Designed for SMEs Bob Trojan and Adalberto Elias NatLaw September - - PowerPoint PPT Presentation

A Workshop Program Designed for SMEs

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Bob Trojan and Adalberto Elias NatLaw September 16th & 17th, 2019

Situational Perspective: Background/Current State of the Secured Transactions Order (STO) Framework and the Collateral Registry Adalberto Elias

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SME Lending Why is it important? Successes in other economies

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SME Finance Gap

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There are

400 million

SMEs in developing countries

50% are unserved

• r underserved
• nly 14%

have a loan or line

• f credit

Source: World Bank Group

SME Finance Gap

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Source: World Bank Group

Secured Transactions Systems

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Bank nk Accou

• unts

ts Accou

• unts

ts Receivabl ivable Invento tory y and Raw Goods

• ds

Intelle ellectual tual Property ty Rights hts Indus dustrial trial and d Agric icultura ultural l Equip uipment ment Durabl able Consum umer Goods ds Agric icultur ltural al Produc ducts ts Vehic icles les

Collateral Gap

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Capital Stock of Firms Collateral Taken by Financial Institutions

Mismatch between assets owned by companies and collateral required

73% 27% Land/ Real Estate Vehicle/ Machinery/ Equipment Accounts Receivable Land/ Real Estate Movable Property Movable Property 22% 44% 34% 78%

Source: World Bank Group

Why are financial institutions not willing to take movable property as collateral?

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Because there is a lack of

Legal framework Registry of security interests in movables Know-how on movable asset lending

Interests

Benefits of a Solid Secured Transactions System

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Increases access to credit reducing the risk of credit Reduces the cost of credit Increase market competition Promotes credit diversification

“Collateral Registries for Movable Assets: Do they Spur Firms’ Access to Finance?”

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ACCESS TO FINANCE ACCESS TO LOAN

INTEREST RATES WORKING CAPITAL FINANCED BY BANKS LOAN MATURITY

• 3

+7 +8 +10 +6

Months Percentage points Percentage points Percentage points Percentage points

Study also provides evidence that the impact of the introduction of movable registries on firms’ access to finance is larger among smaller firms, who also report a reduction in subjective, perception- based measure of finance obstacles.

Source: World Bank Group

Potential Effect in Secured Transactions

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The end result would be greater access to credit to SMEs, more jobs created and increased competition in the financial marketplace.

Improved legislative framework governing secured transactions which is more transparent, efficient and comprehensive. New registry with robust platforms, proper capacity and wide usage. Increased capacity of financial institutions to design and offer new products where movable assets are used as collateral.

Principles for Effective Secured Transactions

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Effective Secured Transactions System

Broad scope Creation Publicity / registration Priority Enforcement

Doing Business “Getting Credit” Indicator

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Borrowers and Creditors Right Index (0-12)

OECD Europe & Central Asia East Asia & Pacific Latin America & the Caribbean South Asia Sub-Saharan Africa Middle East & North Africa

Low High 6 6.4 6.6 5.3 4.6 5 2.2

Source: World Bank Group

Global Collateral Registry Projects

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• Implemented new Secured Lending

Law in 2013 and established new centralized collateral registry in March 2014.

• More loans registered in the first 6

months of implementation than in the last 30 years. More than 445,000 loans registered for a value of more than US$ 1 trillion. Colombia China

• Legal reform was implemented in 2007

and Registry launched in 2008 covering accounts receivable and leasing.

• More than 10.4 trillion dollars in

financing with accounts receivable (mostly for SMEs). Development of the factoring and leasing industries.

Source: World Bank Group

Global Collateral Registry Projects

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• Legal reform and new centralized
• nline registry, which launched in

March 2012, has provided 675,000 loans to more than 354,000 SMEs and 20,000 micro-enterprises.

• Total volume of financing through

the registry is US$ 27 billion. Vietnam Mexico

• Law reform and new centralized online

registry launched in October 2011.

• Over 150,000 loans have been

registered for a total secured amount estimated at over USD$200 billion. Loans secured with movables have grown fourfold.

• 45% of the loans to the agricultural

sector and 95% to SMEs. Businesses have saved US$4 billion in fees.

Source: World Bank Group

Ghana: Impact on SMEs - Supply Chain Finance

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CAL L BANK: : Purchase se Financin cing g Schem eme e for Gold ld Minin ing

Developed a local supply chain for big mining corporations, through local SME service providers

• More than 100 local SMEs have received more than US$ 10
• million. Created hundreds of new jobs.
• SMEs use movable assets (contracts, receivables, equipment) as

collateral.

• No defaults in the 30 months that program has been operating.

Number of loans registered 77,500 Value of loans registered US$ 20 billion Number of SMEs 8,000 Number of microenterprises 30,000 Collateral by type 25% inventory and receivables 20% household goods 19% vehicles

Source: World Bank Group

The Art of the Possible New Financial Products for SMEs Overview

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Enabling Framework

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Lending Products Borrowers Lenders Platforms Bank Regulation Secondary Market Registry Legal Framework Enforcement

Movables Finance Matrix

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FINANCIAL INFRASTRUCTURE

TITLE TRANSACTION LAWS SECURED TRASACTION LAWS COLLATERAL REGISTRY ENFORCEMENT SYSTEM BANKING REGULATION SECONDARY MARKET FINTECH & TRADING PLATFORMS POTENTIAL CREDIT PRODUCTS POTENTIAL COLLATERAL POTENTIAL BORROWERS

Consumer Financing Financial Leasing Equipment Financing Inventory Finance Merchant Financing Factoring Supply Chain Finance Accounts Receivable Financing ABL: Secured Lines of Credit Warehouse Receipt Financing Securities Lending Others Motor Vehicles e-Payments Raw Materials Inventory Accounts Receivable Negotiable Instruments Cash Bank Deposits Bills of Lading Warehouse Receipts Letters of Credit Securities Equipment Fintech & Digitized Assets Other Credit Card Receipts Consumers SMEs Informal Enterprises Corporates Special-Owned Business Micro-Businesses

Movables Finance Matrix

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FINANCIAL INFRASTRUCTURE

TITLE TRANSACTION LAWS SECURED TRASACTION LAWS COLLATERAL REGISTRY ENFORCEMENT SYSTEM BANKING REGULATION SECONDARY MARKET FINTECH & TRADING PLATFORMS POTENTIAL CREDIT PRODUCTS POTENTIAL COLLATERAL POTENTIAL BORROWERS

Consumer Financing Financial Leasing Equipment Financing Inventory Finance Merchant Financing Factoring Supply Chain Finance Accounts Receivable Financing ABL: Secured Lines of Credit Warehouse Receipt Financing Securities Lending Others Motor Vehicles e-Payments Raw Materials Inventory Accounts Receivable Negotiable Instruments Cash Bank Deposits Bills of Lading Warehouse Receipts Letters of Credit Securities Equipment Fintech & Digitized Assets Other Credit Card Receipts Consumers SMEs Informal Enterprises Corporates Special-Owned Business Micro-Businesses

Types of Lending with Movables

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SME Financing Financial Leasing Factoring Asset Based Lending Supply Chain Finance Inventory Finance

SME Financing

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SME Cash Cycle / Collateral

Payment Sale of Product Transformation Process Purchase Raw Materials

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The Art of the Possible New Financial Products for SMEs Factoring

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Factoring

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LEARNING OBJECTIVES  Focused objective is to gain a firm understanding of factoring and enhance skills, in order to sell, utilize and process factoring transactions in line with established standards;  Equip participants with sufficient knowledge to understand and avoid operational risks involved in invoice financing;  Provide micro lenders and banks and their clients with a sound understanding of factoring principles, allowing them to better structure trade transactions, improve risk assessment skills and identify opportunities where factoring could be utilized as a financing tool to facilitate the optimization of clients’ trade activities.

Factoring

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LEARNING OUTCOMES At the end of the training, participants should be able to:  Gain knowledge on factoring and how it works;  Gain deepened understanding on why businesses factor;  Gain understanding on what factors look out for before signing clients on;  List the factoring process and explain the techniques to establish productive factoring relationships.

Factoring

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Factoring

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What is factoring?



How does it differ from commercial lending?



Who are sellers in this context?



Who are clients in this context?



Who are account debtors in this context?

Factoring

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" refers to:  the outright purchase and sale of accounts receivable (A/R) invoices at a discount from their face value.  the structure, terms and conditions

• f

such a transaction may vary in any number

• f

ways, as evidenced by the array of factoring programs currently available.

Factoring Definitions

• Factoring is a transaction in which a business sells its invoices, or

receivables, to a third-party financial company known as a “factor.” The factor then collects payment on those invoices from the business’s customers.

• Factoring is also called “Purchase of Receivables”.
• The main reason that companies (Sellers) choose to factor is that

they want to receive cash quickly on their receivables, rather than waiting the 30 to 60 days it often takes a customer (Obligor/Account Debtor) to pay.

Source: http://www.rtsfinancial.com/guides/what-factoring

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Factoring Definitions

• When factoring an invoice, the factoring provider

advances to you (Seller) a percentage of that invoice value, usually within 24 hours. The factor will then pay the balance of the invoice, minus fees, after it collects payment from the customer (Obligor/Account Debtor).

• The cash advance rate can vary depending on what

industry the client (Seller) company is in and which factor is chosen. The advance rate can range from 80%

• f an invoice value to as much as 95%. The client (Seller)

industry, the customers’ (Obligor/Account Debtors’) credit histories and other criteria help determine the advance rate received.

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Factoring Benefits

• Boosting cash flow is the main reason most companies factor.
• Factors provide free back-office support, including managing

collections from customers.

• Factoring is based on the quality of the customers’

(Obligor/Account Debtors’) credit, not the client’s (Seller’s) credit

• r business history.

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Factoring Benefits

• Factoring can be customized and managed so that it provides

necessary capital it is needed (seasonality).

• Factoring is not a loan, so no debt is incurred debt when factoring.
• Factoring is scalable, meaning the amount of funding can grow as

receivables grow.

Source: http://www.rtsfinancial.com/guides/what-factoring

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Factoring

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Forms of factoring programs include: 1. Maturity Collection with credit insurance 2. Factoring (purchase of invoice) 3. Account Receivable (AR) Financing

Factoring Definition

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GOODS INVOICES BUY INVOICES COLLECTIONS

Factoring Flows

Invoice Sale + Confirmation

   

FACTOR SELLER Obligor/Account Debtor

• 1. SME seller of goods or

services delivers to Obligor/Account Debtor and sends invoice for sale

• 2. Obligor/Account Debtor

confirms delivery and terms of invoice

• 3. SME discounts invoices

with factoring company

• 4. Obligor/Account Debtor

must pay factoring company and Seller notifies Obligor/Account Debtor of the transaction

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Factoring Flows - Roles

FACTOR SELLER Obligor/Account Debtor

• Can be
• Bank
• Non-Bank
• FinTech
• Also called “Factoring

Provider”

• Purchases receivable

from Seller

• Can be
• Manufacturer
• Farmer
• Producer
• Service Provider
• Large or Small Business
• Also called “Client”
• Is originally owed payment

from the Obligor/Account Debtor for product or services purchased (Creation of Receivables)

• Can be
• Distributor
• Retailer
• Large or Small Business
• Government
• Also called “Customer” or

“Debtor”

• Originally owes payment to

the Seller for product or services purchased

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Factoring Flows

Invoice Sale + Confirmation

   

FACTOR SELLER Obligor/Account Debtor

• 1. SME seller of goods or

services delivers to Obligor/Account Debtor and sends invoice for sale

• 2. Obligor/Account Debtor

confirms delivery and terms of invoice

• 3. SME discounts invoices

with Factor

• 4. Seller notifies

Obligor/Account Debtor

• f the transaction and

Obligor/Account Debtor must pay Factor

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Factoring Flows

Invoice Sale + Confirmation

   

FACTOR SELLER Obligor/Account Debtor

• 1. SME seller of goods or

services delivers to Obligor/Account Debtor and sends invoice for sale

• 2. Obligor/Account Debtor

confirms delivery and terms of invoice

• 3. SME discounts invoices

with Factor

• 4. Seller notifies

Obligor/Account Debtor

• f the transaction and

Obligor/Account Debtor must pay Factor

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Factoring Flows

Invoice Sale + Confirmation

   

FACTOR SELLER Obligor/Account Debtor

• 1. SME seller of goods or

services delivers to Obligor/Account Debtor and sends invoice for sale

• 2. Obligor/Account Debtor

confirms delivery and terms of invoice

• 3. SME discounts invoices

with Factor

• 4. Seller notifies

Obligor/Account Debtor

• f the transaction and

Obligor/Account Debtor must pay Factor

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Factoring Flows

Invoice Sale + Confirmation

   

FACTOR SELLER Obligor/Account Debtor

• 1. SME seller of goods or

services delivers to Obligor/Account Debtor and sends invoice for sale

• 2. Obligor/Account Debtor

confirms delivery and terms of invoice

• 3. SME discounts invoices

with Factor

• 4. Seller notifies

Obligor/Account Debtor

• f the transaction and

Obligor/Account Debtor must pay Factor

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To Lend or Purchase Receivables?

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Factoring Benefits

• Allows a company (Seller) to improve their cashflow
• Gives a company (Seller) control over their risk of

Obligor/Account Debtor default

• Provides a company (Seller) balance sheet relief regarding

Accounts Receivables

• Enables Obligor/Account Debtor to pay on normal terms

without pressure from Seller

• Gives a financial institution a secure mechanism for

‘financing’

• Factoring (done right) can be very profitable

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Factoring

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Companies engaged in the business of buying accounts receivable are called "Factors." It often exhibits a flexibility and entrepreneurial awareness whose activities are more generally restricted by regulation and prevailing law.

Factoring

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Companies selling their receivables are typically referred to as "clients" or "sellers" (not "borrowers"). The client's customers, who actually owe the money represented by the invoices, are generally known as "account debtors" or "customers.“

Factoring

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Characteristically, there seems to be no industry-wide term of art to describe the actual event that occurs when a Factor accepts invoices for purchase. Common terms for this event include: "schedule," "funding," "advance," "assignment" and "transaction."

Factoring

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The cash which a Factor issues to a client as initial payment for factored invoices is typically called an "advance."

Factoring

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Difference between factoring and commercial lending Factoring differs from commercial lending because it involves a transfer of asset (account receivable) rather than a loan. In assessing risk, financial institutions look primarily to the quality of the asset being purchased (i.e. the ability to collect client receivables), rather than to the underlying financial condition of the seller/client. Suitable vehicle for growing businesses when traditional commercial borrowing proves either impractical or unavailable.

Factoring

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Factoring vs. Accounts Receivable (A/R) Lending Although factoring is occasionally confused with accounts receivable (A/R) lending, it actually differs both legally and operationally.

Factoring

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LEGALL Y

Factoring AR Lending

A factor takes immediate title to the invoices it purchases. An A/R never takes title to invoices unless and until the borrower defaults on its loan agreement. With the transfer of title, the factor purchases the right to collect payments directly from account debtors, who thus become legally obligated to the factor. An A/R loan does not legally

• bligate account debtors to pay

the lender directly, except when the lender notifies them

• f a default by the borrower.

Factoring

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OPERATIONALL Y

Factoring AR Lending The Factor concentrates on the aging, collection, and posting of each factored invoice. The A/R lender does not track the payment status of every individual invoice generated by the borrower in the normal course of business. The factor will find it necessary to contact individual account debtors directly as a matter of course. An A/R lender will have virtually no interaction with individual account debtors.

Factoring

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Recourse vs Non-recourse

 What happens when an account debtor becomes financially unable to make payment for an

• utstanding invoice that a factor has purchased?

The answer depends on whether the Factor operates on a Recourse or Non-recourse basis.

Factoring

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A Recourse transaction allows the Factor to make claims against the client in order to recover losses caused by account debtor insolvencies. Recourse factoring agreements generally require the client to repurchase any invoices that remain unpaid after a certain number of days (typically 60 or 90).

Factoring

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In a Non-Recourse transaction, the Factor purchases the underlying credit risk associated with each factored

• invoice. The client incurs no liability to the Factor if the

account debtor proves financially unable to make

• payment. In such an event, the Factor either absorb the

loss, or enforces action against the account debtor.

Non-Recourse Recourse Guarantee debtor credit Client refunds uncollected invoices May not be many opportunities in Brunei Well suited to smaller situations

Service depends on the client’s greatest need

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Need to manage risk Needs access to cash

Factoring

Factoring

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Events Undertaken in Factoring Process

Factor approves account debtors' credit Client submits invoices Factor receives and processes invoices Factor verifies invoices Factor disburses advances Factor notifies debtors Factor tracks invoice performance and collects payment Factor deposits and posts payment Factor disburses rebates to client Factor reports to client

To Lend or Purchase Receivables?

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Lending on receivables (ABL/AR Financing) Recourse Factoring Operationally more complex Simpler Requires specialized cash management through lock box Debtor pays factor direct Usually more cost-effective at larger volumes Works well for smaller clients

Factoring

The Art of the Possible New Financial Products for SMEs Supply Chain Finance

Supply Chain Finance (SCF)

Cash Conversion Cycle or CCC is the number of days that a business entity takes to convert its input resources into liquid cash flow. This metric aims to measure how much time a company takes to sell its inventories, collect its receivables and pay off its bills without any delay penalty being charged. Every dollar that is tied up to the process of production till it is recovered as sales are scrutinized to calculate the cash cycle of an entity. A lower number of days are the most desirable when it comes to Cash Conversion Cycle. CALCULATION The length of a cycle can be measured using the following formula: CCC = DIO + DPO + DSO Days Where, DIO = Days Inventory Outstanding DPO = Days Payables Outstanding DSO = Days Sales Outstanding

Sell finished product Cash Cash Profit Get paid Pay debts to suppliers Purchase inventory

• r raw materials

The Cash Cycle

The cash cycle

Supply Chain Finance (SCF)

Inventory Sold and Accounts Receivable Set Up Cash Remaining Cash to Bank Accounts Receivable Collected Cash Used to Pay Accounts Payable and Other Expenses Used to Purchase Inventory, Set Up Accounts Payable

The Cash Cycle

Cash cycle with customer and supplier credit

Credit to customer: Payment terms Credit from supplier: Payment terms

Supply Chain Finance (SCF)

Inventory Sold and Accounts Receivable Set Up

Cash advance from lender

Remaining cash repays loan Accounts Receivable Collected by lender

Cash Used to Pay Accounts Payable and Other Expenses Used to Purchase Inventory, Set Up Accounts Payable

The Cash Cycle

The end goal: Cash cycle with Lender, Buyer and Supplier credit

Credit to Buyer Payment terms Credit from Supplier: Payment terms Credit to borrower: Revolving line NOT a Term loan

Supply Chain Finance (SCF)

Supply Chain Finance (SCF)

Objective: To provide working capital to Supplier by enabling sale of account receivables on open account terms – while enabling buyer to improve working capital, or get better returns

• n their cash

Most popular: Reverse Factoring - Supplier funded through early payment (invoice amount less discount fee) on Buyer approved invoices Funded by a Bank, or Non-Bank financial institution (Payables Financing)

Supply Chain Finance aka “Reverse Factoring”

SME Financing Financial Leasing Factoring Asset Based Lending Supply Chain Finance Inventory Finance

Supply Chain Finance (SCF) Concepts

• A set of technology-based business and financing processes that link the

various parties in a transaction – the buyer, seller, and financing institution

• SME suppliers receive financing in relation to their receivables (money for

goods/services delivered) by a process that is started by the ordering company

• Allows the supplying company (SME) to receive better finance terms than

it would otherwise be able to receive from a lender

• The deal is based entirely on the credit-worthiness of the “Anchor” buyer

Supply Chain Finance (SCF)

Simply put, Reverse factoring is when a lending institution, interposes itself between a Buyer and its Suppliers, and commits to pay the Buyer’s Accounts Payables (its Suppliers 'accounts receivables) at an accelerated rate (often termed as “early pay” in exchange for a discount, primarily driven by enabled technology platform. The Funder as a Paying Agent, funds a Buyer’s supplier receives in relation to their receivables (money for goods/services delivered) by a process that is started by the ordering company (Buyer). It allows the supplying company to receive early payments on better finance terms (discount fee) than it would otherwise be able to receive from a lender on its own merit.

What is Reverse Factoring?

Supply Chain Finance (SCF)

Reverse factoring, or approved payables finance, allows Supplier to receive early payment with a discount, on an invoice due to be paid by Buyer. Buyer approves the invoice for payment and arranges for early payment by means of finance raised from a lender, who relies on the creditworthiness of the Buyer without recourse to the Supplier. The lender charges a discounting fee to the Supplier (cost of early pay) lower than what it would normally cost them for financing receivables. The arbitrage opportunity on the difference of cost of capital between large buying organizations and their smaller suppliers makes these vehicles popular for organizations that may not want to use their own capital to fund trade payables. A win-win for Supplier and Buyer

SCF / Reverse Factoring Flows

Goods Invoice

LENDER SELLER (SME) BUYER (Anchor)

Financing Pays Invoices

• 1. Anchor Buyer creates purchase
• rder to buy goods from SME

Seller

• 2. SME Seller delivers goods to

Buyer

• 3. SME Seller issues invoice to

Buyer

• 4. Buyer sends invoices,

confirmation and approval to Lender/ Platform

• 5. Seller asks Lender/ Platform for

discount facility

• 6. Lender/Platform provides

discounted finance

• 7. Buyer pays invoice to Lender/

Platform

1 2 5 6 4 7 SCF Platform Purchase Order 3

SCF / Reverse Factoring Flows - Roles

FACTOR SELLER BUYER

• Can be
• Bank
• Non-Bank
• FinTech
• Also called “Factoring

Provider”

• Purchases receivable

from Seller

• Can be
• Manufacturer
• Farmer
• Producer
• Service Provider
• Large or Small Business
• Also called “Client”
• Is originally owed payment

from the Buyer for product

• r services purchased

(Creation of Receivables)

• Can be
• Distributor
• Retailer
• Large or Small Business
• Government
• Also called “Customer” or

“Debtor”

• Originally owes payment to

the Seller for product or services purchased

SCF / Reverse Factoring Flows

Goods Invoice

LENDER SELLER (SME) BUYER (Anchor)

Financing Pays Invoices

• 1. Anchor Buyer creates purchase
• rder to buy goods from SME

Seller

• 2. SME Seller delivers goods to

Buyer

• 3. SME Seller issues invoice to

Buyer

• 4. Buyer sends invoices,

confirmation and approval to Lender/ Platform

• 5. Seller asks Lender/ Platform for

discount facility

• 6. Lender/Platform provides

discounted finance

• 7. Buyer pays invoice to Lender/

Platform

1 2 5 6 4 7 SCF Platform Purchase Order 3

SCF / Reverse Factoring Flows

Goods Invoice

LENDER SELLER (SME) BUYER (Anchor)

Financing Pays Invoices

• 1. Anchor Buyer creates purchase
• rder to buy goods from SME

Seller

• 2. SME Seller delivers goods to

Buyer

• 3. SME Seller issues invoice to

Buyer

• 4. Buyer sends invoices,

confirmation and approval to Lender/ Platform

• 5. Seller asks Lender/ Platform for

discount facility

• 6. Lender/Platform provides

discounted finance

• 7. Buyer pays invoice to Lender/

Platform

1 2 5 6 4 7 SCF Platform Purchase Order 3

SCF / Reverse Factoring Flows

Goods Invoice

LENDER SELLER (SME) BUYER (Anchor)

Financing Pays Invoices

• 1. Anchor Buyer creates purchase
• rder to buy goods from SME

Seller

• 2. SME Seller delivers goods to

Buyer

• 3. SME Seller issues invoice to

Buyer

• 4. Buyer sends invoices,

confirmation and approval to Lender/ Platform

• 5. Seller asks Lender/ Platform for

discount facility

• 6. Lender/Platform provides

discounted finance

• 7. Buyer pays invoice to Lender/

Platform

1 2 5 6 4 7 SCF Platform Purchase Order 3

SCF / Reverse Factoring Flows

Goods Invoice

LENDER SELLER (SME) BUYER (Anchor)

Financing Pays Invoices

• 1. Anchor Buyer creates purchase
• rder to buy goods from SME

Seller

• 2. SME Seller delivers goods to

Buyer

• 3. SME Seller issues invoice to

Buyer

• 4. Buyer sends invoices,

confirmation and approval to Lender/ Platform

• 5. Seller asks Lender/ Platform for

discount facility

• 6. Lender/Platform provides

discounted finance

• 7. Buyer pays invoice to Lender/

Platform

1 2 5 6 4 7 SCF Platform Purchase Order 3

SCF / Reverse Factoring Flows

Goods Invoice

LENDER SELLER (SME) BUYER (Anchor)

Financing Pays Invoices

• 1. Anchor Buyer creates purchase
• rder to buy goods from SME

Seller

• 2. SME Seller delivers goods to

Buyer

• 3. SME Seller issues invoice to

Buyer

• 4. Buyer sends invoices,

confirmation and approval to Lender/ Platform

• 5. Seller asks Lender/ Platform for

discount facility

• 6. Lender/Platform provides

discounted finance

• 7. Buyer pays invoice to Lender/

Platform

1 2 5 6 4 7 SCF Platform Purchase Order 3

SCF / Reverse Factoring Flows

Goods Invoice

LENDER SELLER (SME) BUYER (Anchor)

Financing Pays Invoices

• 1. Anchor Buyer creates purchase
• rder to buy goods from SME

Seller

• 2. SME Seller delivers goods to

Buyer

• 3. SME Seller issues invoice to

Buyer

• 4. Buyer sends invoices,

confirmation and approval to Lender/ Platform

• 5. Seller asks Lender/ Platform for

discount facility

• 6. Lender/Platform provides

discounted finance

• 7. Buyer pays invoice to Lender/

Platform

1 2 5 6 4 7 SCF Platform Purchase Order 3

SCF / Reverse Factoring Flows

Goods Invoice

LENDER SELLER (SME) BUYER (Anchor)

Financing Pays Invoices

• 1. Anchor Buyer creates purchase
• rder to buy goods from SME

Seller

• 2. SME Seller delivers goods to

Buyer

• 3. SME Seller issues invoice to

Buyer

• 4. Buyer sends invoices,

confirmation and approval to Lender/ Platform

• 5. Seller asks Lender/Platform for

discount facility

• 6. Lender/Platform provides

discounted finance

• 7. Buyer pays invoice to Lender/

Platform

1 2 5 6 4 7 SCF Platform Purchase Order 3

Supply Chain Finance (SCF)

Why is reverse factoring important?

• Suppliers have a difficult relationship with many corporate Buyers

as they dictate their payment terms. Suppliers also do not want to wait a long time to be funded as they are usually growing businesses with high capital expenditure costs. Conversely, suppliers understand the huge opportunity that is presented to them when faced with a purchase contract from one of these large entities.

• Reverse factoring started in the car industry, as it allowed car

companies to work more efficiently with their smaller supply

• companies. It also assists in industries where payment delays are

the main fear or roadblock to business.

Supply Chain Finance (SCF) Key advantages of reverse factoring

• The liability of the funder is concentrated on a large credit

worthy company

• It means that a funder does not have to worry about fraudulent

invoices

• There is clarity for all parties on knowing when payment will be

received; so no long or unnecessary delays

• It limits any disputes as both sides have agreed the invoice
• Reduces supplier cash flow demands and management of

invoices

• It is a validated regime, so as soon as both parties have agreed

to an invoice – the supplier is protected in a later non-payment event

Supply Chain Finance (SCF)

• A funder only has one party to collect payment from – which is

usually a large corporate

• Close relationships are created between buyers and groups of

suppliers; allowing new companies to work with large corporates

• There is less administration and chasing for payment
• The agreed rate in relation to the whole invoice is advanced,

compared to in a standard discounting scenario where there is a percentage advance rate with the collecting of a further sum on payment

• Liability and risk is assumed by the (usually) larger buying

company, so the rate of interest is lower

Supply Chain Finance (SCF)

Benefits

• A simple system set up and there are lower costs involved to the
• supplier. The reason is due to the funder taking credit risk on the

large corporate compared to the small supplier. The financier behind a scheme may also charge the supplier a couple of percent

• f their funding line, to join the reverse factoring scheme.
• Provide a line of finance to companies that was previously
• inaccessible. Growing suppliers are able to receive funding

quicker, so assisting with their growth and avoiding any potential insolvency situation. It also important to note that reverse factoring less expensive than traditional factoring arrangements.

Supply Chain Finance (SCF)

Benefits to Buyer

• Buyer can have longer payment terms with the

suppliers without having to negotiate any other consideration such as prices (extension of Daily Payables Outstanding-DPO).

• Trade payables increase so the buyer experiences

efficiency in daily operations. This further results in working capital optimization for the buyer.

Supply Chain Finance (SCF)

• Buyers can also take benefits of cash discount

while still paying for the invoice at invoice maturity date. This requires a pre-arrangement with the lender.

• An off-balance sheet finance option, the overall

balance sheet of the buyer also looks good with better ratios of trade payables turnover, days payables outstanding, working capital turnover,

• etc. This helps in raising other sources of finance at

better rates.

Supply Chain Finance (SCF)

Benefits to Supplier

• Receive payments for 100%of invoice value, less discount

fees

• Reduce Daily Sales Outstanding (DSO)
• Suppliers can get faster access to cash at advantageous
• rates. This also results in faster cash conversion

cycle from delivery to cash

• Similar to the buyer’s advantage, the overall balance

sheet of the suppliers also looks good and they can get future finance at better rates.

Supply Chain Finance (SCF)

• Opportunity to discount receivables at a better rate

than other trade finance options by leveraging Buyer credit

• Early cash without pledging other tangible

collaterals, with the privileges for insurance against default of the Buyer without extra costs

• Supplier, with credit challenge, gains access to

credit from a financial institution for as long as it sells products or services to a credit worthy Buyer, with a prerequisite of undisputed sales and pre approved invoices

Factoring Versus Reverse Factoring

A) Traditional Factoring Seller Buyer 1 Buyer 2 Buyer 3 Factor B) Reverse Factoring Anchor Buyer Customer Supplier 1 Supplier 2 Supplier 3 Lender/Factor

Factoring (no anchor needed) Reverse Factoring (requires an Anchor) Advance Rate 80-90% 100% (less fees) Security Short term AR None – relies on Anchor ability to pay – Purchased Invoice Fee payer Supplier who takes out facility Anchor’s Suppliers Operations Invoices submitted and approved on individual basis Buyer approved, Supplier initiated, discretionary Arbitrage Savings None Anchor can reduce COGS or increase payable days Structure True sale of receivables but ultimately a secured loan True sale, off balance sheet finance for both Anchor and Suppliers Recourse? Recourse and non-recourse Non-recourse Collections Lender Lender via automated platform

Factoring Versus Reverse Factoring

Types of Lending with Movables

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Thank You! Connect on LinkedIn Bob Trojan: btrojan@natlaw.com

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