Special Sibos 2014 Edition

28
Featured story
Hernan M. Mayol,
Regional Sales Manager, Supply Chain Solutions and Risk Distribution, Latin America and the Caribbean, Bank of America Merrill Lynch
Comments are based on a TMI article
Supply Chain Finance (SCF) has become an increasingly important working capital tool for companies around the world
in the past decade. It experienced a significant increase in use during the financial crisis, when liquidity for smaller
companies dried up and many buying companies recognized the risk of disruption to their supply chains.
SCF is now being embraced by both Latin American banks as well
as corporations throughout the Americas. They have successfully
adapted their supply chain offerings to take account of the nature
of relationships between buyers and suppliers in the region, and its
legal and regulatory diversity. As a result, SCF offers a compelling
opportunity for a growing number of buyers and suppliers to
strengthen their relationships and that of their banks.
While SCF was greeted with enthusiasm in Latin America when
international banks first began talking to companies about it in
the 2000s, adoption was slower than expected. Some international
banks implementing programs had strong relationships with
large buyers (especially in commodities and retail) but found it
hard to reach these companies’ supplier bases effectively, making
onboarding cumbersome and costly. Conversely, those few banks
with strong supplier relationships often had limited buyer clients.
Some banks also ran up against limits on lending in Latin America:
SCF depends on buyer credit limits (although it does not draw on
them).
With that history Latin America and SCF has had a mixed record.
While its antecedents, forfaiting and factoring, took off in the
region in the late 1980s and 1990s, it was not until the mid-2000s
that SCF began to be used (most notably in Mexico and Chile). There
were some notable successes with domestic schemes, but those
involving cross-border supply chains – especially those including
US companies – proved less successful.
Supply Chain Finance Diversity
The complexities and diversity of Latin America presented a
challenge for some banks implementing SCF. While Spanish and
Portuguese are the dominant languages in the region, many US
suppliers and banks use English. Equally, the regulatory and legal
environment across the region varies widely, making documentation
time-consuming and expensive to produce and administer.
Practically, the size of Latin America raised challenges when
onboarding and educating vendors and communicating the benefits
of SCF to suppliers’ account managers at banks. In some cases, these
challenges increased costs beyond the benefits of an SCF program.
Perhaps the greatest challenge that faced SCF in its early days
in Latin America related to the different credit characteristics of
buyers and suppliers. In many regions of the world, buyers have
superior credit quality (and can therefore borrow more cheaply than
suppliers). In Latin America, the reverse was true as many suppliers
were highly-rated US companies.
Ordinarily, SCF uses the superior credit quality of buyers to
enable suppliers to get paid sooner than usual by financing their
receivables below their usual borrowing cost. In return, buying
companies usually increase payment terms, allowing them to
extend their day’s payable outstanding. Without the benefit of lower
financing costs, the only benefit to suppliers of taking part in a
SCF program is that it strengthens the relationship with the buyer,
creating a potential opportunity to grow sales. For some suppliers,
this was not a sufficiently compelling proposition to encourage
them to adopt SCF.
Refining SCF for Latin America
In the time since international banks first started to introduce SCF
into Latin America much has changed. Banks have successfully
adapted their products and support to reflect the needs of buyers
and suppliers in the region.
Some banks’ programs now incorporate other providers to supply
data or trade tools in order to create programs that are flexible
enough to meet the needs of a wide range of buyers and suppliers.
Some international banks have introduced local currency SCF and
are planning cross-regional offerings. Moreover, some banks have
established trading companies to act on behalf of buyers (usually
in the commodities sector). This arrangement enables the buyer to