Lloyds TSB: The Success of Supplier Finance – Colin Hemsley
The poor state of the world’s economic health has revealed the extent to which the prosperity of individual countries is tied to the performance of their partners in the wider global economy. Drill down to the level of individual corporates and you find a growing awareness among companies that they are tied to the performance of their partners in the supply chain.
Developing long-term, sustainable strategies, especially in uncertain times like these, means looking beyond an organisation’s own walls and working closely with key suppliers to support and strengthen the physical and financial supply chains. After all, the failure of an important supplier can expose a company to considerable risk.
This sense of connectedness, along with the consequent desire to strengthen the links in their supply chains, is one of the many reasons why companies are looking to take advantage of supplier finance programmes.
‘It is an area of urgency for many companies,’ says Colin Hemsley, head of Major Corporate & FI sales, Transaction Services for Lloyds TSB Corporate Markets. ‘We have seen a move towards unlocking supply chains, and the real shift is that people are taking action. They are doing it to support working capital, to support their key suppliers and to mitigate risk.’
Lloyds TSB has been operating its supplier finance service (SFS) to UK investment-grade corporate and global businesses for three years. Sitting alongside the bank’s solutions for trade, import, pre-shipment and post-shipment finance, SFS enables corporate clients to manage their payments to suppliers more efficiently. By using the service, companies can ensure that their suppliers receive payment on a date of the supplier’s choosing, which can be earlier than the agreed payment terms.
By providing the funding to the supplier, banks such as Lloyds TSB can help corporate clients improve their working capital and profit margins, while also improving cashflow for suppliers. In short, payment terms can be extended, but suppliers are still paid on time.
‘Companies are increasingly using supply chain structures to boost working capital, increase DPO or get cash in quicker. They are also using structures that support key suppliers that are less financially robust, but who can be helped in generating working capital by collaborating with a larger partner. The ability to mitigate risk is a big motivator, which is why we have seen such a significant change in attitude,’ Hemsley remarks.
Seeing the light
Companies are starting to heed the message that some banks understood a long time ago. Although some financial institutions have withdrawn from the arena of trade finance, those that remain are committed to it, and have been spreading the message that banks can help corporates improve the efficiency of their supply chains even though there is still a squeeze on traditional sources of credit.
‘This area of working capital is something that we have been talking about for years, but only now are we seeing a wider pool of corporates use it. Companies need more support now that there is less liquidity in the market. They have a need for working capital and even though global trade is weakening there is growing use of trade finance by large, well-known organisations,’ Hemsley says.
Companies have started to look in earnest at improving their working capital position by focusing on schemes related to suppliers, inventory and finance, but whichever path they take there is certainly a shift in perception of the value these structures can bring.
Their potential benefits have been thrown into sharp relief in the economic downturn, so companies are looking to improve the flow of funds in their financial supply chain. Services such as SFS are helping corporates to support their suppliers and mitigate risk along the supply chain, which enables them to take an increasingly strategic view through building long-term and sustainable relationships, which in turn brings greater predictability and stability to the supply chain.
‘When times are hard it is tempting to squeeze payment terms with suppliers, but more companies are now realising that those suppliers have a threshold in regards to quality, delivery and payment conditions,’ says Hemsley.
Suppliers are able to receive funds earlier, and with their improved access to credit they can increase production more easily. Payment terms become more flexible and liquidity along the supply chain can be greatly improved as the time to capture the value of an invoice is shortened.
‘One of the biggest differences we have seen in the last year is that more corporates are getting a better view of cash management in general. They want good visibility of the cash with the group on a global basis, which enables them to improve risk management, especially when it comes to bank risk,’ Hemsley explains.
‘They also want to decrease costs, so they are lowering their debits with credit balances and maximising income. So, they are looking to banks to help them leverage the strengths of their specific supply chain, which is why people are no longer just talking about supplier finance programmes, they are aggressively mandating them,’ he adds.
The events of the last few months in the world’s financial markets, which have led to greatly increased awareness of bank risk, have forced companies to look much more closely at their relationships with their providers of financial services, as well as their relationships with key suppliers in the physical supply chain.
‘Relationships between banks and their clients have changed a lot in the last year. We are now operating in a radically different environment,’ acknowledges Hemsley.
Trust is a more important element in banking relationships than ever before, which is no surprise given that bank risk is perceived to be much greater than most companies had previously accounted for.
‘Banks were once seen merely as places to buy financial products, just like buying raw materials from a supplier, and corporates had an aggressive approach to buying the products banks were offering. Now there has been a big change. Companies want banks to have a close working relationship with them,’ Hemsley adds.
Indeed, the quality of the relationship between a company and its provider of supply chain finance programmes can be crucial to the success of any structure aimed at improving working capital and strengthening the bonds with key suppliers in the physical supply chain. This is largely because any supply chain finance structure must be sufficiently flexible to adapt to the specific needs of a company. There is no ‘one size fits all’ solution.
As a result, banks must understand the complexities of a client’s supply chain. In this respect Lloyds TSB is well placed, not least because it was the originator of relationship banking for corporate customers.
Furthermore, Lloyds Banking Group is well capitalised and has made a firm commitment to engage in lending to UK corporates. It also has an electronic trading platform – Lloyds Online Trade Services – that is recognised as one of the market leaders. Add to this a sector-focused sales force and it becomes clear why the bank has been able to engage fully in the provision of supplier finance services.
‘Customers want banks to be proactive in helping them improve efficiency in the supply chain, which means understanding their business in detail. They also want operational clarity from their banking partners. People want to now exactly what they have to do to improve the performance of their physical and financial supply chains, and they want to know what is happening in their financial supply chain at any given moment,’ explains Hemsley.
Lloyds TSB knows how valuable it can be for small or start-up companies, SMEs or major corporations to have access to the funding that supplier finance schemes offer, and its commitment to these services means it already has the experience and sector focus that companies need now that they are turning thoughts into action.