Liquidity is among the big treasury themes that resonated in 2020 as CFOs and treasurers try to keep their organizations afloat amid the onslaught of Covid-19. Cash is again regarded as king as the business disruption impacted cash flow, making it imperative for many businesses to initiate adjustments to their payment practices.
Indeed, the pandemic has left many corporates struggling to maintain liquidity and optimize working capital. And this is where supply chain finance comes in as a facilitator to enable corporates continue operating against the challenging market environment. It becomes the lifeblood for many corporates during this pandemic as it also helps free up cash flow, thus preserving liquidity.
The supply chain finance programme comes in different shapes, sizes and forms – supplier, vendor, channel, dealer, distributor – depending on the requirements of the anchor clients. One of the winning solutions that stood out in 2020 was a bespoke accounts receivables’ purchase solution implemented by DBS on behalf of Microsoft to support extending payment terms to end customers without negatively impacting working capital. In addition to extending payment terms, the solution enables Microsoft to offer credit terms of up to three years as compared to the initial payment terms of 60 days.
There were also a number of uncommitted receivables purchase programmes implemented during the review period that accelerate the conversion of trade receivables into cash, while obtaining an off-balance sheet treatment of the receivables. The solution implemented on behalf of Lenovo by BNP Paribas involved the purchase of 100% of the invoice value due from Latin American buyers on a without-recourse basis.
There were likewise bespoke receivables purchase solutions backed by insurance policy, such as in the case for Umicore, again implemented by BNP Paribas, in which a Sinosure insurance policy was put in place to cover up to 90% payment risk of the pool of Chinese debtors. Another bespoke receivables’ solution backed by Sinosure policy was implemented for Wistron Corporation by Standard Chartered as it sought a working capital solution to monetize trade receivables due from a strategic buyer.
Sustainable supply chain finance solutions are also increasingly an area of focus as corporates demonstrate their commitments to environmental, social and governance (ESG) principles. DBS implemented a market-first sustainable cotton procurement supply chain financing programme, which provides financing incentives to farmers to grow organic cotton instead of conventional cotton. This shift in cultivation will yield long-term results such as reducing environmental damage at the farm by using organic farming techniques that discourage the use of chemical pesticides.
At this time when Covid-19 remains the biggest threat to business operations, supply chain finance is also a risk mitigant for corporates as it transfers risk of payment to banks. It increases corporate liquidity without raising bank debt and at the same time, it provides extended terms to buyers without impacting its balance sheet.
Over the past few weeks, The Asset has been revealing the other winners of The Triple A Treasury, Trade, Sustainable Supply Chain and Risk Management Awards 2021.
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The virtual awards ceremony for The Asset Triple A Treasury, Trade, SSC and Risk Management Awards 2021 is scheduled to take place on June 17, 2021.