Late September 2025, the First Brands Group, LLC (FBG) filed for US Chapter 11 bankruptcy protection. Their chief restructuring officer declared debt totalling $11.5b. In the mix of debt were debt labelled “unsecured supply chain finance” of $800MM and “accounts receivable factoring” of $2.3b.

What was the nature of the supply chain finance debt under these labels?

“Unsecured Supply Chain Finance”

The Official Form 204 listing the top 30 creditors included thirteen financiers with SCF claims on First Brands. The SCF referenced was most likely Payables Finance. This describes a buyer-arranged financing for its suppliers within the credit terms provided by the supplier for its sales to the buyer. 

Under the arrangement, participating suppliers may avail financing before payment from the buyer is due, normally on non-recourse basis, from the buyer’s financial institution partner. Within the period of supplier credit, the buyer reflects the amounts billed by the supplier as accounts payable.  At the due date for payment, the buyer pays the amount to the financial institution.

Payables Finance tends to be offered by banks to buyers of strong credit standing, usually investment grade companies or near investment grade.

“Accounts Receivable Factoring”

First Brands had two types of Accounts Receivable Factoring, which they labelled “Customer Factoring” and “Third-Party Factoring”.

Factoring is a financing method where the supplier sells its receivables to a financial institution, either on a recourse basis or without, to avail financing before payment from the buyer is due. The financing is settled from payment by the buyer.

In First Brands’ “Customer Financing”, the financing is provided by the financial institution partners of their customers, likely under their customers’ Payables Finance programs. The amount financed under such programs would not constitute debt to First Brands, because they are early payment for amounts owed to them under supplier credit, with payment at maturity settled directly by their customers with the financial institutions.

Differently, their “Third-Party Factoring” is financing arranged with their own financial institution partners. These are financing for the supplier credit they provide to their customers, where the financial institution advances an amount to them against assignment of the receivables to the financial institutions.

What is “Off-Balance Sheet” in SCF?

The term “off balance sheet” refers to financing that is not accounted as financial debt in the books of the party receiving or arranging the financing.

In Payables Finance, the buyer arranges financing for its suppliers within the credit terms provided by the suppliers. The buyer’s financial institution partner normally provides the financing based on the buyer’s irrevocable undertaking to pay on the future due date of its approved payables. If the financial institution has advanced the payment to the supplier, it would apply the buyer’s payment to settle the advance; if it has not advanced payment to the supplier, it would transfer the buyer’s payment to the supplier.

In Receivables Discounting (which includes Factoring), the supplier sells its receivables to a financial institution to receive advance payment. It sells the receivables by way of assigning or transferring the receivables to the financial institution. Receivables Discounting can be availed with recourse or without recourse to the seller. When it is with recourse, the seller has the obligation to repurchase the receivables and pay the amount to the financial institution if the buyer defaults. When it is without recourse, the seller is not obligated to pay the financial institution if the buyer defaults.

Auditors opine whether Payables Finance and Receivables Discounting arrangements qualify as off-balance sheet financing according to the applicable accounting rules (US GAAP set by the FASB or IFRS set by the IASB). As examples: A Payables Finance obligation can be treated as commercial debt when it simply settles trade payables but may be reclassified as financial debt (on-balance sheet financing) if it is deemed financing the buyer via extended payment terms or incur financing costs to the buyer; a receivables discounting arrangement is treated as a sale when the risks of the receivables are transferred to the financier but may be deemed a borrowing (on-balance sheet financing) if the seller retains significant risk or recourse.

Did SCF contribute to the collapse of First Brands?

The payables obligations (“unsecured SCF”) of $800MM form a small portion of their total on-balance sheet and off-balance sheet financing obligation, and were unlikely to have played a major role in the collapse of the group.

The declaration of “AR factoring” obligations of $2.3b was made on suspicion of irregularities (under investigation and hence not confirmed). The amount was declared because of suspected duplicate financing (the same receivables sold to multiple financiers – the amounts paid by the buyer would not cover the sum of the financing) and funds diversion (payments collected by the seller were not transferred to the financiers).

If the company had not indulged in duplicate financing, and had sold its receivables to financiers and payment from the customers had been forthcoming and been used to settle the purchased receivables held by the financiers, this debt would not exist.

Why Private Credit?

It is noteworthy that private credit was a major source of financing for First Brands.

Private credit expands the sources of liquidity beyond banks, often offering faster deployment of liquidity and potentially more flexibility due to more specialised set ups and less regulation. This can be a positive, filling financing gaps especially for SMEs. 

It tends to be costlier to take financing from private credit than from banks. If a company eligible for bank credit turns to private credit, could it be that the terms of financing might be less stringent with private credit than with banks?

The future of SCF 

Thanks to the benefits of SCF, it can keep heavily indebted companies afloat for some time, but SCF is not meant to enable companies to keep accumulating other financial debt.

Properly used, SCF, whether it is payables finance or receivables purchase, shortens the cash conversion cycle and improves free cash flow, unlocking working capital and liquidity. With this understanding, SCF continues to play an important role to help companies in working capital management. But it calls for sound practice by providers, and integrity on the part of users.