Author: Nick Lawrence, Managing Director for Supply Chain Finance, Wells Fargo Capital Finance
5 Jan 2017
Innovation in supply chain financing tends to focus on the technology platforms and solutions that underpin client financing programmes, particularly given the proliferation of fintech entrants. Indeed, an effective technology platform is a prerequisite for the successful implementation and seamless provision of a financing programme, as thousands of invoices can be funded with multiple customers and currencies across numerous countries. The flexibility and robustness of a technology platform are crucial and certainly not exclusive. They go hand in hand, and are equally important in the delivery of a mutually successful financing solution.
In light of both the growing pressure and rising opportunities for supply chain financing, European CEO spoke with Nick Lawrence, Managing Director for Supply Chain Finance at Wells Fargo Capital Finance, about how flexible channel financing can help companies stay ahead and succeed.
How has the market for flexible, innovative financing changed recently?
Let me comment from the perspective of Wells Fargo Capital Finance’s supply chain finance business in the EMEA region. We offer a broad spectrum of accounts receivable and accounts payable financing solutions, including supplier and sales finance, as well as accounts receivable channel financing in the technology sector. Although supply chain finance is fairly specialised, and a less established asset class, its importance is growing in cross-border trade as a tool for optimising working capital and cash flow, while managing risk and keeping supply chains liquid.
Wells Fargo’s accounts receivable channel financing product offers an alternative source of capital to traditional loans
Clients are becoming more demanding, and rightly so; in order to preserve and deepen these relationships, finance partners need to be aligned strategically, adaptable, and flexible in their day-to-day engagement. I believe flexibility manifests itself most evidently in the ability to fulfil individual requirements and to customise product offerings as client business strategies evolve, markets grow, business processes are transformed and cross-border trade becomes ever more complex.
What are the biggest challenges for those in the tech industry when it comes to securing working capital?
Working capital is the lifeblood of every business, and this is particularly true for those players operating in the tech industry, especially those with a hardware component to their business model and a requirement to hold inventory. Arguably, the importance of working capital has been brought into sharper focus following the 2008 global financial crisis and its impact on bank lending as a source of liquidity.
Some of the biggest challenges faced by tech companies seeking to secure working capital include the requirements for growth in a rapidly evolving and highly competitive industry, together with reducing the cost of borrowing. They are also required to manage costs and improve profitability, while optimising cash flow through better payment terms.
Wells Fargo’s accounts receivable channel financing product offers an alternative source of capital to traditional loans by providing tailored financing designed to address these and other key strategic goals for our tech clients. Arguably, the most important benefit it provides is growth capital to help manufacturers increase sales. In the tech industry, we do this by injecting free working capital through extended payment terms to help provide a competitive advantage.
In order to provide a working capital benefit the finance provider has to provide the channel partner with a credit line, thereby taking credit risk in the event of non-payment or insolvency. Therein lies the key challenge, as channel partners will exhibit differing risk profiles based on financial performance, size, payment behaviour, and trading history. Providing liquidity for an investment-grade global tech distributor is usually more straightforward than, for example, a modestly sized, privately held non-investment-grade channel partner with a less mature business model. Taken from the perspective of the channel partner, a key challenge they may face is sourcing sufficient credit capacity from the finance provider if they have a weak financial profile, or if they are domiciled in a country facing particular macro issues.
How does Wells Fargo’s supply chain team address these challenges?
In order to maximise programme success, both from the perspective of the manufacturer or vendor and its channel partners, it is important that a strategic vision for the financing programme is established, all key stakeholders are engaged, and a clear roadmap for implementation is established. Identifying a pool of target channel participants, as well as investment in the manufacturer or vendor’s brand in terms of training, certification and technology, helps to underpin programme success.
The rigour of Wells Fargo’s credit assessment process and the deployment of risk mitigation measures, such as credit insurance and syndication, help to ensure the provision of credit capacity and the resultant working capital benefits are maximised for both channel partner and manufacturer or vendor.
How do your pan-EMEA channel financing programmes for the tech industry differ from those of your competitors?
Our experienced team and leadership, long-established presence in the market, strong focus on customer relationships, and our ability to implement programmes for complex companies and their global trading partners set us apart. Clients take comfort in our domestic and global strength, as we have relationships with hundreds of vendors and thousands of resellers and solution providers, together with billions in volume and credit lines that are backed by a leading global bank.
What do you need to take into account for tech when it comes to financing?
Partnering with the right manufacturer or vendor is of primary importance. This includes manufacturers or vendors that have potential for increased sales via extended terms, those that want to accelerate the receipt of cash and improve their days-sales-outstanding metric, or manufacturers or vendors that wish to outsource credit and collections risk. The manufacturer or vendor must sell its products and services through a network of channel partners, with sufficient scale and global reach. Not all manufacturer or vendor channel partners are eligible for the financing programme.
Similarly, eligible channel partners must be motivated by the desire for interest-free extended terms financing and a boost to their purchasing power through higher credit lines. Moreover, the optimisation of procurement and the purchase of products through Wells Fargo’s proprietary technology platform, which is supported by a suite of customised reports on credit line metrics and performance, are also essential for securing partnerships. As I have mentioned, a formal implementation plan and a strategic vision for the programme, its geographic expansion, key strategic objectives and milestones for implementation are all vital.
What plans are in the pipeline?
An exciting development for Wells Fargo is the 2016 acquisition of GE Capital’s Commercial Distribution Finance (CDF) business. This provides customised inventory financing to fund the flow of products from manufacturers to dealers. CDF helps manufacturers and dealers improve cash flow, reduce risk and grow sales. It has approximately 2,000 manufacturer or vendor relationships and a portfolio of 40,000 dealers, in a diverse range of geographies and industry sectors, including motorsports, marine, recreational vehicles and electronics. Adding this complementary business firmly positions Wells Fargo as a market leader in this product area.