now loading...
Wealth Asia Connect Middle East Treasury & Capital Markets Europe ESG Forum TechTalk
Treasury & Capital Markets
Reinventing supply chain finance
Treasurers’ increasing need to effectively manage liquidity amid volatile markets and anemic economic growth is bolstering interest in supply chain financing. With default risk on the rise in Asia and suppliers requiring support, how are CFOs and treasurers coping during this challenging time?
Darryl Yu 15 Jul 2016
With companies’ suppliers struggling to fund their operations and buyer default risk on the rise, treasurers and CFOs have leveraged on solutions such as supply chain finance to ease the economic pain from their external stakeholders.
“We are starting supply chain finance where we are lending our balance sheet in helping those suppliers as a way for them to access capital,” explains Wilkie Wong, group chief financial officer at Esquel Group. As a manufacturer of textiles for large brands such as Ralph Lauren and Nike, it was critical for Wong to ensure the company suppliers are reliable.
Ronan Marc, chief financial officer at electrical specialist Legrand is doing something similar in India, where access to cash is difficult. Legrand India pushed for a vendor financing solution that fulfills the country’s new regulation in aiding smaller businesses.
“There is a global trend and regulation in India where you need to pay your small and medium-sized suppliers within 45 days,” notes Marc. Complying with the 45-day regulation improved Legrand’s relationship with its suppliers.
Supplier finance programmes are proving beneficial, but as Wong and Marc note that they come with challenges. Setting up such programmes alongside banks is one of them. 
“From a financial point of view [supplier financing] makes a lot sense. There are two hurdles for getting this started, one is the bank itself regarding regulatory and compliance issues,” highlights Wong. “The other is from the supplier side, a lot of these supply finance programs ask for the supplier to provide their financials to the banks. They don’t understand why they have to provide the financials to a bank that’s not one of their regular banks.”
On average the setup of a typical supplier finance programme takes at least three months to establish depending on the number of suppliers within a company’s ecosystem. With increasing regulatory scrutiny on financial institutions, banks are pressured to enforce KYC (know your customer) processes and onboarding of suppliers that delay financing approvals.
This leaves a void in the market for non-bank financing companies to fill. One such company is Finocap – a dynamic discounting online marketplace.
Rajah Chaudhry, founder and managing director at Finocap recommends that companies use underutilized funds to support suppliers. Finocap provides discounts for earlier payment; it formularizes and automates discounts for large enterprises with their supplier base.
But CFOs are taking a step further to resolve supply chain finance issues by looking at the other side of the spectrum: their customers.  “After the global financial crisis a lot of our customers have been asking to lengthen their payment terms. When a customer asks you to do these things, it’s difficult to say no,” shares Wong. Marc agrees. “Our customers have been suffering from shortage of working capital and cash. You need to implement a relation of trust and visibility.”
Credit insurance, with its ability to mitigate customer risk for companies has been growing in popularity as result of customer’s requests for flexibility. “There are two parts, one is talking to the credit insurer and understanding what kind of information they are receiving in the marketplace,” states Wong. “Secondly we need to have a serious conversation within our own sales team in trying to understand whether we are willing to take the risk of the customer.”    
More than the coverage, credit insurance allows a company to better understand its customers. “It provides us with an alert about the market of our customers that are more risky when it comes to credit,” says Wong.
During a low growth environment, the challenges for treasurers are tougher. “You want to keep your supply chain intact and healthy. How do you unlock value in a way that is efficient? The biggest pain point we are hearing on a regular basis is how to implement those solutions,” highlights Chaudhry.  
Conversation
David Ng
David Ng
deputy CEO, Singapore
CSOP Asset Management
- JOINED THE EVENT -
In-person roundtable
Asia and the future of funds
View Highlights
Conversation
Victor Cheung
Victor Cheung
director, ETF investment strategist
Mirae Asset Global Investments
- JOINED THE EVENT -
Webinar
Developing strategies supporting sustainable investing
View Highlights