This article in the Bloomberg newsletter speaks to the relative popularity of supply chain finance (SCF), which the piece suggests is under increased scrutiny given the differing treatment that the financing tool is given vis-à-vis balance sheets. We have been covering the space in member research for many years and would suggest that the scrutiny is not necessarily new (which the authors point out themselves via examples in the article) but that the pandemic has increased corporate interest in these types of financing tools. As such, auditors are likely running across cases more often, especially among SMEs, where the need for cash flow is most greatly felt. There is an estimate as to the size of the funding market (though we don’t have any details around methodology), and a downloadable piece is in the article, for which a link is provided. Interested readers can have a look.
‘A $700 billion funding market that’s quietly greasing the wheels of the global economy is coming under greater scrutiny of accounting watchdogs….A form of short-term borrowing, known as supply-chain finance, operates off corporate balance sheets and has become so prevalent that the US Securities and Exchange Commission called Coca-Cola and Boeing to reveal details of their exposure to what some call “hidden debt.”…
The funds used in the practice have grown six-fold since 2015…’
While the authors do not detail the particular types of SCF available (there are a few), or which types are under scrutiny, the general concern is of course real and should be considered a risk at some level. One example of a popular version is reverse factoring, whereby the buyer uses their credit to provide a short term loan to the supplier, which improves cash flow and aids the long tail supply chain vendors. This should be a good thing in these times, but abuse is always possible. Worth a quick read for those interested in the space.
‘Big firms are pushing back, by saying that planned disclosure rules are unnecessary and cumbersome to comply with, and arguing that everyone wins in most cases. The supplier gets funds promptly, the bank takes a cut, and the buyer protects working capital…
The world’s top accounting bodies are currently mulling changes that would require companies to say how much supply-chain finance they use, but that’s not enough for some investors…
“For the majority of investors, this is financial debt,” Saul Casadio, director of corporate credit research at M&G. “If I am not able to know how much debt there is in a capital structure, I am not able to properly assess the credit risk.”’
Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group
