MULTI-FUNDER OR SINGLE BANK?Choosing the Best Supply Chain Finance Program for Your Business

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Introduction

One of the most important decisions a company will make when selecting a supply chain finance partner is whether to choose a bank-led program or a fintech platform that leverages multiple funders. It’s a choice that has significant bearing on program success, coverage, financial risk and – most importantly – the ability for companies to meet the larger business objective(s) at stake. Those goals vary from the discrete, such as funding a specific innovation initiative or upgrade to infrastructure, to the far-reaching, such as finding the liquidity to fend off risk in the current global business climate.

Whatever the objective, it’s critical to understand the advantages and disadvantages of these two distinct approaches to supply chain finance. But that’s easier said than done in today’s increasingly crowded supply chain finance marketplace.

The current landscape includes a mix of financial institutions, fintech vendors (legacy and new entrants), supply chain/logistics companies and more – all of which bring a unique perspective to supply chain finance. As a result, it is difficult to pinpoint how some providers fund their supply chain finance offerings and whether their approach falls into the category of bank-led or multi-funder.

This white paper aims to cut through this confusion and answer the following questions:

What are the differences between a technology-led multi-funder offering and a bank-led approach to supply chain finance?

What are the advantages and disadvantages of each?

What are some common misperceptions about both?

Bank-led versus Multi-funder – What’s the Difference?

Bank-Led Supply Chain FinanceMany multinational financial institutions offer supply chain finance to their largest customers. Similar to other financing practices, the bank operates as the sole funder of the supply chain finance program.

There are a couple of perceived advantages to using this approach that warrant careful consideration. The first is leveraging and protecting the company’s existing relationship with the financial institution. Companies invest a lot of time and effort in developing strong relationships with their banks (and vice versa). Many believe that rewarding a banking partner

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with additional business leads to a stronger, more rewarding relationship that could ultimately benefit the company when it comes to future financial needs. Financial institutions market heavily to reinforce this belief. The second perceived advantage is domain of expertise. Supply chain finance appears to be a natural extension of a financial institutions’ product portfolios.

However, the limitations of bank-led supply chain finance provide strong counterpoints to the perceived advantages:

No single bank can meet the funding requirements of a global supply chain finance program. Even the largest global financial institutions lack the ability to serve all currencies and jurisdictions – thereby limiting the success and reach of a supply chain finance program. Additionally, just because a bank has historically provided coverage to a specific region or currency doesn’t guarantee that coverage will continue. Consider this: In 2014, Citigroup announced it would exit 11 countries where it was experiencing lower market returns amid a soft global economy. In 2015, Royal Bank of Scotland made a similar move to wind down its cash management and trade services in 25 of 38 countries. These are just two examples of how banks have responded to volatility in the business climate.

The risk of a single-funder approach is untenable. A cursory review of the banking industry over the last decade (as well as the current economic and geopolitical landscape) underscores the risks inherent in bank-led supply chain finance. What happens when a bank exits a jurisdiction as illustrated in the point above? For a supply chain finance program with suppliers in the affected geography, the consequences could be dire. The success of the program and the health of relationships with key suppliers are at stake.

Bank-led programs only target a certain type of customer and a certain type of supplier. Historically, only large investment-grade companies have had access to supply chain finance. This is a byproduct of how banks choose to manage risk across their customer base. Similarly, once a supply chain finance program is underway, the bank limits supplier participation to the company’s most lucrative and strategic suppliers.

Financial institutions are focused on finance, not supplier relationships. For bank-led supply chain finance programs, the focus is primarily on “finance” rather than “supply chain.” Supplier onboarding and support are secondary concerns despite the impact supply chain finance can have on supplier relationships.

Syndication is not the same as multi-funder. Many banks claim to be multi-funder but rely on a single funding source to syndicate funds or through selling notes.

Multi-Funder Supply Chain Finance

Recognizing the limitations and risks of a single-funder and bank-led approach, a different breed of supply chain finance providers has emerged. These providers are defined by two primary characteristics: (1) deep expertise in supplier onboarding and relationship building, and (2) the use of bank-agnostic tools and processes to connect multiple funding sources to a supply chain finance program.

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A multi-funder approach offers several distinct advantages, including:

The coverage of all currencies and jurisdictions. A multi-funder approach enables a company to execute a supply chain finance program that offers more diverse and more consistent coverage across varying jurisdictions and currencies. Companies are no longer held hostage to the risk tolerance of a single financial institution.

The ability to extend supply chain finance to more companies (and more suppliers) and yield more value for the business. Unlike most bank-led programs, a multi-funder approach allows a supply chain finance provider to bring in alternative sources of funding that can cover non-investment grade companies and any company’s smaller suppliers. By removing the investment criteria constraints of bank-led programs, more companies can employ broader supply chain finance programs that deliver more value to the business.

Strategic focus on increasing supplier participation and improving supplier relationship health. For some providers, supply chain finance is their core business. They are deeply invested in the success and scale of their customers’ supply chain finance programs and understand that the key to fully optimizing working capital is to increase program participation. To that point, these providers are well trained in helping their customers successfully execute supplier payment term extensions, onboard suppliers and provide ongoing support across the supplier base.

Common Misperceptions

As the supply chain finance provider landscape grows, so do misperceptions around the bank-led versus multi-funder debate. Here are three examples:

“Some bank-led programs use a multi-funder approach.” Some banks claim to bring in other sources of funding to fill gaps in jurisdictional and currency coverage. In this situation, the lead bank in the supply chain finance program will syndicate liquidity requirements to other banks. While this may look and feel like a multi-funder approach, it’s far from it. A key benefit of a true multi-funder approach is pricing competition. If one bank can’t offer a supplier competitive pricing and discounts, another bank can. In a syndication scenario, pricing is set by the lead bank and syndicates are forced to adhere accordingly.

Is Bank Syndication the Same as Multi-Funder? No. While banks may claim to have a multi-funder solution, it is most likely a form of syndication. This is when a lead bank spreads liquidity requirements and risk across multiple lenders (banks, investors, hedge funds, etc.)

Syndication presents three primary issues. First, there is pricing. With the need for coordinating and reporting among multiple funders, which all have various rate requirements, fees can be higher. Second, is the issue of transparency. There is no consent required by the buyer in a syndicated process, so the lead lender doesn’t have to disclose which other funders are involved in the program nor how much of the buyer’s funding requirements are being syndicated to other funders. Thirdly, the sustainability of the supply chain finance program still resides with a single financial institution. If the lead lender exits the funding structure for any reason, the program will collapse.

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“If a program isn’t bank-led, then it must be multi-funder.” Some non-bank-led supply chain finance providers claim to be multi-funder but still rely on a single or primary funding relationship. Because program funding is still tied to a single funding source, the coverage and program risks in this scenario are no different than the risks of a bank-led program.

“You can’t leverage your existing banking relationships with a multi-funder approach.” Some multi-funder supply chain finance providers will allow companies to bring their existing banking relationships to the funding mix. This enables a company to mitigate the risks of having a sole source of funding while also leveraging the strong banking relationships they’ve developed over time.

Conclusion

A multi-funder approach to supply chain finance is the most effective way to improve cash flow. Partnered with the right provider, companies can derive more value from their supply chain finance program and eliminate the risks that plague a bank-led approach – all while strengthening supplier relationships.

However, it’s important for companies to validate the funding arrangements of every supply chain finance program – whether bank-led or multi-funder. Questions to ask include:

- Does the provider use bank syndication to meet liquidity requirements?

- With which financial institutions does the provider have active funding relationships? Beware of providers that only have a handful of funding relationships.

- Can you leverage your existing banking relationship as part of your program’s funding mix?

By answering these questions, companies can cut through the noise in the marketplace and identify a partner that can unlock the full potential of supply chain finance in their business.

© 2017 PrimeRevenue, Inc.

Cash flow matters.About PrimeRevenue PrimeRevenue is the leader in working capital financial technology solutions, managing and optimizing cash flow for more than 20,000 customers in over 70 countries. PrimeRevenue processes more than $180 billion worth of payment transactions through its platform – helping companies unlock billions of dollars in working capital. PrimeRevenue uses an extensive database and sophisticated analytics, coupled with proven supplier onboarding processes to drive customized programs across complex global supply chains. www.primerevenue.com

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