Financing receivables: A look back and the shift to a deep-tier, digital future - Trade Treasury Payments

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Financing receivables: A look back and the shift to a deep-tier, digital future

Ten or so years ago, if a bank wanted to purchase invoices issued by a supplier (of goods or services) to an acceptable buyer (called receivables), it was most likely to sign a receivables purchase agreement (RPA) with the supplier. The supplier would generally be a customer of the bank and the buyer an acceptable credit risk (in the eyes of the bank). The arrangement would allow the supplier to be paid early and allow the buyer to make payment at a later date when the invoice was due.

The purchase would, in most circumstances, be without recourse to the supplier so the bank would take most (or even all) the credit risk of non-payment by the buyer. However, if the buyer disputed the invoice or refused to pay because the goods or services did not meet the contractual terms, then the bank would be able to require the supplier to buy back the receivable. These would be called recourse events.

The bank would pay a discounted price for the receivable to reflect the time it would wait to be paid by the buyer and perhaps with a further discount to reflect some risk that the supplier would take.

In some cases, the supplier would continue to collect from the buyer and pay the proceeds to the bank—this would be as agent for the bank. In other cases, the supplier—or the bank—would serve a notice (of assignment) on the buyer and require payment be made to the bank and to a designated account.

This all sounds reasonable—so what has changed?

Arrangers of these types of RPA have become more resourceful. The RPA product has developed into ways of giving buyers more time and of helping suppliers at the request of the buyer, even where the supplier was not a customer of the bank. The whole structure has turned into supply chain finance (SCF)—the supply chain being sales by a supplier to a buyer.

SCF has also changed into different product offerings:

• The RPA, as explained above, is based on the receivables of the supplier and the arrangement where the buyer agrees to pay the invoice at a specific date—payables finance. 
• Banks can step in with their buyer customer and arrange to make payment to the supplier on its due date, or earlier, with a discount on terms that the buyer irrevocably agrees to pay the invoice or instructs the bank to debit its account—a payment services arrangement.

All of this has become mechanical, with either banks using an electronic platform or third parties hosting suppliers, buyers, and banks (as funders) on a platform.

In addition, invoice financing has definitely moved on.

More is happening now with the passing of the Electronic Trade Documents Act (ETDA) in 2023. This has allowed for promissory notes (PNs) and bills of exchange (BoEs)—traditional ways to pay for goods and services—to exist in a digital form and so be created and traded on platforms; so long as the platform is a ‘reliable system’ under ETDA.

What can happen now is for the buyer’s promise to pay an invoice to be changed into an ePN or eBoE, issued or payable to a supplier, endorsed to a bank and sold to an investor. The market can continue to expand and, indeed, the more acceptable the structure, the more likely non-bank investors will want to participate in trade assets.

This is part of a wider discussion on the digitalisation of trade.

There is more to come as the structurers look at using the promise from the buyer (now called an anchor buyer) to finance not just the supplier to the anchor buyer (a tier 1 supplier) but also to suppliers to the tier 1 supplier and down the physical supply chain. Watch this space for developments in what is called Deep Tier Supply Chain Finance (DTSCF).

So, simple invoice financing has changed so that it can cover more in the financing of trade and potentially encourage more players to join in trade finance assets—will this turn the original concept into something almost beyond recognition?