Supply chain finance for SMEs comes under increased scrutiny

This article in the Bloomberg newsletter talks about the relative popularity of supply chain finance (SCF), which the article says is under intense scrutiny given the different treatment the financing tool is accorded compared to balance sheets. We have covered the space in the limb to research for many years and would suggest that the review is not necessarily new (which the authors themselves point out via examples in the article) but that the pandemic has increased business interest in these types of tools of financing. Thus, auditors are likely to come across cases more often, especially among SMEs, where the need for cash flow is greatest. There is an estimate of the size of the funding market (although we don’t have details on the methodology), and a downloadable piece is in the article, for which a link is provided. Interested readers can take a look.

“A $700 billion funding market that quietly greases the wheels of the global economy is coming under closer scrutiny from accounting watchdogs…A form of short-term borrowing, known as supply chain finance, works off of corporate balance sheets and has become so widespread that the U.S. Securities and Exchange Commission has called out Coca-Cola and Boeing to reveal details of their exposure to what some call the “hidden debt”.…

Funds used in practice have increased sixfold since 2015…’

Although the authors do not detail the particular types of SCF available (there are a few), or which types are being studied, the general concern is of course real and should be considered a risk at some level. . An example of a popular version is reverse factoring, in which the buyer uses their credit to provide a short-term loan to the supplier, which improves cash flow and helps suppliers in the long-term supply chain. tail. That should be a good thing in these times, but abuse is always possible. Worth a quick read for those interested in space.

“Big companies are resisting, saying the planned disclosure rules are unnecessary and hard to follow, and saying everyone wins in most cases. The supplier gets cash fast, the bank takes a cut, and the buyer protects working capital…

The world’s leading accounting bodies are now considering changes that would require companies to say how much supply chain finance they use, but that’s not enough for some investors…

“For the majority of investors, this is financial debt,” said Saul Casadio, director of corporate credit research at M&G. “If I can’t know the amount of debt in a capital structure, I can’t properly assess credit risk.”‘

Preview by Steve MurphyDirector, Commercial and Corporate Payments Consulting at Mercator Advisory Group