Exploring Working Capital Options: Bank Programs

The choices for supply chain finance (SCF) solutions have never been greater. From traditional working capital providers (banks, etc.) to fintechs to purchasing or virtual card providers, the landscape is littered with options for companies looking to make the most of their cash to build and grow their businesses.

But not all solutions are equal. 

Some have better technology than others allowing for seamless integrations into existing software solutions. Others have a lower cost of capital, while some SCF solutions are limited as to company size (both for buyers and suppliers).

In this blog series, we will take a look at some of the options available to companies looking to effectively and efficiently manage their working capital and payments processes and compare four types of solutions – traditional bank supply chain finance programs, purchasing cards, fintechs, and LSQ – across five important factors:

• Access
• Funding stability
• Cost of capital
• Technology
• Supplier Support

We will look at bank programs first.

Traditional Bank Supply Chain Finance Programs

Many national and regional banks offer supply chain finance (SCF) programs allowing corporate buyers to hold onto their cash longer while still offering early payments to their suppliers. These programs usually run parallel to other financial services relationships between the bank and the company.

Access

Access is one of the weaker features of traditional bank SCF programs. Large banks like to work with large enterprise customers. That is, bank SCF program participation is limited to enterprises with high credit ratings (AAA or AA) and their largest, tier-1 suppliers (the top 10-20 percent of spend). This results in excluding mid-market companies – the bulk of the supply chain and the suppliers who could benefit from an SCF program the most. In general banks are risk averse and unfamiliar with structuring SCF programs, so they limit their exposure by sticking with the safest bets. 

Funding Stability

Funding stability is one of the strong points of bank programs. National and regional banks have solid balance sheets and consistently available funds to support working capital programs.

Cost of Capital

Of all the working capital options available, bank SCF programs usually have the lowest cost of capital. Again, with banks’ risk aversion, they normally only make SCF programs available to those companies with superb credit ratings who qualify for excellent financing rates. Sure, they are cheaper than other options, but bank rates come at the cost of widespread access to the programs.

Technology

Bank programs typically fall behind the other available solutions in terms of the functionality and user experience of the technology that supports their working capital programs. Banks are financial institutions, not technology companies, so they usually outsource the software development. An outsourced platform means a slower pace of innovation, limited functionality, and a sub-optimal user experience for buyers and suppliers. This poor user experience leads to supplier dissatisfaction and limits ability to access funding when needed; factors that prevent a program from scaling.

Supplier Support 

Another traditionally weak spot for bank programs. Banks have a cumbersome onboarding process, limited supplier scope, and tedious UCC lien-filing and carve-out requirements. Banks typically outsource its supplier engagement process to a third party, delaying onboarding and implementation. With bank platforms, there is limited visibility for buyers to see supplier engagement status, leading to communications blockers and increased time to scale programs.

These factors prevent most suppliers from joining, limiting program adoption to only a handful of suppliers – remember, bank programs usually only serve the top 10-20 percent of suppliers. With extensive documentation processes via email exchange, onboarding can take 3-5 weeks, greatly increasing time to value. Bank programs tend to be structured with variable pricing (base rate plus spread). These programs are subject to interest rate fluctuations, leading to volatility in pricing and difficulty with reconciliation for suppliers. Once again, this means bank SCF is only viable for the top suppliers and smaller suppliers, who need capital the most are left out as they don’t have the resources to join and run the program.

Summary

Traditional bank programs have their place in the working capital management landscape. But that place is limited to large enterprises with strong credit ratings and banking relationships and their large enterprise suppliers. For those companies, cost of capital is a key concern and bank programs have a discernible advantage over other programs in that category. Smaller companies needing more support and a more efficient technology platform are not a good fit for bank SCF programs.

Come back next week when we will look at the advantages and disadvantages of procurement card programs.