The Interface Financial Group https://www.interfacefinancial.com Early Payments Reinvented Fri, 24 Jul 2020 14:57:20 +0000 en-US hourly 1 https://wordpress.org/?v=5.3.2 https://www.interfacefinancial.com/wp-content/uploads/2020/01/new_IFG_logo2020.svg The Interface Financial Group https://www.interfacefinancial.com 32 32 Many Fintechs Still Rely on Bring-Your-Own-Bank Strategy for Supply Chain Finance https://www.interfacefinancial.com/blog/many-fintechs-still-rely-on-bring-your-own-bank-strategy-for-supply-chain-finance/ https://www.interfacefinancial.com/blog/many-fintechs-still-rely-on-bring-your-own-bank-strategy-for-supply-chain-finance/#comments Mon, 04 Feb 2019 18:51:01 +0000 https://www.interfacefinancial.com/?p=34124 Many Fintechs Still Rely on Bring-Your-Own-Bank Strategy for Supply Chain Finance
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Many Fintech's Still Rely on Bring-Your-Own-Bank Strategy for Supply Chain Finance

Today, banks are by far the dominant player in providing supply chain finance, and do so in four ways:

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  1. Direct credit facilities to their customers (corporate buyers) who can then use the facility for early payment to their supplier ecosystem.
  2. Provide an uncommitted credit facility to their large buyer and then the bank will on-board their suppliers and also sign a Receivable Purchase Agreement with their client’s suppliers if they want to discount their receivable.
  3. Provide the funding for dedicated supply chain finance automation vendors such as PrimeRevenue or Orbian.
  4. Provide funding as part of a Fintech solution (for example, supply chain collaboration vendor, Treasury management solution vendor) where the company using the vendor brings their house bank as part of the supply chain finance solution.

Many Fintechs that offer source-to-pay (S2P) and other supply chain collaboration solutions still have a strategy of using their clients’ house banks for supply chain finance. While it makes things easy if the customer can bring their own bank, it does not come without risk.

Is Reliance on a House Bank-Only Strategy Wise?

The regulations coming out of the Great Recession around capital and leverage have made it more difficult for banks to lend to NON-investment grade companies. In addition, onerous compliance rules such as Uniform Beneficial Ownership and Know Your Customer have made it very difficult for banks to deal with non-customers with the exception of those with the largest of names, or well-established suppliers to large corporations.

Fintechs are subject to a bank’s credit policy, and many banks are not comfortable lending to companies that are not investment grade or near investment grade given the capital, leverage, etc.

In addition, capital is scarce within a company. There is an internal demand for credit capacity at a company and having your bank provide facilities to fund your supplier ecosystem may not be the best priority relative to other lending options. Using it in this way means you may not be able to use in it in other ways, all things being equal.

Renegotiating Credit Agreements

Many companies are also renegotiating their credit agreements. We have been in a long-term cycle of interest rate reductions that started with the Volker era in the early 1980s. Many of you were not around professionally then, but I swear rates were above 20%. This benign credit cycle could be ending. Companies are certainly feeling it as their rates are renegotiated upward when current loan contracts end.

All these factors speak to S2P platforms to think hard about relying only on banks as their funding provider. With the potential for early pay finance to mushroom through marketplaces and source-to-pay platforms, non-banks can help fill the void.

In the next post, I will look at some of these non-bank options.

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The Blurring of Supply Chain Finance Definitions https://www.interfacefinancial.com/blog/the-blurring-of-supply-chain-finance-definitions/ https://www.interfacefinancial.com/blog/the-blurring-of-supply-chain-finance-definitions/#respond Tue, 29 Jan 2019 19:35:29 +0000 https://www.interfacefinancial.com/?p=34108 The Blurring of Supply Chain Finance Definitions
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I often get this question about how factoring and supply chain finance differ from traditional invoice finance. And the real answer is it’s very murky. There is certainly a blurring between invoice finance, invoice discounting, factoring, supply chain finance and asset-based lending.

 

By whatever name you want to call it, what really matters is what usury laws are governed by the lending technique and how bankruptcy court will interpret the structure (loan, asset purchase) and what the state or legal jurisdiction laws are in relation to the technique. Definitions are fine to help educate and illustrate, but they are meaningless when it comes to judges and investors.

 

I have written about definitions before when the ICC spent considerable time defining supply chain finance and other techniques. The objective was to help investors understand an asset class, but the reality is supply chain finance is a private placement market where definitions don’t matter — but credit and operation risk do.

 

To give an example, consider recourse factoring. In four U.S. states, if you purchase invoices on a recourse basis (meaning if the account debtor does not pay, you can go back to the borrower to claim funds), this is considered lending, not invoice finance, and you are subject to the same licensing and usury laws as lenders.

 

When you look at the textbook and historical definition of factoring, factors control the administration and collection of receivables. They offer a few key services to the seller:

 

  • Finance
  • Ledger management relating to the receivables
  • Collection of receivables
  • Credit cover against default by the buyers

 

In factoring or asset-based lending, the funder undertakes credit management and collection of its clients’ book debts, whereas with invoice discounting, a business collects its own book debts and  typically the receivables are assigned to the factor, and notice of assignment is served on the buyers — by way of an introductory letter, assignment clause on all invoices and statement of accounts from the factor.

 

Factor’s shift risks that they do not assume back to their client via chargebacks and indemnities. For example, in full recourse factoring, language in contracts can state that in the event any purchased account is not paid and collected within 120 days of invoice for any reason, then the factor shall have the right to chargeback such account to seller.

 

Now we have other early pay finance techniques, such as digital supply chain finance, that has an advantage over these traditional methods of financing suppliers like factoring or invoice discounting because many operational costs are eliminated through the use of fast and big data.

 

Beyond the definitions and fancy names, we need to be cognizant of how various lending and asset purchase techniques work from an operational perspective, and what laws govern the transactions and how bankruptcy courts will treat the request to recover funds. This does matter!

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How multi-enterprise networks are changing the supplier finance game https://www.interfacefinancial.com/blog/how-multi-enterprise-networks-are-changing-the-supplier-finance-game/ https://www.interfacefinancial.com/blog/how-multi-enterprise-networks-are-changing-the-supplier-finance-game/#respond Thu, 24 Jan 2019 14:41:45 +0000 https://www.interfacefinancial.com/index.php/?p=34040
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Predicting dilution – key for invoice finance solutions https://www.interfacefinancial.com/blog/test-post/ https://www.interfacefinancial.com/blog/test-post/#respond Wed, 26 Dec 2018 16:03:10 +0000 http://dev1devifg.com/?p=33889 But in terms of the risk, funding receivables based on seller’s data or funding receivables based on buyer’s data, there is truth and that truth is buyer data is more reliable.]]>

Predicting dilution – key for invoice finance solutions

Sabeen Ahmed, COO and Chief Credit Officer of The Interface Finance Group discuss about dilution and its impact on receivable financing.

There are few truisms left anymore especially in this era where trust is at a premium and everything appears to be a product of fake or fiat news. But in terms of the risk, funding receivables based on seller’s data or funding receivables based on buyer’s data, there is truth and that truth is buyer data is more reliable. Why? The simple reason is that helps in predicting dilution. In this day where new forms of invoice finance are the rage, there are many things that can go wrong with financing receivables.

Naturally, there are a number of differences between traditional and digital invoice finance services when it comes to onboarding, processing, underwriting and funding. Digital invoice finance players are designed to provide funding during a single (sometimes two) online session(s). As such, they don’t really have the ability to fully address invoice quality and verifiable deliverables, which are important components of invoice finance underwriting and risk mitigation.

In addition, simply pulling invoices from the sellers accounting systems (ie seller centric approach where providers are integrated with many cloud accounting systems and have the ability to instantly pulling data from the majority of desktop accounting systems), may help speed up the process but can’t really tell you if the invoices have been approved and scheduled for payment by the buyers (account debtors).

Obviously, integration with the buyers account payable system either directly or via third party platforms offers the ability to pull a lot of additional information about approved invoices.

But even when invoices have been approved and scheduled for payment, the risk of dilution still exists. Post-confirmed invoice dilution can take a number of forms including credit memos, nonspecific invoice related chargebacks, withholdings, counterclaims, tax issues, judgments and so on.

Some of the more advanced players are trying to address this issue in a number of ways: through a fully automated digital supply chain finance service based on fast data and a dynamic credit limit engine or with big data and machine learning.

Clearly, this critical issue is getting more attention and the rate of progress is quite exciting but, as of yet, no single solution has been tested on a large scale in the market.

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Digital Supply Chain Finance – a silent revolution underway https://www.interfacefinancial.com/blog/digital-supply-chain-finance/ https://www.interfacefinancial.com/blog/digital-supply-chain-finance/#comments Wed, 26 Dec 2018 16:03:21 +0000 http://dev1devifg.com/?p=33918
The connected commerce world is being driven by two primary players - corporations moving to the cloud for documents and data exchange around their source]]>
digital invoice finance solutions
Digital Supply chain Finance
Forward Thinking in Digital Supply Chain Finance
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3 Essential Factors to Facilitating Supply Chain Finance Adoption With Suppliers https://www.interfacefinancial.com/blog/single-post-25/ https://www.interfacefinancial.com/blog/single-post-25/#respond Mon, 24 Dec 2018 12:54:57 +0000 http://dev1devifg.com/?p=33893 3 Essential Factors to Facilitating Supply Chain Finance Adoption With Suppliers
finance

As general awareness about dynamic discounting and supply chain finance grows among practitioners, procurement groups are increasingly pushing their technology providers to offer early payment capabilities. These organizations are primarily seeking to strengthen their supply base, relieving the DPO stretch that has plagued small suppliers as of late while also improving their own working capital.

But while enthusiasm for such programs has grown with buying organizations and their technology providers, suppliers have been the reluctant missing piece to the early payment puzzle. To encourage the full spectrum of suppliers to fully adopt early payment, the parties offering these programs must team up explain the benefits in the supplier’s language, providing a seamless, flexible and fast experience that creates win-win scenarios for everyone involved.

1. A Seamless User Experience

Before addressing the more intricate financial aspects of early payment program adoption, procurement organizations and their technology providers must first consider the role user experience plays in introducing supply chain finance to suppliers.

Over the last several years, procurement technology providers have increasingly focused on delivering an improved user interfaces. They have done so because frontline users of such systems now desire a seamless enterprise software experience akin to the web-based interfaces they use in the consumer world.

The yardstick with which these users are measuring their technology is known as the GAFA standard, an acronym for Google, Amazon, Facebook and Apple. These four companies have created the benchmark for seamless digital experiences, offering ubiquitous platforms that facilitate a full end-to-end process for whatever the user may need.

For early payment programs, the supplier on-boarding process in particular is a common stumbling block. On-boarding, in its worst iterations, can be tedious and time-consuming, requiring users to set up an account filled out with many desperate pieces of information.

A more GAFA-like approach is to enable features such as click-through signup, according to George Shapiro, CEO and chairman of The Interface Financial Group, a provider of digital supply chain finance solutions. Shepherding users through the on-boarding process with minimal interaction allows them to embrace SCF features by preventing them from quitting at the outset.

“What suppliers are looking for in order align with early payment solutions is this level of quality in their customer journey,” Shapiro said. “And that’s why on-boarding and click-through sign up should be as close as possible to this GAFA standard.”

2. Flexible Functionality

Providing a seamless user experience is essential to prevent mishaps from derailing program adoption, but it not enough to ensure long-term success. That will require suppliers find appropriate and flexible functionality once they begin actually using the early payment solution.

Small suppliers, companies that have traditionally struggled to access early payment, provide one important example. Historically, only large suppliers have had the opportunity to access supply chain finance. Long-tail suppliers have been left to fend for themselves, relying on more traditional invoice financing methods like factoring or new funding through expensive services such as merchant cash advances (MCA).

Even though large procurement organizations are beginning to offer new payment options such as dynamic discounting, the value proposition in terms of time and effort to use such programs may not be compelling to the supplier. A large customer could reasonably represent only 5% of the supplier’s revenue, meaning beyond that one relationship the only options for early payment for other customers are non-digital solutions in the open market.

To make early payment truly valuable to the full spectrum of suppliers, solutions must support appropriate amounts of flexibility to make the early payment program workable. Suppliers should be able to use the early payment program when they want and how they want — allowing them to request only as much money as they need, for whichever invoices they want, as often or infrequently as they want it.

This level of flexibility is what Shapiro says is necessary to get all suppliers on board with supply chain finance. Where buying organizations and suppliers already have an established dynamic discounting program, IFG provides an extension of this program in the form of digital supply chain finance, which can cover all suppliers not already enrolled in dynamic discounting programs. When such a relationship does not already exist, however, IFG also offers what it calls an off-platform funding option, where it can provide capital in scenarios where both another customer and the supplier are not on the same P2P or e-invoicing platform.

Enabling early payment both on and off platform is key to encouraging large-scale supplier adoption, because it provides a more attractive option to suppliers in all working capital scenarios. No longer restricted to using dynamic discounting with only their largest customers, suppliers can choose digital supply chain finance as their first option for early payment, rather than needing to pledge their receivables to a third party.

3. Uber Speed

Finally, for the early payment processes to be truly attractive for all parties involved, buying organizations and technology providers must ensure that suppliers can trust the program is fast enough to relieve their working capital pain points as quickly as possible.

From a user experience perspective, the application itself should be fast. Are there wait times between steps in the workflow? Does the solution lag or take considerable time to process data and requests? If so, it could discourage suppliers from bothering to use it consistently.

Ideally, the process of requesting early payment should be akin to ordering a rideshare — one click, the algorithm matches you with payment and the funds are sent to your bank account with minimal delay. To create this Uber-like experience, early payment solutions will likely have to upend the traditional approach to funding that places banks between buyers and suppliers.

Banks fall short in this role because they slow down the funding process with additional communication and underwriting requirements. For a supplier facing extended payment terms and shrinking working capital, these delays are a major impediment to embracing early payment solutions.

Just as rideshare apps allow users to press a button and summon a car to their location, an early payment solution that has long-term staying power with suppliers should provide access to funding at the click of a button.

This is how IFG’s Shapiro approaches bridging the gap between buyers and suppliers, by integrating with technology providers during the P2P process. To ensure it can mitigate the risks associated with funding early payment, IFG’s decision engine performs millisecond-level analysis and produces dynamic credit limits associated with prediction of post-conformation dilution. These analyses allow IFG to quickly provide working capital flexibility to both sides, as well as offer payment of the date of the business’ choice.

“You check the invoices you’d like, a calendar pops up, you select the dates you want, you click submit and that’s it. There is nothing else to do,” Shapiro says.

Ultimately, improving working capital is a proposition all companies can get behind. With common hurdles like clunky user experiences, inflexible payment options and funding delays alleviated, buying organizations and their technology partners can improve early payment programs, helping to put these offerings in the language of the suppliers and encourage adoption throughout the supply chain.

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Accounting considerations on SCF transactions https://www.interfacefinancial.com/blog/post-99966/ https://www.interfacefinancial.com/blog/post-99966/#respond Mon, 24 Dec 2018 12:53:34 +0000 http://dev1devifg.com/?p=33891

Accounting considerations on SCF transactions

David Gustin, chief strategy officer of The Interface Financial Group, is describing below some accounting implications on the SCF programs.

Whichever way you look at it and define it, supply chain finance has grown into a big number. And if you define it as using the balance sheet of a large company to offer early payment to some or all of its suppliers, it is has gained in popularity. Plus, it’s not only offered by large banks who can both originate and distribute large-scale programs for the likes of Unilever or Procter & Gamble, but also non-bank asset arrangers like Greensill, Seaport and others working together with source-to-pay platforms or directly with buyers to develop programs.

And always in the background we have heard this whispering of accounting treatment. And by now, most people who have dabbled in this space know the issue: Is it trade payable or is it debt? Fewer understand the implications.

If the supplier finance arrangement is treated as debt, the company will be subject to disclosing this on its borrowing arrangements. This action will have an impact on its ratios, especially if the program is very large, as was the case with Carillion and Abengoa, where it was not disclosed anywhere on financial statements. This could reduce the availability of other loan commitments from lenders.

Second, the consequences on the cash flow statement impact whether the cash flows are “operating” or “financing” cash flows. If trade debt, cash flows that extinguish this liability are presented as a financing cash flow.

The regulators have not provided clear guidance on this finance technique, and so it has been up to the accounting firms to make determinations case by case. The Big Four accounting firms have established criteria to make that determination. While the below list is not complete, the following questions tend to be very important in evaluating whether buyers have modified the substance of their liabilities:

  • Is the buyer providing a higher level of comfort to the funder? The crux of the issue is if the buyer is confirming to the financial institution that it will pay at maturity of the invoice regardless of trade disputes or other rights of offset it may have against the supplier, then it is giving a higher commitment to pay to the financial institution than it owes to the supplier, and this may be construed as a bank financing and not a trade payable on its books.
  • What type of agreements are in place between buyers, suppliers, lenders and their service and platform provider? In general, it is important not to have tri-party agreements with the buyer, seller and funder. It is very important to keep these programs with independent agreements.
  • Does the buyer know who the funder is? Buyers generally must keep a hands-off approach as to who funds the program.
  • Does the buyer have discretion over the lender?
  • Does the buyer extend credit terms as a result of entering the finance program and pay their financier later than they could have paid their supplier under a normal commercial agreement?

In practice, the impact of a supplier finance arrangement on the presentation of a financial liability is likely to involve a high degree of judgment based on specific facts and circumstances.

Given the high stakes involved, there have been a few posts around this topic. In an Oct. 4 sponsored blog on Spend Matters, Taulia wrote, “As a rule of thumb, an early payment finance provider should not be put in a better position than the original trade debtors were.” Yet this is precisely what third-party supply chain finance programs do. By issuing an irrevocable payment undertaking (IPU) or guarantee to a funder, lenders are put in a better position.

In September, The Global Trade Review reported that the International Trade & Forfaiting Association (ITFA) will do research to release a set of guidelines to help those involved in supply chain finance assess their financing programs and “recognize instances where they are being misused — and when they should be reclassified as debt.”

Yet ITFA is not an accounting body, and thus likely lacks the necessary background to provide comprehensive guidelines around these issues — especially in the current grey area created from murky regulatory standards.

These kinds of statements concern me because misinformation is not good for the industry.

When we look at the cases of Abengoa and Carillion, we have to ask ourselves, are these one-offs and “extreme cases” as ITFA believes. Recall we have been living in the most benign credit cycle in all our collective pasts. And recent news about GE regarding accounting irregularities related to massive write downs in its power division to the tune of $22 billion is not comforting.

Without clear rules from regulators, we continue to live in this grey world. But clearly many supply chain finance programs are built on the back of an irrevocable payment undertaking to manage post confirmation dilution risk. While that is perfectly acceptable and is a way to broaden investor appeal, it provides a higher level of comfort to the funder than normal trade payables. That is clear.

This article was published first on Spend Matters.

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To Reclassify Trade Payables or Not? https://www.interfacefinancial.com/blog/to-reclassify-trade-payables-or-not/ https://www.interfacefinancial.com/blog/to-reclassify-trade-payables-or-not/#respond Sun, 23 Dec 2018 14:33:25 +0000 http://dev1devifg.com/?p=33899

To Reclassify Trade Payables or Not?

Early Pay Programs and their Accounting Treatment

David Gustin, Managing Editor, Trade Financing Matters, IFG Chief Strategy Officer

As more companies adopt early pay programs, including self funded and third party supply chain finance (“SCF”) programs, concerns are growing that third-party arrangements could trigger accounting problems. Trade Finance Matters examines the background and where we are today.

Background

With the explosion of early payment solutions to assist a buyer’s supplier group (egs. dynamic discounting, reverse factoring, pcards) and the start of receivable auction markets, the issue of rebates and retiring payables early has become serious. The concern is that such an arrangement could prompt the Securities and Exchange Commission to require the company to reclassify its trade payables as short-term bank debt, potentially impacting loan covenants and leverage ratios.
For dynamic discounting programs, most of these programs are generally small and still self-funded by the corporate themselves. But, and here is the big issue, what happens when non banks become more significant and touch on more spend besides indirect?
Robert Comerford, a former professional accounting fellow in the SEC’s Office of the Chief Accountant (OCA), first addressed the issue of supply chain finance in speeches he did back in 2003 and 2004. Comerford posed several rhetorical questions about SCF arrangements, including whether the financial institution makes any sort of referral or rebate payments to the client, and whether it reduces the amount due from its client so that the payment is less than it otherwise would have paid to the vendor. This was a time when rebates (think of rebates as the buyer participating in the benefits of the financing by taking a portion of the spread) were rampant.

Two things have changed drastically in North America programs since that time.

  1. First, back in 2003 when Mr. Comerford made his comments, the bank had an agreement with the buyer that guaranteed them payment. Today, in most SCF programs, the banks purchase receivables from the supplier, check for liens against the receivables, file UCC statements (in the US), etc. In order to get paid the bank needs to rely on the validity of their receivable purchase, not on a guarantee from the buyer. That was not the case in 2003.
  2. Second, and this is most important, companies are aware of the rebate concerns with supply chain finance programs and most have taken the conservative route. The concern has long been that a funding provider is paying the buyer for access to their suppliers and the data from their internal systems and the buyer is participating in the benefits of the financing in some form of rebate (or cut of the spread). We believe that is because the rebate issue so critical back in Comerford’s days is no longer an issue.

In reaching out to various consultants and others, we have not found one instance of reclassification.

What we did find in speaking with a few large Fortune 1000 corporations is that they discontinued the practice of being offered data and access fees for every invoice sent to a funder (ie, the Buyer would get part of the spread).

This practice has been offered by a few select banks and vendors as recently as four years ago. Most corporations are now conservative enough with their accounting treatment and it appears to not be a standard offering. In addition, some companies mentioned that if their suppliers knew they were receiving a benefit on their margin, it would impact supplier negotiations.

Nomenclature around Self-funded and Third Party Programs

Supply chain finance is a confusing term and unfortunately many in the industry use the term to mean different things. Supply chain finance is part of a corporations Trade Credit, that is inter-firm trade credit between buyers and sellers. We tend to view supply chain finance as either self-funded using various early pay tools, or funded via third parties using platforms and financing techniques.

Self Funded Early Pay

Dynamic Discounting (DDM) means the supplier gets paid earlier than the due date on the invoice and money comes from the balance sheet of the buyer. That implies two things, the DPO metrics of the buyer will change as the Buyer extinguishes a payable earlier. And the buyer earns a discount in return. DDM is an online request for a change to a payment term.
The accounting issue with self-funded early pay is limited to one thing – what do you do in a VAT regime? Depending on the country, it can be calculated on the amount of the invoice and other times it can be calculated on the amount paid. This is not a SEC issue as there is no funding occurring.
Vendors operating in different tax jurisdictions, whether it be sales tax, VAT, or some VAT equivalent, should be able to adopt their platform whether you adjust net or gross price. For example, in the U.K., if an invoice is for £120 gross, £100 plus VAT and the buyer has a 2% rebate program, payment made to a supplier is £98 + VAT, so the supplier gets £117.60. The vendor can adjust the account system of the buyer the fact they paid less to the supplier and the fact VAT is less. The system can supply a debit note to supplier so they can reconcile new price for the goods and new VAT for the goods.
As to how companies record discounts, most corporations account for the discount the same way they account for traditional discounting, in most cases there is a discount account and that gets split back across cost centers where the original invoice (or buy decision) to credit the buying department. DDM should not be any different than what’s been done with decades with 2% net 10. Every company should have a policy on how they handle traditional discounts that has been vetted by their external auditor.

Funded by Third Party (Factor, Bank, Non Bank, Pcard)

What the market calls Supply Chain Finance – examples include Taulia’s TED program or PrimeRevenue’s multi-bank supply chain finance program, or Orbian’s capital market program, this is where the supplier is paid early but the money comes from someone other than the buyer. Now the issue becomes does the buyer keep it as trade payable or should they reclassify as debt.
The determination comes from the criteria that are applied. The Big Four accounting firms have established criteria (which is mostly consistent, but there would be some differentiation), to make that determination. There is not 100% consistency across the firms that make this determination.
This definition of third party funding can apply to a number of early pay techniques, including:
• Bank Approved Trade Payable programs (or Bank Supply Chain Finance)
• Factoring
• Pcards – pcards clashes with many of the criteria that Big 4 use with classification but all pcard is classified with Trade Payables.

Auditors and the Relationship with their Clients

I think it is important to note that when a corporation implements an early pay initiative, the two big areas that drive programs are Procurement and the Assistant Treasurer, and neither one of these deals with the external auditor. They may ask their internal auditor to get an opinion. Their internal auditor may ask the external auditor how to contemplate treating the proposed program.
What is most important is the criteria the lead auditing partner for Disney or Kraft uses to instruct his staff when reviewing Disney or Kraft’s receivables and payables. This is the most important checklist. And I am sure every company’s checklist for AP and AR is different.
Overall, the market for third party funding of payables is small, whether it be dynamic discounting programs, bank supply chain finance, or other techniques. For any one large corporate, confirmed payables are insignificant relative to their overall payables. For example, a typical Fortune 1000 running a program will have AP transactions into the many millions, with only a few thousand being part of a confirmed payables program.

Vendor Criteria to determine Trade Payable or Trade Debt

When it comes to the question of criteria for vendors using third party funding sources, the three questions to ask are:
1. What are these criteria?
2. How does any third party funded model perform against these criteria?
3. How do you minimize risk of reclassification to trade debt?

Key Criteria

While this list is not complete, the following questions tend to be very important in evaluating programs:
• Is the Buyer providing a higher level of comfort to the funder? The crux of the issue is if the Buyer is confirming to the financial institution that it will pay at maturity of the invoice regardless of trade disputes or other rights of offset it may have against the supplier, then it is giving a higher commitment to pay to the financial institution than it owes to the supplier and this may be construed as a bank financing and not a trade payable on its books.

• What type of agreements are in place between Buyers, Suppliers, Lenders and their Service and Platform provider? In general, it is important not to have tri-party agreement, ie, no tri-party agreement between buyer, seller and funder. It is very important to keep these programs with independent agreements.

• Does the Buyer know who the funder is? Buyers generally must keep a hands off approach as to who funds the program.

• Does the Buyer have discretion over the lender?

• Does the Buyer know the commercial borrowing terms?

• Does the Buyer have as part of the initiative the desire to extended payment terms?

If you answer yes to many of these questions, that is an indicator of trade debt.

Early Pay Vendors with Third Party Models Comments

One early payment vendor planning to offer third party finance commented, “We are building an automated factoring program, we make a deal between the supplier and lender. We can make better deal than factoring because we have way more information our platform controls payment, payment date, and amount, there is not double payment, no late payment, and no short pay. There is no agreement with Buyer. Buyer only has agreement with us.”
Buyer pays supplier account specified for supplier and the supplier in our platform has the ability to manage their “pay to” account. That’s a feature we have for all suppliers and their remit to addresses, etc. What we do we obtain the right from supplier on suppliers behalf to modify the pay to account to implement the factoring transaction. But for the Buyer just like normal factoring, you pay the supplier into the account specified by the supplier.
We do same thing but completely automated. The supplier agrees with us that we have the permission to implement on his behalf the factoring transaction and because we have access to the payment system of buyer we automatically put in collection account of supplier but we don’t override the supplier. We put it in only for this transaction and for this invoice. And that is extremely clean.

A supply chain finance vendor commented back in the early days, under early payment programs, when a supplier wanted early payment, the bank simply paid the supplier early on behalf of the buyer. The bank had an agreement with the buyer that guaranteed them payment. Today, in most SCF programs, the banks purchase receivables from the supplier. In order to get paid the bank needs to rely on the validity of their receivable purchase, not on a guarantee from the buyer. Also, regarding independent platform providers, those providers separate the buyer from the bank and don‚t utilize a contract between the buyer and the bank. So, while they certainly don‚t ensure maintaining a trade payables classification, they do eliminate some of the risk, such as the possibility of a tri-party agreement between the bank, buyer and supplier.

Final Thoughts

Shelly Luisi, senior associate chief accountant in the SEC’s Office of Chief Accountant (OCA), says that to her knowledge, the SEC hasn’t provided any additional public guidance on how to account for potentially problematic payables transactions since Comerford’s comments.

“The company may be sending the money to a different bank account, but if its relationship with the vendor stays the same, then the arrangement could very well be acceptable,” Luisi says.

She emphasizes that the OCA has yet to see two such arrangements that are the same and says each arrangement has to be examined individually to determine the proper accounting treatment. Luisi adds that OCA is occasionally asked to review a company’s accounting treatment for a supply-chain-finance program through its filings consultation process, which allows companies to submit the details of a transaction along with the proposed accounting to see if OCA has any objection to the proposal.
According to Luisi, she has not seen a consultation request that‚s included marketing fees since about the time of [Comerford’s] speech. In summary, I think it’s pretty clear that there is no clear guidance from the IFRS in regards to reclassification of trade payables to debt. This is something of paramount importance, as large companies will continue to be conservative. This issue continues to slow down acceptance of these programs and make the set up costs more expensive by enriching accounting firms.
Some of the large corporates I have dealt with are concerned with issues around credit notes (ie, dealing with returns with suppliers). Another big concern is providing some comfort to suppliers that this form of finance will not be pulled in three months (or some minimum period) thus risking reclassification.
It is time to get accounting guidance on these issues, as these Buyer led programs have proven to be a viable form of finance to suppliers.

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DSCF as Extension of Dynamic Discounting https://www.interfacefinancial.com/blog/video-post/ https://www.interfacefinancial.com/blog/video-post/#respond Mon, 24 Dec 2018 12:32:28 +0000 http://dev1devifg.com/?p=33882 IFG’s Digital Supply Chain Finance is an extension of Dynamic Discounting — early payment for Suppliers, funded by Buyers. IFG’s DSCF works only when a Buyer’s Dynamic Discounting is unavailable, paused, or not offered. IFG never competes with Buyer programs.

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PWC: SCF Barometer 2017/2018 https://www.interfacefinancial.com/blog/post-256/ https://www.interfacefinancial.com/blog/post-256/#respond Wed, 26 Dec 2018 15:37:27 +0000 http://dev1devifg.com/?p=33884
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