Since the financial crisis began, working capital management has not just been elevated to a paramount concern for corporates and small and medium-sized enterprises (SMEs) but has assumed national economic importance in many countries. As the challenges facing the world have morphed from a financial crisis in 2008 to a corporate crisis and finally a sovereign crisis, attention has been drawn to the critical need to provide greater support to companies.
With recovery in many countries patchy, many governments and central banks are trying to encourage economic growth using unorthodox tools, such as quantitative easing. Some governments are planning to lend directly to small business and mortgage borrowers. Another unorthodox idea now emerging is the use of SCF by governments - something no-one could have envisaged just five years ago.
SCF to the rescue
The basic principle underlying supply chain finance is the same regardless of whether a corporate or a government is the buyer: the moment when a supplier receives payment is decoupled from the moment an obligator makes the payment. As a result, the receiver is able to receive its payments earlier than would be the case if they simply waited for the obligator to pay.
However, for governments, the goals of a SCF program are necessarily different to those of a corporate. Governments want SMEs to benefit and also aim to improve their own process efficiency and that of their suppliers - something that SCF has been proven to do across many corporate implementations. Nevertheless, good intensions are not a sound basis on which to build a SCF program: it is necessary to find a flow where government can provide an early irrevocable commitment to pay so that a bank can offer a supplier early payment terms at an advantageous rate.