I was recently alerted to a senior logistics professional who argued that supply chain finance, in particular reverse factoring, would develop into a pyramid game. This was supported by a bank advising an SME transportation company not to engage in reverse factoring, as this would decrease the quality of his balance sheet. Even further, his bank advised that a portfolio of debtors would be a relatively safe collateral while having the actual cash would give the bank less control over potential whims of the SME. Aside from the fact that this is simply not true (reverse factoring is generally non-recourse), this observation is characteristic of the fact that financiers are taking control of the reverse factoring decision, while supply chain managers should actually be at the heart of this decision.

Actually, proper usage of supply chain finance techniques such as reverse factoring can improve operational performance and reduce supply chain risk. Hence, SCF can improve the competitiveness of a company’s supply chain, both of the OEM offering the reverse factoring arrangement and of its suppliers taking the immediate advantage. In a widely publicized news clipping, Caterpillar has deployed reverse factoring during the credit to make its key suppliers survive. In the capital goods manufacturing industry, a small group of key suppliers can be crucial in the success of the entire supply chain. By improving their liquidity, they will be able to much better follow in the typical strongly cyclical markets. Of course, reverse factoring can be misused by exclusively administering the benefits towards payment term extension of the OEM, and many of those examples obviously abound. One of the large companies in the Eindhoven area, as a counterexample, however gave all of its financial advantage reached through reverse factoring to its suppliers, but demanding in return more operational flexibility: no short term balance orientation, but real supply chain improvement. In another example, a large company that had implemented VMI (advocated by logistics professionals for balance sheet reasons but very increasing financing cost) to also adopt reverse factoring to counter the negative financing cost implications.

For transport and other service providers, that do not provide physical, storable products, supply chain finance is still to be developed in smart ways. But also there I can see many mutual opportunities, for instance in eco-friendly investments in transport equipment. All of this suggests that supply chain finance can provide operational (thus real rather than balance sheet) improvement in your performance. This however requires a well-trained supply chain manager, that has sufficient finance knowledge to counter the simplistic arguments of his company’s current financier.

(this text is based on a Dutch text in this blog authored by myself, Kasper van der Vliet, and Matthew Reindorp)