Have you ever asked yourself why so many classic Supply Chain Finance (SCF) programs, also known as Reverse Factoring programs, fail? In our meetings with customers, we repeatedly hear that SCF programs are simply not flexible enough and that it takes much too long to set them up. One particularly charged issue is that most suppliers do not want to participate in an SCF program at all, or only do it because they feel compelled to so as not to jeopardize customer relationships.
In order to better understand these critical voices, we must first take a closer look at the mechanisms of a classic SCF program:
The idea is simple. A bank offers its customers a platform where invoices against them as customers can be uploaded. This is done by the associated suppliers, who are connected to the SCF platform via a framework agreement and who issue the receivables with extended payment terms on a revolving basis. The customer uploads them to the platform. The suppliers in turn receive access to immediate liquidity from the bank for a discount which is fixed over the duration of the program. The bank then receives the invoice amount as usual within the framework of the previously defined payment period from the buyer, their customer, whose own liquidity management is n turn optimized with the extended payment period.
Classic SCF programs are too rigid for our agile and fast moving world of trade
So much for the theory. Because the actual implementation is much more complex. The customer must provide IT capacities – for example, for the interface between an ERP system, usually SAP, and the bank’s Supply Chain Finance platform. In addition, because of requirements to prevent money laundering, all suppliers and the customer must undergo a Know Your Customer process through the financing bank.
Anyone who has ever opened a business account with a bank knows that banks usually take several weeks or even months to do this – especially if the company is located abroad. All parties involved, i.e. bank, buyer and suppliers, have to agree on a single framework agreement in order to ensure that the assignability of receivables, for example, is unproblematic. In our exchanges with customers, there is growing talk of a “battle of the lawyers”. On average it can easily take more than a year to set up a Supply Chain Finance program. This is way too long in this still tense and above all uncertain economic situation.
Of course, suppliers normally do not have just one single customer. An SCF program with one customer does not enable suppliers to finance receivables with their other customers. If such an arrangement is to be made with another customer, the game starts all over again. Usually this means: another customer, another SCF program based on another platform, which must be used by the supplier. A real nightmare.
Let your suppliers decide if, at what price and to whom they want to sell their receivables, but help them to upgrade their receivables. Then it works.
And now the good news: There is an alternative, virtually an upgrade of traditional supply chain financing, which can be implemented much faster – usually within 3 weeks – does not tie up IT capacities, does not require any framework agreements and offers additional benefits for buyers and suppliers. You may already have guessed: our fully digital marketplace for unpaid B2B invoices Walbing Trade Finance is the said upgrade.
And this is why: buyers and suppliers have two options for optimizing their respective liquidity management with us.
Option 1: A supplier – and not the customer – uploads receivables against the customer to Walbing, followed by an invitation to the customer to confirm the receivables. In return, the customer is granted a longer payment term. The advantage for the supplier: Confirmed receivables fetch higher prices because the risk for the institutional investors acting as buyers of the receivables is reduced. The buyer of the goods benefits by being able to double, sometimes even triple the payment term – an immense advantage for working capital management.
Most suppliers also prefer this option because they can decide for themselves whether to sell open receivables at all, to whom and at what prices. And they do not make themselves dependent on the bank of their customer. In addition, via our marketplace they can not only sell receivables from one customer, but can also use Walbing Cash to convert receivables from other customers into working capital at the best possible price.
Option 2: Debtors, i.e. customers, upload receivables against them to Walbing Cash. For this purpose, our API must be installed, but this can be done quickly and easily. By doing this, the receivables are automatically confirmed by the debtors. Here, the payment term is negotiated bilaterally with the supplier. Afterwards, the suppliers themselves decide whether they want to sell their receivables at all and if so, at what price and to whom. In any case, the receivables are converted into working capital at the highest possible equivalent value through an auction. Immediately after the end of the sale, the supplier receives the sales price, i.e. the invoice amount minus a discount.
Why are Walbing SCF programs such a success, unlike bank programs?
Another reason why Walbing Cash is an upgrade of the classic Supply Chain Finance programs is that receivables can be sold to a broad base of institutional investors via our marketplace.
The financing capacity of several investors is much greater than that of a single bank. A simple example is automotive manufacturers, whose capital requirements for supply chain financing can quickly reach billions. A single bank cannot cope with this, but can only finance a few hundred million euros at most, if at all.
In addition, in classic Supply Chain Finance the credit lines of the buyer of the goods are used, since the purchase of receivables from suppliers against their customers leads to additional credit exposure. If a company plans to use its credit lines to finance capital expenditure or capital expenditures, it is wiser to organize supplier financing through other financing partners than through its own banks.
It is the independence of selling receivables via Walbing that convinces the suppliers in particular. They refuse to participate in SFC programs, primarily because they are dependent on their customers or their banks. Moreover, as previously emphasized, a supplier rarely has only one customer. 20 different customers can quickly mean 20 different SFC programs – each with everything that comes with setting it up. Here, too, Walbing scores with a simple solution that is accessible to everyone.
Working capital management is important, and so is flexible access to liquidity is. This is precisely where Walbing Cash offers a practical and proven solution that is attracting more and more companies’ attention. After all, the future belongs to supply chain financing that is fast and cost-effective – for all parties – and does not make the system more rigid through even greater dependencies.