Explaining Supply Chain Finance and Greensill’s Woes

The concept that it often makes good business sense to delay paying suppliers, keeping cash free for other purposes, has been taken to new levels of complexity. A global industry has grown up of financial go-betweens who buy unpaid invoices at a discount. The firms give vendors cash sooner than if they’d waited for customers to pay -- if they’re willing to accept less than what they’re owed. Supply chain financing, as it’s known, is heralded by its champions as a “win-win” for all sides, but critics point to its opacity and concerns that big companies will use it to mask indebtedness. The struggles at Greensill, one of the new generation of supply chain financiers, are putting the practice under the spotlight again.

1. What is the point of supply chain finance?

In theory, it speeds up payments owed by businesses to their often cash-strapped suppliers. Third parties, traditionally banks and now also independent intermediaries backed by investors, pay suppliers the value of their outstanding invoices minus a discount. Proponents say the arrangement leaves all sides happy: Buyers get their goods weeks, or even months, before having to pay for them, while sellers get paid more quickly -- something many small companies aren’t used to. The intermediary closes the loop by collecting the full invoice amount from the buyer at a later date and profits from the spread.

Explaining Supply Chain Finance and Greensill’s Woes

2. Is this is a new idea?

Not entirely. It has historically been known as reverse factoring or accounts receivable financing (they’re subtly different), and the third party was usually a bank. What’s relatively new are financing startups such as C2FO, PrimeRevenue Inc. and Greensill that partner with large companies to proactively arrange early payments to their suppliers. They have turned supply chain financing into a marketable investment product paying returns of 5% or more. The bet is that the market is crying out for a middleman to knit yield-starved institutional investors into the increasingly elaborate global supply chain.

3. What’s happening with Greensill?

For London-based Greensill, which packages supplier bills into bond-like instruments, business appeared rosy when SoftBank Group Corp.’s Vision Fund, a mammoth investor in tech startups around the world, plowed $1.5 billion into the company in 2019. But Greensill moved close to collapse this week, and the Vision Fund was said to have written down its investment and to be considering a valuation of its stake at close to zero. Credit Suisse AG froze $10 billion of funds that purchase the debt securities issued by Greensill, citing “considerable uncertainty” about the valuation of some of the holdings. Germany’s banking regulator then shuttered Greensill Bank and asked law enforcement officials to investigate accounting irregularities at the lender. The regulator had earlier put pressure on Greensill Bank to reduce the concentration of assets linked to U.K. industrialist Sanjeev Gupta.

4. What are the criticisms of supply chain finance?

Small business lobbyists liken it to throwing a life jacket to someone you’ve just chucked overboard. There would be little need for it if companies adopted prompt payment practices. But for big corporations, delaying payment can boost cash flow and burnishes a key metric known as “working capital.” However, it doesn’t always end happily. Carillion, a collapsed British building contractor, became the poster child of how a program meant to improve the financial security of small businesses fed the reckless management of a big one. In its final year of business, Carillion lengthened its standard payment terms to 120 days and encouraged suppliers to use its bank-financed Early Payment Scheme. The result was that Carillion rapidly built up 500 million pounds ($700 million) of debt that wasn’t counted as such.

5. Why are watchdogs concerned?

Though it was entirely legal, Fitch Ratings Ltd. characterized Carillion’s use of supply chain finance as “an accounting loophole” that may be more widespread than investors realize. The lack of uniform auditing rules means the issue is proving increasingly divisive. Companies from Australian builder Cimic Group Ltd. to French retailer Casino Guichard-Perrachon SA have faced -- and rebuffed -- criticism about their use of trade finance. The design of the programs can also be curiously complex. Telecommunications giant Vodafone Group Plc once invested 1 billion euros ($1.2 billion) of its reserves into a fund managed by Greensill that contained thousands of its own unpaid bills. The investment existed on Vodafone’s balance sheet as an asset that offset its debts. The company discontinued the program seven weeks after its structure was first reported.

6. How big is the supply chain finance business?

Revenues derived from supply chain finance reached $50 billion to $75 billion in 2019, by one estimate. Demand for this type of financing has surged during the coronavirus pandemic, according to S&P Global Ratings. Consultancy McKinsey & Co. has forecast that as much as $2 trillion in payables could be financed this way in the future.

The Reference Shelf

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.