• The buyer will usually have established a Corporate Payment Undertaking programme with the finance provider(s) which aims to provide benefit to all or a sub-set of its sellers.
• The seller(s) and finance provider(s) will typically communicate with each other in relation to the basis for provision of early payments and on-boarding procedures, including any relevant KYC/AML and risk-based checks.
• Whilst uncommon, in some instances the finance provider may purely act on instruction of the buyer (without interaction with the seller(s)) in which case it is for the buyer to ensure seller(s) has/have sufficient information to understand and accept why the buyer has instructed the finance provider to make a discounted early payment to such seller(s).
• The key ‘trigger’ for the provision of early payments is the corporate payment undertaking given by the buyer confirming approved invoice amounts.
• Partial early payment of an approved invoice amount would be unusual.
• The process may be manual, semi-manual or automated.
• Electronic invoicing may play a vital role since it will usually accelerate invoice approval and the ability for the seller to promptly receive early payment.
• The seller has the option to receive full payment of the confirmed invoice on its due date or to request an early discounted payment.
• The buyer makes payment in full of the approved invoice amount to the finance provider at the confirmed invoice due date.

CPU – Key Parties

Buyer: the entity (finance provider’s customer) that enters into a corporate payment undertaking with a finance provider, which facilitates access to discounted early payments by the finance provider for the benefit of its supply chain. The buyer approves the invoices and submits the details of the approved invoices and amounts to the finance provider together with a corporate payment undertaking to make payment of the approved amount to the finance provider at the confirmed invoice due date.

Seller: the entity selling goods or services to the buyer which agrees or acknowledges interest in arrangements for receiving optional early payments at a discount and may agree with the finance provider that the finance provider and the buyer shall have no further obligations to the seller for the approved invoice amounts (and may confirm transfer of rights or obligations) for which early payment has been received.

Risks and risk mitigation for the CPU

Relevant risks and mitigants include the following:

• Buyer non-payment risk mitigated by completing standard credit analysis / risk assessment at on boarding and continual monitoring
• Seller commercial disputes and/or other dilution events may be handled by credit notes and offsets against invoices due for payment (but not yet paid); the risk this could otherwise pose to the finance provider is mitigated by the corporate payment undertaking
• Appropriate KYC/AML and/or compliance review on the buyer and risk-based checks on the seller, handled during the on-boarding procedures and subsequent post-transaction reviews
• Risk of double financing is mitigated by any relevant contractual warranties and/or representations and can also be mitigated by finance provider’s due diligence review(s)
• Pre-existing security arrangements entered into by or affecting the seller; the risk this could otherwise pose to the finance provider is mitigated by relevant contractual warranties and/or representations and the corporate payment undertaking
• Lack of corporate or signing officer authority, mitigated by appropriate due diligence following the finance provider’s relevant internal procedures

All the above risks are also mitigated by a robust monitoring, reporting and audit process regarding transactions, systems and controls.

Accounting Treatment of Payables Finance

Accounting treatment Because of questionable practices by a few identifying certain transactions as supply chain finance rather than loans, the accounting treatment of trade payables is under increased scrutiny. Trade payables by nature are short term. If a buyer borrows to settle its trade payables, this will be reflected as bank debt. However, if the same buyer develops a payables finance programme for its suppliers, the trade payables may remain as trade payables on its balance sheet if certain criteria are met.

While there is no exhaustive list of criteria to minimize re-characterisation or clear guidance , it is useful to highlight some key criteria that have been mentioned as relevant in this context:

In recent years, rating agencies have begun to place heightened levels of scrutiny on supply chain finance and its accounting practices. In 2015, using Spanish company Abengoa as an example, Moody’s reported that reverse factoring had debt-like features, Subsequently through Industry advocacy led by the ITFA, Moody’s have taken a more nuanced and balanced view.

In January 2018, concerns resurfaced with the collapse of Carillion.

Following these events in October 2018, ITFA published a report, Payables Finance – what can we learn from the Abengoa and Carillion experiences? The paper references both companies as case studies, providing an overview of considerations required to assess payables finance arrangements and calling for increased transparency from companies, as well as greater dialogue between all stakeholders to clarify methodology and best practices.

A recent publication from Moodys takes a closer look at how Payables Finance is reflected on a corporate’s balance sheet and provides three cautions of note:

• Greater Transparency: Many buyers are not required to make public their Payables Finance programs, so users of financial statements may not be aware, despite the potential material consequences
• Extension of Terms: There is a leverage impact of hidden debt like obligations where payables finance allows payments to suppliers to be stretched beyond normal commercial
• Impact on Future Liquidity: Because of the potential size of these Payables Finance programs, the cancellation of such programs can lead to a sudden working capital outflow over a short period of time, leading to a liquidity crunch.

It is important to note that Moody’s does not conclude that Payables Finance is harmful or bad for SME’s. Rather, the Moody’s publication asks for greater transparency so that its impact on buyer’s balance sheets can be assessed and properly evaluated.

Working Capital Solution – Payables Finance

While the examples of misuse of payables finance to force a supplier into accepting uncommercial payments terms are few, they are nevertheless very worrying. While such cases have been prominently highlighted in the media, they are not representative of how payables finance programs are used by the majority of buyers and sellers in mutually supportive supply chains. Payables finance – correctly implemented – continues to be used as a means for buyers and sellers to optimise their working capital, and strengthen their relationships with each other. The GSCFF acknowledges the need for buyers and sellers to continue to improve their working capital. To support this goal, the GSCFF advocates for the continued use of payables finance programmes, as they present significant benefits for all stakeholders when applied in a reasonable and appropriate manner. To help further increase awareness and understanding of payables finance, and other SCF techniques, the GSCFF is building on its 2016 Standard Definitions for Techniques of Supply Chain Finance with individual reports on each of the eight techniques. The first, on receivables finance, was published in June 2019. The second, to cover payables finance, will be released in Q1 2020.

Podcasts – Global Supply Chain Finance Forum