- January 29, 2021
Global Supply Chain Finance Forum (GSCFF) announces update to its Standard Definitions to include description of corporate payment undertaking (CPU)
- August 28, 2020
Home of Supply Chain Finance Terminology
These aim to standardize and harmonize the existing Supply Chain Finance market terminology to make it operational and usable in daily practice by banks and non-banks when processing, financing and mitigating risk in trade transactions.
World trade volumes have seen a startling increase in open account transaction over the recent years. Already today more than 80 % of the total world trade volume (export) is settled by clean payment. This impressive ratio is expected to grow even further in the future. As a consequence banks are compelled to offer their corporate clients products that support fully automated processing as well as cost savings combined with payment assurance and financing options.
The graphic reflects the relative slow growth of traditional trade finance as against the exponential growth in open account trade activity, particularly in the last decade.
Open account transactions
Letters of Credit transactions
This document elaborates on an enhancement of the existing GSCFF Standard Definitions for Supply Chain Finance that have been released in 2016. Due to the global applicability of the SCF Definitions, it needs to be ensured that any changes to the existing SCF Definitions are carefully considered and aligned with all relevant stakeholders.
The update described in this document has been discussed and approved by the GSCFF Steering Board in October 2019.
This document describes the reasons, benefits and expected outcome of the proposed change and shall serve as a basis for actions that are required to accomplish the agreed change of the GSCFF Standard Definitions.
Corporate Payment Undertaking is provided as a buyer-led programme within which sellers in the buyer’s supply chain can, at their option, access liquidity by means of receiving discounted early payment. Such payment to a seller covers seller’s invoices (or buyer approved amounts relating to such invoices). The technique provides a seller of goods or services (seller) with the option of receiving the discounted value as early payment of outstanding invoices (that have an unconditional approval by the buyer to pay on the due date) prior to their actual due date and typically at a discount with cost of early payment more aligned to the credit risk of the buyer.
Whereas in Payables Finance the finance provider enters into receivables purchase arrangements with a seller, under a Corporate Payment Undertaking programme the early payment does not require receivables purchase but may require the seller to confirm the finance provider’s right to receive buyer payment and/or pass-through arrangements and/or acceptance as full payment of the approved invoice amount.
This SCF technique is subject to several naming conventions (consistency should be encouraged), which can overlap with Payables Finance. The Forum decided that the term Corporate Payment Undertaking is an appropriate name that captures the essence of the technique.
In 2016, the Global Supply Chain Finance Forum (GSCFF) published the Standard Definitions for Techniques of Supply Chain Finance (SDTSCF) in order to outline and establish common market practice guidelines.
This guide is the second in the series and is meant to complement the aforementioned publications.
This guidance is intended to benefit Finance Providers, Corporate/Commercial/SME clients, Investors, Regulators, Legal Practitioners, Accountants and Standards Bodies and other communities by clarifying common, accepted and emerging market practices in the risk management, documentation, and operational handling for Payables Finance transactions as defined in the SDTSCF. The scope of this guide is limited to the mechanics of the technique rather than how it is administered or executed.
Over the past decade, payables finance programmes have become a popular means of financing supply chains—bringing in new pools of investment liquidity from financiers to generate win-win benefits throughout the supply chain. For the buyer, this means improved payment terms and working capital optimisation, for the seller this means alternative sources of funding and at lower rates than most small and medium-sized enterprises (SMEs) can normally access. For both, it means more secure and stable supply chains and more sustainable business.
Such an arrangement should create benefits on both sides of the transaction. However, it is concerning to observe certain practices in the market and to read reports that this may not be the case in some instances, with criticisms emerging regarding these programmes: both their objectives and their outcomes.
The terminology will greatly enhance the ability of clients to understand, compare and select optimal solutions to their supply chain finance needs and consider the offerings as an attractive alternative to other financing models. Clients will be able to weigh alternatives, their advantages and disadvantages, and engage in a clearer and more relevant dialogue with finance providers and other supporting communities.
Download a PDF version of the terminology in English or Chinese language.
Supply chain finance is one of the fastest growing trade products, however, financial institutions often don’t use similar terminology or accounting techniques. The Forum, comprised of BAFT (Bankers Association for Finance & Trade), Euro Banking Association (EBA), Factors Chain International (FCI), International Chamber of Commerce (ICC), and International Trade and Forfaiting Association (ITFA), is issuing a series of guidance documents based on its 2016 Standard Definitions for Techniques of Supply Chain Finance to get all industry stakeholders on the same page.
The paper released today focuses on receivables discounting – a technique and form of receivables purchase, flexibly applied, in which sellers of goods and services sell individual or multiple receivables (represented by outstanding invoices) to a finance provider at a discount.
Supply Chain Finance is defined as the use of financing and risk mitigation practices and techniques to optimise the management of the working capital and liquidity invested in supply chain processes and transactions.
SCF is typically applied to open account trade and is triggered by supply chain events.
Visibility of underlying trade flows by the finance provider(s) is a necessary component of such financing arrangements which can be enabled by a technology platform.
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