform

Minimum of 20bps; average100–200 bps

Peaks of 500bps in Africa

Bank throughserviceprovider

Average 40–70bps

Peaks of 250up to 450(Asia)

Source: author’s calculations based on expertinterviews

The chapters that follow provide furtherdetails of the elements of the SCF‘checklist’.

‘Success of global SCF rolloutsrequires standardised businessprocesses and technologies amongcompany subsidiaries as well as withbanking partners’.EXPERT INTERVIEWEE, HEINEKEN

Benets: all parties in an SCF

programme have the objective ofobtaining positive returns. To setproper expectations it is important toconsider tangible benets (iequantiable in monetary terms) fromintangible ones (ie hard to quantify),and to identify the beneciaries.

Costs: too often academic papersand industry journals dedicateattention to the (undoubted) benetsof SCF, while the correspondingcosts are seldom discussed, let alonequantied. One of the mostsignicant contributions of thisresearch report is that it presents alist of one-off and recurring costelements that can justly constitute a‘Total Cost of Ownership’ model forSCF.

Legal assistance: elements related totaxes and jurisdictions must beincluded to complete the frameworkfor SCF business case.


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3.2. TRANSFER OF TITLE

There are various aspects to considerwhen signing an SCF scheme contract(Tables 3.2 and 3.3)

Once the supplier has selected theinvoices to be discounted, it isadvisable for both buyer and supplier toverify whether the bank/fund provider isobliged to purchase (ie nance) allpayables, or whether the collection ofpayables is still the supplier’s ownresponsibility.

The bank/nance provider needs to benotied whether the payables it isrequired to nance represent the netvalue of the invoice after any discounts,rebates, offset or adjustments.

The bank/nance provider alsonominates the party who noties itabout that information, and this partycan be:

• the buyer

•

the supplier, or• both

It is usual practice that the bank/fundprovider will also establish how thatinformation is notied (eg via formalletter or email).

Table 3.2: Various legal aspects to consider in an SCF contract…

Legal Item Options

Type of legal instrument forcollateral

Purchase of receivables: the nance provider legally owns thereceivables and collects directly the payments due to theborrower.

Assignment of receivables: the borrower retains ownership of theaccounts, continues to collect the accounts receivable, and passesthe payments on to the nance provider. Since the borrowerretains ownership, it also retains the risk that some accountsreceivable will not be repaid.

Pledge of receivables: the borrowing company completes aborrowing base certicate following the completion of eachreporting period, and forwards the signed certicate to thenance provider. The borrowing base certicate itemises theamount of accounts receivable outstanding at the end of thereporting period into the age brackets specied by the nanceprovider, calculates the maximum amount of borrowing allowableon the basis of the amount of accounts receivable, and states theamount actually borrowed. The nance provider uses thiscerticate to monitor the amount of collateral available, andwhether it needs to adjust the amount of debt available to thecompany. Under a pledging agreement, the borrowing companyretains title to and is responsible for collecting accountsreceivable.

Other type of security interestUnderlying instrument used for thenancing

Open account receivable

Bill of exchange

Promissory note

Table 3.3: ...and aspects that go beyond legal considerations

Item Options

Supplier has to sign a notication of assignment of receivables tothe bank/fund provider?

Yes/ No

Supplier has to provide bank/fund provider with any datapertaining to the buyer’s payment track record?

Yes/ No

Payables must be transferred to the bank/fund providerindividually or by batch?

Individually/ By batch

In case of batch transfer, how is the discount rate calculated? To be determined


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3.5 DATES

The process ows illustrated in FigureA1 in the Appendix are sequential andthe completion of each one triggers thenext, determining the overall time ittakes for suppliers to access nance.Parties involved in the SCF schememust be well aware of the followingmilestones:

• date of original invoice due (iematurity date), including:

– any grace period conceded bythe supplier

– whether a consolidated maturitydate (eg Friday of the week forall payables that fall within thatweek) is conceded by thesupplier

• date of invoice approval by buyer

• date of request for discount bysupplier

•

date of decision to approve/refusediscount by bank/nance provider

• date of response to supplierregarding approved/refuseddiscount by bank/nance provider

• date of payment (of discountedamount payable) to supplier bybank/nance provider

• date of payment of fees by supplierto bank/ nance provider

• date of refunding by buyer to bank/nance provider; at this time it isadvisable also to verify whetherthere is a limit of days from thisrefunding date after which the buyerbecomes delinquent.

3.4 PAYMENTS

A number of conditions must be veriedto ensure swift payment of the facilities.

The bank/fund provider must conrmwhether the facility it provides iscommitted (ie clearly dened terms andconditions are set forth by the nanceprovider and imposed upon theborrower) or uncommitted (ie the lenderagrees to make funding available to theborrower, but is under no obligation toprovide a specic amount of money).

The supplier must verify whether thetransaction must be notied to the buyer.

The supplier must verify whether theSCF scheme allows the nance providerto change:

• the supplier discount limit and/or

• the payment date of the discountedpayable

Buyer and supplier must verify whether

there is a web-based tool that theymust use to load the invoices fordiscounting.

Buyer and supplier must verify how manycurrencies are available for funding.

Depending on the chosen legalinstrument for collateral (see Table 4.1:

Various legal aspects to consider in anSCF contract… Table 4.1) the suppliermay have to act as collection agent forthe bank/nance provider.

If so, is there an allowance to thesupplier for such a service?

Is any such eventual allowance part ofthe discount rate applied by the bank oraccounted separately?

Does the collection agent have to opena separate bank account?

With what frequency does thecollection agent transfer receipts to thebank/fund provider?

The supplier must verify whether it has toopen a special bank account to receivenancing by the bank/fund provider.

3.3 LIMITS AND THRESHOLDS

Only eligible payables can be nanced.The following is a series of decisionconstraints – in order of use frequency– normally adopted by the bank/fundprovider.

• Payables must be free from any liensor security interests, and must nothave been previously pledged, sold,assigned or transferred, and mustbe readily available to be assigned.

• There must be no commercialdispute between buyer and supplierrelated to that payable.

• The minimal value of the amountpayable that is to be nanced for theentire SCF contract must beestablished between parties

• The minimum period that mustelapse before the amount payable isnanced must be agreed (eg‘payable not sooner than ‘n’ daysfrom date of issue’).

• A facility limit may be imposed bythe bank/fund provider.

• There may be a maximum numberof payables that can be submitted inone month.

• There may be a minimum/maximumallowed discount to the supplier.

• There may be a minimum discountperiod (eg shall not be less than ‘n’calendar days).


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3.6 RISKS

The interest rate applied by the nanceprovider to the borrower takes intoaccount not just the time value ofmoney, but also the risk or uncertaintyof future cash ows; the greater theuncertainty of future cash ows, thehigher the discount rate. The bankneeds to minimise its exposure to riskand there are various options possible:

• risk is wholly on the supplier with norecourse (see denition in Glossary)

•

risk is wholly on the supplier withpossible form of recourse• risk is wholly on the buyer without

recourse to the supplier• risk is shared in some agreed

proportion between the parties.

While in the reverse factoring SCFscheme the general rule is that thefunding provider relies on thecreditworthiness (ie risk) of the buyer,suppliers must be aware that there arenonetheless some conditions that allowthe bank recourse to the supplier:

• existence of fraud in relation to apayable or a commercial disputebetween the supplier and the buyer

• payables that are not eligible• supplier omits to pay any duties or

taxes due• supplier breaches any of its

obligations as collection agent• loss in the purchased payables as a

result of the application of creditnotes or marketing rebates.

Although this is not frequent, somereverse factoring contracts stipulatethat, in case of recourse to the supplier,the supplier may have to repurchasesuch receivables immediately.

3.7 BENEFITS

The reverse factoring SCF scheme ispromoted as a ‘win-win’ for both buyersand suppliers. Benets are grouped intwo categories:

• tangible benets (Table 3.4), and

• intangible benets (Table 3.5).

‘A buyer usually subscribes to SupplyChain Finance as an extension of theProcure-to-Pay solution’.EXPERT INTERVIEWEE, GTNEXUS

Table 3.4: Each party enjoys tangible benets with reverse factoring

Party Tangible benets Comments

Supplier Reduced days sales outstanding (DSO)1Reduce commitment feesReduced cost of equivalent nancing lineReduced probability-weighted average marginalcost of arranging emergency liquidity

An average of 20 bps is likely.

Buyer Extended days payable outstanding (DPO)2Rebates (i.e., kickbacks) from fund provider.

Table 3.5: Each party enjoys intangible benets with reverse factoring

Party Intangible benets CommentsSupplier Standardised payment terms

Improved cash forecasting Reduced cycle time todevelop a short-term cashow forecast: between 1 and4 FTEs.3

Between 1 and 2% inovernight FX or spotborrowing savings on totalannual spend but virtue ofbetter cash ow forecast.

Reduced AR4 carrying costs (eg reduce disputes forpayments not in time), improved reconciliation processes

Reduced cycle time from thetime a discrepancy isdiscovered until thediscrepancy is resolved:

between 0.5 and 1 FTEs.Cash ow predictability and certainty Reduced marginal cost of

arranging a larger facility thanotherwise needed: between50 and 500 bps.

Reduced currency risk (ie less hedging required)Buyer Reduced AP10 carrying costs (eg disputes), improved

reconciliation processes (ie FTE reduction % of APdepartment)Freed up credit linesAvoid the opportunity cost of forgone investment 5bps on average.Managing electronic invoices (ie % reduced staff hoursfor manual handling)Reduced risk of non supply (ie reduced safety stocks;reduced lot order size of supplies)

Reduced risk of non-innovation by supplier (ie reducedtime-to-market responsiveness)Reduced Currency risk (i.e., less hedging required)


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Table 3.6: Reverse factoring cost elements

Cost element One-off /recurring

Partyaccountable*

Comments

Monetised: software toaccess and integrate theSCF platform to theparty’s back ofce

One- of f Buyer If the SCF plat form is bank- propriet ar y the banktends not to charge the cost.

If the SCF platform is provided by a serviceprovider the cost is often embedded in thetotal cost of implementing the SCF programme(approx. US$2,500 one-time cost).

Supplier Banks tend not to charge the cost.

Platform providers charge approx. US$200.Monetised: hardware andequipment needed touse SSL (Secure SocketLayer) technology orequivalent for secureaccess to the SCFplatform

One-off Buyer/Supplier

A bank could require such a facility dependingon its access system and on the bank’s securitypolicy.

For a platform provider this cost is part ofimplementation cost and embedded in thecost for the portal solution.

Monetised: SCF platform(ie, portal) softwarelicence fee

One-of f Buyer The buyer can purchase the sof tware directlyfrom a SCF platform vendor, or decide to usethe bank’s, or, nally, to pay a pay-per-uselicence to a SCF portal service provider.

If the buyer decides to purchase the software,the cost may be around US$600,000.

If the SCF platform belongs to the bank, the feeis normally embedded in the risk margin.

If the SCF portal is operated through a ser viceprovider, the pay-per-use fee is normally tiered:the annual order spend is multiplied by

transaction fees, and paid as an annualsubscription. The fee can be as low as US$2,000for an annual spend of US$1,000,000, up toUS$600,000 for US$10,000,000 of annual spend.

Monetised: Platformsoftware Implementationand integration fee

One-off Buyer Banks tend not to charge this cost.

Portal service providers charge this as aprofessional service fee. It is a one-off cost andusually ranges from US$300,000 up to US$1million.

Monetised: ITmaintenance costs

Recurring Buyer Banks do not charge this cost.

Portal service providers charge this cost. It is afraction (usually 18–20%) of the initial licencefee, and is based on volumes transacted.

If the software is in pay-per-use mode, the cost

is embedded in the subscription fee.Monetised: Duediligence costs

One-of f Buyer Costs to bank for assessing buyer’s creditworthiness.

Between US$300 and US$400 in Europe

Whether or not to charge the buyer is thebank’s commercial decision

Supplier Bank K YC 6 as ses sment.

3.8 COSTS

Cost factors are necessary for buildinga reliable business case for SCF. Thecost elements for reverse factoringprogrammes (Table 3.6) can becategorised as follows:

• monetised costs: these are normallyembedded in the fee structure

• employee time (ie FTEs): employeetime spent in activities dedicated tothe SCF programme

• one-off costs: single costs typicallycharged during the start-up of theSCF programme

• recurring costs: costs that repeat,normally annually.

‘IT maintenance costs from an SCF

software provider are roughly around20% of the license fee’.EXPERT INTERVIEWEE, PREMIUMTECHNOLOGY

‘Some of the costs associated withthe implementation andmanagement of an SCF programmeare not always easy to quantify in alarge organisation’.EXPERT INTERVIEW, VOLVO

‘If corporate IT is not involved in theearlier stages of an SCF project andbefore contract signature, theimplementation costs can besignicantly higher, in dollar terms,but also in regards to time’.EXPERT INTERVIEWEE, PA CONSULTING


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Cost element One-off /recurring

Partyaccountable*

Comments

Monetised: Training andEducation costs

Recurring Buyer Banks do not charge this cost.

For SCF portal service providers it is normallyembedded with the licence fee.

It is very important to educate the internal staff(eg procurement, accounts payables) on thechanges to the supplier relationshipprocedures.

The amount of the cost depends on thenumber of subsidiaries to train. The averagetraining time is ve days/year.

In some cases these costs are quoted as part of

a professional services fee.Monetised: Legal cost s One- of f Buyer Cost s for formalising the SCF agreement. On

average US$15,000FTEs: IT staff for startup One-off Buyer Between 1 and 2

Suppl ie r Not very signicant. Less than 1FTEs: On-boarding Recurring Bank/ Buyer Between 1 and 2

A rough gure is 1 FTE for every 100–150suppliers to on-board

FTEs: Internal operations Recurring Bank Between 0.5 and 2

On average 20% of on-boarded suppliers tendnot to use the platform for nancing, so there isthe need to keep a constant eye on them andfollow up

FTEs: Assistance to

buyer/supplier/bank/fund provider

Recurring SCF platform

provider

0.5 on average

FTEs: Staff ofprocurement departmentto discuss contractualdetails as part of supplierrelationship management

Rec ur ring Buyer Bet ween 1 and 2 for inter nal coordination

FTEs: Staff of Legaldepartment.

Rec ur ring Buyer 0.5 F TEs on average to work with bank andsuppliers to ensure proper on-boardingprocedures.

Large corporations have their own contractready to hand over to banks and this reducesthe FTE time.

FTEs: Staff of Legaldepartment

One-of f Supplier On average 0.1, to max 1 FTE.

This cost often represents a potential barrier toenter SCF programs for small companies.

FTEs: SCF Programleader

Recurring Buyer Between 0.5 and 3 FTEs.

The number depends very much on the size ofthe company.

* Same pair of trade relationship buyers/suppliers as discussed so far, and not buyers/suppliers of software.

3.9 LEGAL ASSISTANCE

There are various additional costelements that must be included toprepare a complete view of the SCFbusiness case:

• auditors’ fees for accountingtreatments

• advisory services to verify theapplicable country laws in case ofmulti-country SCF programmes

• advisory and legal assistance toestablish contractually who pays fortax withholdings, VAT, deductions,charges, translations of documents,fees.

Advisory and legal assistance todetermine and agree contractually onwho will pay, where the bank/fundprovider needs more informationbefore executing the nancing (eg auditof supplier’s credit control andcollection procedures – in case supplieris a collection agent).

‘Some costs vary with the scope ofthe SCF programme: for instance thenumber of buying legal entitiesactivated from the start and thenumber of invoicing currencieseligible’.EXPERT INTERVIEWEE, VOLVO

‘Education of internal staff (eg,procurement, AP) must be factored

in, especially regarding training onchanges brought by SCF schemes tointernal procedures and how currentand new suppliers are on-boarded’.EXPERT INTERVIEWEE, PA CONSULTING


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4.1 MARKET SIZE

Literature abounds (eg ING EconomicsDepartment 2012; Demica 2012) withattempts to quantify how much can benanced through reverse factoringprogrammes. There is, however, poorinformation as to how the numbers arecalculated. This section suggests amethodology for collecting andanalysing data, and proposes a way ofquantifying the potential size of thereverse factoring nanceable market.

To ensure the utmost impartial andobjective results, Aite Group followedtwo separate calculation methods. Bothapproaches provided very similarresults, which further supports theoutcome.

The estimated market size for reversefactoring ranges between US$255billion and US$280 billion.

Method 1

Estimates were extrapolated frommarket statistics and from the results ofinterviews with SCF industry experts.

Aite Group selected the industrysectors most active with SCFprogrammes (Figure 4.1):

• aerospace

• automotive

• chemicals

• consumer packaged goods

• pharmaceuticals

• retail

• telecommunications.

Table 4.1: Reverse factoring market size. First estimation method

(values in US$bn)

Top’ sectorAP

Sectoroutstanding

Conversionfactor

Total sectorAP

Total sectorAP ‘tail’

Outs%_Sec_Tail

Tailoutstanding

Total sector APoutstanding

Aerospace 157.3 18.5 12% 224.7 67.4 2% 1.59 20.1Automotive 356.4 7.4 2% 594.0 237.6 0% 0.99 8.4Chemicals 129.8 25.9 20% 173.1 43.3 4% 1.73 27.7CPG 168.3 37.0 22% 210.4 42.1 4% 1.85 38.9Pharma 71.4 3.7 5% 142.7 71.4 1% 0.74 4.4Retail 173.4 22.2 13% 231.1 57.8 3% 1.48 23.7Telco 131.9 37.0 28% 164.9 33.0 6% 1.85 38.9

162.1Additional value to account for remaining indust ry sec tors 91.8

Total Reverse Factoring market size ($US B) 253.8

A number of top rms were identied

for each industry sector, and each one’saccounts payables (AP) value extractedfrom its annual nancial lings. Theinterviews with expert panellistsallowed Aite Group to assess theestimated total outstanding payables(ie value of AP currently nanced viareverse factoring) per sector. This valuewas the basis for building a ‘conversionfactor’ for turning the value of AP intonanceable payables (ie ‘outstanding’payables). This factor was then appliedto the AP values of the ‘tail’ (ie companiesother than the ‘top’) rms in the sector,in order to derive the ‘tail outstanding’gure. The total AP outstanding valuewas then estimated for each sector.

Finally, by adding up the total outstandingvalues of all sectors, plus an additionalvalue to account for remaining industrysectors, the estimated actual marketsize of reverse factoring produced theresult demonstrated in Table 4.1rounded to US$255 billion.

Table 4.2: Reverse factoring market size. Second estimation method

Top’ sector DPO(average days)

Exceeded threshold(avg. days)

Values exceeding threshold(US$ bn)

Aerospace 73.1 35.0 15.1Automotive 92.3 56.3 30.8Chemicals 72.9 39.4 16.1CPG 107.8 74.3 44.5Pharma 219.0 185.6 20.8Retail 65.1 31.6 22.0Telco 208.8 175.3 55.4

204.7Additional value to account for remaining industry sectors 77.3

Total Reverse Factoring market size ($US B) 282.0

Source: Author’s calculations

4. The market for reverse factoring in numbers


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Method 2

Here Aite Group adopted a moreanalytical approach. As with theprevious method, this calculationstarted with the same ‘top’ companiesof selected industry sectors. Theassumption behind this calculation isthat reverse factoring helps companiesextend longer payment terms (ie DPO)while allowing their suppliers to benetfrom receiving on-time payments oftheir receivables from nance providers(eg banks). The foundation of theestimate was to quantify the value ofthe current delays of payments beyondcontractually agreed terms, as this isthe value that reverse factoring canaddress and resolve.

Each rm’s DPO was calculated (Table4.2: Reverse factoring market size.Second estimation method) from itsnancial statements. A calculation wasthen performed to estimate how muchthe rm’s DPO exceeded the thresholdlimit accepted by suppliers before thedelayed payment becomes a concern. 2 The values of payments exceeding such

accepted limits represent theopportunity to use reverse factoring tosupport nancially distressed suppliers.

As in the previous method, anadditional value to account for theremaining industry sectors was includedto produce the estimate for the size ofthe reverse factoring market size,rounded to US$280 billion.

Based on the two alternative calculationmethods, the business potential ofreverse factoring is best estimated asbetween 20% and 25% of an industry’saccounts payable.

2. These threshold statistics are available from the‘Atradius Payment Practices Barometer’,September 2013 < http://www.atradius.co.uk >,accessed 12 May 2014.

‘There are at least 1,500–2,000companies globally utilizing SCF’.EXPERT INTERVIEWEE, GREENSILLCAPITAL

4.2 SHARE OF BENEFITS

If reverse factoring reduces costs acrossthe supply chain by letting suppliers‘borrow’ against their customers’creditworthiness instead of their own,then some of the resulting value mustbe captured by the suppliers, some bythe buyer and some by the nancialintermediary and other serviceproviders.

The ndings from interviews with panelexperts and subsequent vericationwith market data has produced theresults illustrated in Figure 13.1: Share ofbenets and typical benets amongreverse factoring players. Consensusgures were derived through interviewswith market players and averagingoverall data provided independently– and anonymously – by respondents.

‘The benet to the bank is earningthe commensurate return on riskweighted assets, between 30–50%’.EXPERT INTERVIEWEE, GREENSILLCAPITAL

‘The bank/nance provider onaverage gets a share of benetsbetween 20 and 100 bps, while theplatform provider enjoys a rangebetween 10 and 25 bps’.EXPERT INTERVIEWEE, BARCLAYS

‘Typically when buyers launch SCF

schemes with a view to extendingtheir payment terms they do notexpect to receive a share of thediscounting fee’.EXPERT INTERVIEWEE, CITI

Table 4.3: Allocation of benets among reverse factoring players

Share of SCF savings captured Typical benets expressed as spread

Min Max Min Max

Buyer 35% 50% 50 150Platform provider 2% 5% NA NASuppliers 25% 45% 50 150Bank/fund provider 15% 18% 20 100

Source: Author’s calculations based on expert interviews

http://www.atradius.co.uk/http://www.atradius.co.uk/


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Of the numerous varieties of nancial

instruments that fall under the supplychain nance (SCF) ‘umbrella’ themost popular and most widely usedis reverse factoring.

When approaching a reversefactoring programme, the importantelements of a company’s checklist forplanning a successful business caseare:

– fee structure – transfer of title – limits and thresholds – payments – dates

– risk – benets – costs.

The estimated global market size for

reverse factoring ranges betweenUS$255 billion and US$280 billion, ofwhich about one-third can beattributed to Europe. Anextrapolation for estimating thebusiness potential of reversefactoring is to apply a 20–25%‘conversion factor’ to the value ofaccounts payables.

Reverse factoring reduces costsacross the supply chain by lettingsuppliers ‘borrow’ against theircustomers’ creditworthiness insteadof their own. On average, 80% of theresulting value is shared between thesuppliers and the buyer, with varyingdegrees of allocation depending onwhether the buyer wants to facilitateits key suppliers’ nancials (ie thelargest share goes to supplier)or,instead, take all the benets byextending payment terms. Typically,the buyer will capture 35% to 50% ofall savings, while suppliers will get25% to 45%. Another 15% goes tothe nancial intermediary while the

remaining 5% is for the serviceprovider.

5. Impact points


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Appendix

PANEL OF INDUSTRY EXPERTS

Banks – Global US Bank – Barclays – Citi – Global European Bank

Financial Services Operators(non-banks) – Greensill Capital

Solution providers – Misys – Premium Technology – GTNexus – Primerevenue – Consulting – PA Consulting

Corporations – Heineken – Volvo

Due to the commercially sensitivenature of their insights, some expertshave chosen to remain anonymous.

OPERATIONAL PROCESSES OF

REVERSE FACTORING

Reverse factoring is also known as‘approved payables nance’. The basisfor the approved payables nance is theunderlying transaction between thebuyer and the supplier (step 1 in FigureA1). The invoice for the transaction issubmitted to the buyer by the supplier(2), enabling the buying party to receiveit into its enterprise resource planning(ERP) system (3). Electroniccommunication between the supplierand buyer is supported by the platform.

Figure A1: Process ows of reverse factoring

As soon as the buyer has approved the

invoice/account payable, the approval iscommunicated via the SCF platform (4),allowing the supplier to see it. It is theup to the supplier either to wait untilthe payment term expires and the buyerpays the invoice, or to request nancefrom the bank (5). The bank receives thisrequest via the SCF platform (6) andpays the supplier for the invoices,withholding the agreed discount (7).When the agreed payment termexpires, the buyer makes a payment tothe bank, after which all obligationshave been met.


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ACCA (2014),Innovations in Access to Finance for SMEs

, accessed 12May 2014.

Aite Group (2010a), ‘Supply Chain Finance: A Taxonomy’, accessed 12 May 2014.

Aite Group (2010b), ‘ Supply Chain Finance Programs:Implementation Guidelines ’ , accessed 12 May 2014.

Aite Group (2013), ‘Supply Chain Finance in Europe’ < http://www.aitegroup.com/report/supply-chain-nance-europe >,accessed 12 May 2014.

Demica (2012), ‘The Hidden Player’ , accessed12 May 2014.

EBA (Euro Banking Association) (2013), ‘Market Guide OnSupply Chain Finance’ < https://www.abe-eba.eu/N=EBA-Market-Guide-on-SCF.aspx >, accessed 12 May 2014.

Independent Taskforce on Non-Bank Lending (2012),Boosting Finance Options for Business ,accessed 12 May 2014.

ING Economics Department (2012), Supply Chain Finance , accessed 12May 2014.

References

http://www.aitegroup.com/report/supply-chain-finance-taxonomyhttp://www.aitegroup.com/report/supply-chain-finance-taxonomyhttp://www.aitegroup.com/report/supply-chain-finance-programs-implementation-guidelineshttp://www.aitegroup.com/report/supply-chain-finance-programs-implementation-guidelineshttp://www.aitegroup.com/report/supply-chain-finance-europehttp://www.aitegroup.com/report/supply-chain-finance-europehttps://www.abe-eba.eu/N=EBA-Market-Guide-on-SCF.aspxhttps://www.abe-eba.eu/N=EBA-Market-Guide-on-SCF.aspxhttp://www.bis.gov.uk/assets/biscore/enterprise/docs/b/12-668-boosting-finance-options-for-business.pdfhttp://www.bis.gov.uk/assets/biscore/enterprise/docs/b/12-668-boosting-finance-options-for-business.pdfhttp://www.bis.gov.uk/assets/biscore/enterprise/docs/b/12-668-boosting-finance-options-for-business.pdfhttp://www.nvg.nl/downloads/cms//ING%20Supply%20Chain%20Finance%20-%20June%202012.pdfhttp://www.nvg.nl/downloads/cms//ING%20Supply%20Chain%20Finance%20-%20June%202012.pdfhttp://www.nvg.nl/downloads/cms//ING%20Supply%20Chain%20Finance%20-%20June%202012.pdfhttp://www.nvg.nl/downloads/cms//ING%20Supply%20Chain%20Finance%20-%20June%202012.pdfhttp://www.bis.gov.uk/assets/biscore/enterprise/docs/b/12-668-boosting-finance-options-for-business.pdfhttp://www.bis.gov.uk/assets/biscore/enterprise/docs/b/12-668-boosting-finance-options-for-business.pdfhttp://www.bis.gov.uk/assets/biscore/enterprise/docs/b/12-668-boosting-finance-options-for-business.pdfhttps://www.abe-eba.eu/N=EBA-Market-Guide-on-SCF.aspxhttps://www.abe-eba.eu/N=EBA-Market-Guide-on-SCF.aspxhttp://www.aitegroup.com/report/supply-chain-finance-europehttp://www.aitegroup.com/report/supply-chain-finance-europehttp://www.aitegroup.com/report/supply-chain-finance-programs-implementation-guidelineshttp://www.aitegroup.com/report/supply-chain-finance-programs-implementation-guidelineshttp://www.aitegroup.com/report/supply-chain-finance-taxonomyhttp://www.aitegroup.com/report/supply-chain-finance-taxonomy


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Documents

Supply Chain Finance - ACCA Paper