Financing receivables can often prove an arduous administrative exercise for corporates, requiring them to deal with a number of different buyers in order to sell an entire portfolio. Yet the days of such troubles may soon be at an end, as banks, factors and insurers work to create a single, syndicated buyer for entire receivables portfolios.
This will come as welcome news for frustrated treasurers—arriving at a time when supply chain finance solutions are in high demand. With firms looking to take advantage of the opportunities generated by increasing trade between emerging market economies and the implementation of the Single Euro Payments Area (SEPA) in Europe, supply chain finance techniques will be instrumental in underpinning a sustainable program of growth.
Of course, receivables financing will be at the very core of any such program. An old favorite for its liquidity benefits, the technique remains popular even in today’s more liquid markets.
Why the demand? In part, it can be explained by another well-known benefit: risk management. Selling receivables allows firms to offload exposure to specific geographies and industries—enabling them to invest heavily in these areas without shouldering the associated risk.
Beyond this, there is a growing appreciation of the technique’s less-celebrated benefits. Maintaining orderly and attractive balance sheets is a constant priority for treasurers, and by selling receivables, they can optimize their key performance indicators—lowering Days Sales Outstanding (DSO), raising asset quality, and improving debt/equity ratios.
Reaping these rewards, however, can be challenging. All too often, firms are unable to find a buyer prepared to finance their entire receivables portfolio—a problem caused by the fact that different buyers are structured in different ways. These structures in turn predispose buyers towards certain types of contract—and deter them from others.
For example, factors often work in partnership with insurers—using statistical models and analysis to spread their risk exposure evenly across a range of counterparties. This naturally lends them towards large numbers of small contracts. On the other hand, it means factors and insurers cannot afford to take on concentrated risks—ruling out the purchase of entire portfolios containing large contracts or numerous contracts focused on a particular sector or geography.
These concentrated risks can, however, be sold to banks. This is because banks work by carrying out detailed research on debtors—a system which enables them to be confident that contracts will be fulfilled. Of course, this is not an approach that can be reproduced for large numbers of small contracts, since it is more profitable for banks to focus this effort on contracts offering greater return.
These predispositions therefore leave firms with little option but to sell different parts of their portfolio to different buyers—an onerous task that eats away at the benefits of the technique, creating extra work for treasurers and forcing up DSO.
Collaboration has quickly emerged as the key to any successful solution, with the central idea that between them banks, factors and insurers can purchase receivables portfolios wholesale and subsequently divide the contracts among themselves.
Indeed, thanks to their diverse appetites, these buyers are ideally poised for collaboration. Banks are happy to assume the risks of the larger contracts, while factors and insurers can integrate the smaller contracts into their statistical models. Crucially, between them, they have the appetite to buy entire portfolios wholesale.
Realizing the potential of this collaboration, however, poses a challenge. One way of structuring the partnership is to set up a working group—buying receivables portfolios that no one firm would take on alone, and sharing contracts according to appetite.
Yet while this approach makes it quicker for corporates to find buyers, it still requires them to package their receivables for several different counterparties. A full solution requires a more cohesive service.
Digitalization can play an important role here. Banks are leading the way in the adoption of digital processes—an upgrade that enables them to onboard receivables portfolios far quicker than before. What’s more, via shared digital platforms, banks can distribute this information to their partners almost instantly—greatly simplifying the challenge of sharing contracts.
In view of this, buyers can present a more cohesive service to their clients by making the bank the fronting entity for their collaboration. In this way, clients have a single, familiar, point of contact throughout the selling process—with the buyers dividing the portfolio at a later stage.
A final challenge remains, however. The partnership must have uniform standards in terms of the information it asks for and the service it provides. Regardless of which firm is the ultimate buyer of a contract, these parameters must remain the same. This is a task complicated by the inherent differences between the banking and insurance industries—differences which have become entrenched in their respective regulatory frameworks. If this collaboration is to work, banks, factors and insurers must find a way of bringing their divergent practices in line, while continuing to respect their regulations.
Sebastian Hölker is head of structuring and implementation of SCF products at UniCredit.