How to Structure a Supply Chain Finance Transaction

WHAT IS A SUPPLY CHAIN FINANCE TRANSACTION?

Supply chain finance is a financing method designed to support suppliers fulfill their orders especially in regard to a reputable and financially stable customer. The off taker equally benefits by extending their day’s payable and thereby managing their business better.

From the sponsors (banks) perspective this is a medium risk, short term, high income transaction income product. The risk is anchored on the reputation and credit worthiness of the off taker with whom the supplier does business with regularly.

If well-structured with the right parties has the opportunity to rake in more income with less risk and minimal provisional as regards to the regulators expectations of safe lending practices.

Transaction Checklist Items

NEGOTIABLE

Industry

Address

Audited Financials

Procurement Policy/Supplier On boarding Protocols

Memorandum and Articles of Association

NON NEGOTIABLE

Company Name

Annual Turnover

CRB number

PARTIES

Off taker – usually the Buyer issuing the Electronic Purchase Order (E-PO)

Supplier – usually the one delivering the goods or services to the off taker issue E-Invoice

Sponsor – Bank or Financial Institution delivering the Cash for the Transaction.

Platform – the facilitator of the transaction end to end electronically.

CONDUCTING YOUR KNOW YOUR CUSTOMER CHECKS

The key to a successful Know Your Customer is relying on business details for example does the Off Taker have a Bank Account are they known in the business community.  

BUILD A CREDIT PROFILE

You should go ahead and build a Credit Profile of the Off Taker, which may include a CRB check via trace only or a quick company registry search (it’s recommended you follow your bank guidelines as you compile your file)

APPROVING THE TRANSACTION

If you are comfortable with the Off Taker and the transaction you can follow normal procedure to approve the transaction and book the limit for the trade cycle – normally 90 days based on the industry, Oil and Gas is normally 120 days.

MONITORING THE TRANSACTION

One the limit is market, you can proceed to inform the off taker and ask them to sign up and proceed to push their transactions. You can only view what the Supplier has asked to Discount and nothing else neither can you control view any other transaction on the platform.

BUILDING TRANSACTION SIZE

You may choose to increase the limits of the program fo the off taker based on internal approved protocols such that an off taker who started out with a limit of 1Bn can now access 2.5Bn in the next 90 days trade cycle enabling manageable portfolio growth and better risk management.

PAYMENT TERMS

Payments must be made to the ESCROW ACCOUNT to better manage any delinquencies and delays in payment so it doesn’t affect the supplier’s credit ratings.

COLLECTING YOUR PROFIT

Your profit is a % of the amount discounted for example an invoice worth 100,000, you can discount up to 80,000 (80%) of the amount hence your interest is calculated based on 80,000/period of the outstanding

CALCULATING PLATFORM FEES

Platform Fees (0.5%) of Approved Transaction Value only example on a 1,000,000 transaction the platform fees are 5,000 only.

BE MINDFUL

AML/KYC Concerns – these should never be ignored.

Be vigilant

TRANSACTION HEALTH

Early warning signs – may include reduced order volumes. Delayed payments. Adverse Media and many other news sources related to the industry or particular off taker.

PROVISIONING FOR SUPPLY CHAIN FINANCE TRANSACTION

If you experience a delay in recovering payment on due date, you have a list of communication templates to use as reminder to the off taker before you conclude on legal action.

RECOVERING UNDER A SUPPLY CHAIN TRANSACTION

When an invoice is discounted a Sponsor receives a Notification of Assignment which is the legal ownership of the transaction proceeds enabling the Sponsor to commence full recovery from the off taker for the trade credit including Garnishee Orders, seizure and other remedies available swiftly from the commercial court.

Tripartite Agreement – this emphasizes the existence of a relationship between the off taker, supplier and the sponsor and its terms are clear on what happens in the event of any breach by the parties.