Deutsche Bank: Ready, Willing and ABL
In the search for liquidity, many large organisations look to optimise their financial supply chains and alternative sources of funding. Some financial services providers believe that these internal and external efforts will provide corporates with the platform to make greater use of asset-based lending, as Axel-Peter Ohse of Deutsche Bank explains to FDE.
Corporates have started to take much greater interest in ABL, which offers them a source of secured funding at a time when credit is tight. At the same time, they are looking at financial supply chain optimisation to make cash flow more efficient. The combination of these tactics could be vital in the current climate.
‘ABL is making available credit against an ongoing flow of good trade payment obligations,’ says Axel-Peter Ohse, head of Trade Finance in Germany for Deutsche Bank.
‘It can be initiated either by owners of account payables of good rating. It can also be initiated reversely by buyers who make available their own credit standing to allow their suppliers to either get credit against their payment obligations to them.’
For many corporate clients the interest now is not in arbitrage or strengthening supplier scoring but in where to find liquidity.
‘Corporates can look to their financial supply chain or they can look to their relationships with banks to try to increase credit,’ says Ohse.
Optimising financial supply chain efficiency is a vital task for the finance department, but Ohse points out that a finance department cannot do it successfully without support from the rest of the business.
‘What is clear now is that the silos within a corporate – treasury, procurement, logistics, sales and everything else – are all talking to each other. They must have a joint and commonly understood strategy on payment terms and the treatment of suppliers,’ he says.
He believes this communication is essential in defining how many exceptions will be allowed in the flow of payments, and will focus minds on whether particular suppliers are needed or can be substituted.
He also believes that it is only after substantial internal discussions have taken place to establish a clear strategy on risk allocation and governance that corporates will be in a position to contemplate ABL.
‘You should not consider ABL to cure a distressed financial situation since the trade assets which you provide to the bank essentially derive from and request for ongoing smooth operational performance; in that respect it is not for use as a last resort to acquire finance,’ Ohse stresses.
The ABL advantage
ABL usually helps to adjust the time difference between incoming money from accounts payables and outgoing money from accounts receivable. It can convert initial payment terms to cash payments on the payables side or to initiate a lengthening of terms on the receivables side while financing the relevant supplier through a bank programme. This is usually helped by electronic platforms which link buyers, sellers and a financing bank.
However, the benefit of using ABL lies not only in its ability to unlock funding, but also in its cost profile.
‘ABL can give a company added liquidity over a set period which can be linked to certain transactions, with positions that can be liquidated at the end. Unlike an overdraft you can see where the money goes and where it comes from,’ explains Ohse.
Deutsche Bank has made great efforts to ensure that it can provide the treasury consulting services that help clients to put the right data processes in place to capture cash flow information. From there it can advise on how to optimise the financial supply chain and manage the risks that lie therein.
‘The data is usually there in the ERP system, it is just a question of how to access it. Some companies don’t want to give up their sensitive data, but it is a choice of whether they want ABL or not. Use the data you have so you have a good package to show a bank when you‘re discussing credit,’ advises Ohse.
Thorough preparation, process reorganisation, choice of banking partner and, above all, clear lines of communication between internal functions can not only enable financial supply chain optimisation, but also provide a strong platform from which to seek much-needed credit through products like ABL.