Banking & Finance 1 Supply Chain Finance: "Win-Win" Financing Jonathan Walsh Partner +44 20 7919 1613 Jonathan.Walsh@bakermckenzie.com Jeremy Levy Senior Associate +44 20 7919 1550 Jeremy.Levy@bakermckenzie.com Introduction For corporates selling goods and/or services, supply chain finance is becoming increasingly popular. The reasons are clear. It allows suppliers access to financing at better rates than would otherwise be available and on a non recourse basis. Buyers also benefit as they are likely to get extended payment terms, prompt payment discounts and a robust supply chain without having to pay amounts early. If you are thinking about joining one of these programmes (as a buyer or supplier), here are some of the key points to consider to make the process as straightforward as possible. Why use it? Supply chain finance programmes offer significant advantages to all parties: The buyer can receive prompt payment discounts and/or extended payment terms. Its suppliers are less likely to have cash flow problems but without requiring the buyer to pay early. The supplier can receive cash immediately rather than wait for payment of receivables. Buyers often have better credit ratings than suppliers so suppliers can receive an attractive funding rate (on a non-recourse basis) based upon the quality of the receivable. The finance provider purchases receivables that the buyer has committed to pay, which gives the finance provider a high degree of comfort that it will be paid. How it Works The programmes typically work as follows: A buyer of goods and/or services signs up to a programme and invites related suppliers to sign up too. The buyer can upload an invoice received from its supplier. A supplier who has joined the programme can then sell the debt represented by that invoice (the "receivable") to a finance provider at a discount. The buyer commits to pay the receivable to the finance provider on its due date. Banking & Finance 2 Key Considerations Most supply chain finance programmes work by virtue of a dedicated IT platform and are designed not to interrupt day to day business. A few issues worth considering are set out below: 1) Affiliates - Relationships between buyers and supplier groups might cover multiple affiliates and jurisdictions. The company submitting invoices might not be the actual supplier. Determine exactly which companies should sign up to the transaction documentation at an early stage. 2) Jurisdictions - Different jurisdictions and legal systems have distinct approaches to supply chain finance. For example, some jurisdictions restrict the sale of receivables, have registration requirements (e.g. Uniform Commercial Code filings in the USA) or view a buyer agreeing to pay receivables owed by affiliates as a guarantee which will need to meet local law guarantee requirements. Local law input is essential. 3) Representations and Due Diligence - Programmes frequently require the buyers and/or suppliers to make various representations. Consider what due diligence of underlying contracts is appropriate to verify the representations and whether legal opinions are required. 4) Compatibility - If interaction between the IT systems and accounts of the buyer, supplier and platform provider is required, there may be data protection or licensing (as well as often practical) issues to consider. Conclusion Supply Chain Finance programmes benefit multiple parties and are on the rise. Some initial thought (and legal advice) should assist with a smooth process.