Supply chain finance is making the news for all the wrong reasons. Although it is a centuries old form of finance, it has played a part in the demise of Abengoa, NMC, Carillion and most recently, Greensill.
Here is a simple slide that explains the basic concepts behind factoring and supply chain finance. Download a version for PowerPoint below.
This raises some interesting questions for students (and regulators):
- to whom has the finance provider extended credit: the supermarket or the farmer?
- within the financial statements of the supermarket, how should the amount owed to the farmer be disclosed?
In factoring, the finance provider extends credit to the farmer. In supply chain financing the finance provider extends credit to the supermarket. The supermarket will usually have a higher credit rating than the farmer, in which case supply chain financing will be cheaper than factoring.
Currently, the supermarket discloses the amount owed to the farmer within accounts payable (trade creditors), even though this is more like a credit line provided by a bank. There is an argument that these amounts should be included as part of debt.
Whatever your personal view, there is a strong case for better disclosure within financial statements of this type of financing arrangement and better regulation of supply chain finance.
None of this is new. As far back as 2004, the Office of the Chief Accountant at the SEC objected to entitites classifying amounts due to financial institutions as accounts payable1. The editorial board of the Financial Times called for this on 4 March 20212, and auditors have been seeking clarification from regulators for months.
Download: Supply chain finance (PPTX)
- Comerford R. (2004) Speech by SEC Staff: Remarks before the 2004 AICPA National Conference on Current SEC and PCAOB Developments, U.S. Securities and Exchange Commission
Available at: https://www.sec.gov/news/speech/spch120604rjc.htm (Accessed 10 May 2021).
- Financial Times (2021) Greensill case shows risks of supply chain finance. Available at: https://www.ft.com/content/706203ec-4786-48f1-b859-ffe4c9171eee (Accessed 7 April 2021).