The supply chain finance technique of payables finance is widely regarded by the industry as a highly useful and beneficial tool for both buyers and suppliers. Payables Finance offers substantial benefits to both trading parties.

In spite of these obvious benefits, Payables Finance has received controversial press in recent times, particularly following the collapse of certain companies that have misused it, and such misuses are of significant concern for the industry. With this in mind, the Global Supply Chain Finance Forum (GSCFF) made up of the major global associations representing the trade finance market, BAFT, FCI the ICC, the ITFA and the EBA, would like to allay such concerns by clarifying what Payables Finance is and how it works.

The buyer identifies an invoice(s) or account(s) payable (on its books) for which it has given an unconditional, irrevocable commitment to pay, and the seller has the option to sell the receivable(s) (i.e. the counterpart of the buyer’s payable on its own books) and receive an early, discounted payment from the finance provider. The technique is ‘buyer-centric’ in that the buyer will typically arrange a payables finance programme with one or more finance providers in favour of its suppliers. The buyer encourages its suppliers to consider the use of this Payables Finance programme; the suppliers make an independent decision to utilise the programme.

The finance provider relies on the creditworthiness of the buyer and typically grants the financing ‘without recourse’ to the seller. Such ‘without recourse’ relates to the credit risk or risk of non-payment by the buyer of the invoice or account payable. It is common that certain elements of recourse are retained against the seller, such as relates to breaches of representations and warranties.

The buyer will pay the principal amount owed at the invoice maturity/due date or at another agreed upon due date directly to the finance provider. If there are any dilutions between the buyer and seller, it would be resolved outside of this Payables Finance structure.

The buyer acting as the ‘anchor party’ or programme arranger will have previously established a Payables Finance programme with a single or multiple finance provider(s) for the benefit of its (designated) suppliers. Whilst Payables Finance is often arranged by large corporate buyers and their finance provider, it can also be applied to non-investment grade and medium-sized buyers.

• A service agreement is entered into between the finance provider and buyer
• This will contain an undertaking issued by the buyer agreeing to pay ‘approved for payment’ invoices and accounts payable
• Receivables Purchase Agreement (RPA) between the seller and the finance provider under which the seller provides the finance provider with an assignment of rights (or transfer of title or the equivalent) to the asset(s) being financed, according to the jurisdiction in question.

• Default by the buyer, mitigated by careful risk assessment and monitoring
• Seller dilutions handled by credit notes and offsets against invoices due for payment, mitigated by the ‘approved for payment’ undertaking given by the buyer
• Operational risks resulting from multiple operational requirements to perfect ownership etc., mitigated by automation or ensuring possession of a negotiable instrument for the proceeds of the receivable
• Appropriate KYC/AML on the buyer and the seller, handled during the on-boarding procedures and subsequent post-transaction reviews
• Risk of double financing, mitigated by KYC and perfection of ownership of the receivable or ensuring possession of a negotiable instrument as per the relevant jurisdictional requirements
• Pre-existing security arrangements, mitigated by waivers or their removal and completing perfection requirements or ensuring possession of a negotiable instrument
• Lack of cor0070orate or signing officer authority, mitigated by legal due diligence

All the above risks are also mitigated by a robust monitoring, reporting and audit process regarding transactions, systems and controls.

Source: Global SCF Forum

• For the buyer improved payment and commercial terms and liquidity optimisation
• Greater supply chain stability from the point of view of the buyer
• Benefit of improved operating processes through automation
• For the seller, finance raised against a strong credit rating with lower implied cost of funding than would have been obtained on its own
• Also for the seller, working capital optimisation and improved cash flow forecasting and flexibility, including the option to not finance and hold the receivable until maturity
• Provides alternative sources of funding with reduced use of credit availability from traditional banking sources
• For sellers, the ability to manage potentially significantly longer payment terms imposed by financially strong buyers
• For the finance provider offers high quality transaction-based short term finance based on the credit of a prime buyer and supporting the business objectives of both trading parties.

‘Confirming’ as applied in the Iberian context may be considered as a variation with differing distinctive features, contractual relationships and operational procedures. Such facilities usually contain a binding commitment as to availability and inclusion of recourse to the seller.

An additional variant is ‘dynamic’ discounting whereby the buyer may utilise its own funds to pay an invoice or account payable prior to the original due date (see Glossary).

Reverse Factoring, which is also a synonym, is also used to refer to a ‘softer’ variant of Payables Finance, whereby the buyer does not formalise its commitment to the finance provider to pay the invoices at maturity, but does provide information on which invoices it considers valid and correct. In this variant, the buyer may introduce its suppliers to the finance provider. The scheme is then managed as a series of factoring or receivables purchase agreements between the finance provider and each of the sellers and thus lacks the element of an unconditional and irrevocable payment undertaking that is given to finance provider in a standard Payables Finance setup. This is also referred to as import or post-shipment finance.