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Ledge Q&A

With Brendan Lee from Fifo Capital

For this edition of the Ledge Q&A we spoke to Brendan Lee from Fifo Capital. Lee explains Fifo Capital’s role in the market and answers some FAQ’s about supply chain finance and the other products and services they offer to businesses.

Q: Who is Fifo Capital and what is your role?

A: Fifo Capital is one of Australia’s largest non-bank business lenders in the working capital space – providing companies with Supply Chain Finance, Trade Finance, and Invoice Financing facilities. Fifo Capital was founded in 2005, and we have offices throughout Australia. Alongside Jason Starcevich, I head up the WA office of Fifo Capital.

Q: What is Supply Chain Finance?

A: Supply Chain Finance, or ‘reverse-factoring’, is a type of working capital facility provided by Fifo Capital (among other select financiers). It works as an early-payment program which companies use to offer their suppliers immediate payment of their invoices for a small discount. Simultaneously, the company can then extend their payment terms out to 90 days without affecting their suppliers.

This provides a dual-functioning working capital benefit to both the big company and their small suppliers alike.

  • The benefit to the company offering Supply Chain Finance to their suppliers is preservation of their own working capital.
  • The benefit to the smaller suppliers is having the option to receive early payment of their invoices without having to apply for any lending through their bank.

Supply Chain Finance facilities are a recent introduction into the Australian market, and uptake is accelerating as market knowledge increases.

Q: What types of businesses can benefit from Supply Chain Finance?

A: Both large companies & their smaller suppliers alike.

Large companies benefit by;

  • Extend payment terms by up to 90 days without impacting their suppliers
  • Preserve working capital
  • No borrowing or security required
  • Improves liquidity of supply-chain and enhances supplier relationships

Smaller suppliers benefit by;

  • Instant access to early payment of their invoices on demand
  • Improved cash flow
  • No borrowing or security required

Q: A recent article in the AFR explored the pros and cons of supply chain finance. What are your comments in relation to this article?

A: Recent articles like this in mainstream press are excellent for increasing market awareness of Supply Chain Finance which is still in its infancy within the Australian market.

It is important that people understand the benefits of using Supply Chain Finance, however it is also crucial to understand any pitfalls associated with these types of facilities and how companies can potentially abuse the power of it.

Supplier Payment Terms

The Australian Financial Review recently identified that certain large companies within Australia are coercing their smaller suppliers into accepting early payment of their invoices (and hence incurring the early-settlement fee) by pushing out their standard payment terms if the supplier chooses not to partake in the facility.

To ensure that this potential abuse of power does not take place, Fifo Capital have structured their Supply Chain Finance facility so that no increase in payment terms are forced upon the supplier in the event a supplier does not wish to receive early payment.

Fifo Capital’s facility also grants the 90 day payment terms extension without any requirement of the suppliers to having to receive early payment if they do not wish.

Creative Accounting

Recent articles have also brought to light some controversy surrounding the requirement of a company to actually disclose its use of Supply Chain Finance – that being the facility is not recorded as a loan, but rather just substituting the financier in place of a trade creditor (once that creditor has been paid by the financier). Therefore, from a financial reporting perspective, there may be no transparency on whether or not a company is using Supply Chain Finance.

This method of accounting can be used to temporarily distort the true financial position of the company by disguising underlying cash flow problems.

Fifo Capital’s view concerning the obligation of a company to disclose using Supply Chain Finance is a responsibility that rests solely with the company and their auditors. It should be noted that, in quantum, a dollar owed to a trade creditor is no different to a dollar owed to a Supply Chain Finance provider – and as with any new disruptive financial product within the marketplace, we look forward to further robust discussion around this important aspect.

Q: What is Invoice Finance?

A: Invoice Finance is a type of working capital facility that allows businesses to get access to future revenues that would otherwise be out of reach. It is a tool used to smooth out lumpy cash flow cycles.

If a business has an outstanding invoice to their customer that isn’t due yet, the business can access immediate payment of the invoice by utilising an Invoice Financing facility. In Australia, Invoice Finance facilities are offered by a number of banks & non-bank providers.

Q: Who can benefit from Invoice Finance?

A: Any business who bills their customers on credit terms can benefit from using Invoice Finance by receiving immediate payment of their invoices from an Invoice Finance provider.

Instead of taking on any additional debt, the business simply presents an invoice for immediate payment. This shortens the cash conversion cycle of the business, and if used in conjunction with Supply Chain Finance, the cash conversion cycle can be potentially reduced to zero. At this point the business’ operations are fully financed.

Invoice Financing helps rapidly expanding businesses to not only manage cash flow interruptions, but also to vastly improve their growth potential.

Q: What is Trade Finance?

A: Trade Finance is a type of working capital facility where a financier makes payment to a company’s supplier, on their behalf. The company then repays the financier at a later point in time – this typically between 90-120 days (depending on the financier).

This can be useful to a growing company to fulfil new orders, as typically suppliers require a deposit or upfront payment before goods can be provided – or in the situation where the agreed credit limit between a company and their supplier has been reached, this facility then ensures that there is no interruption to the order process.

Q: Who can benefit from Trade Finance?

A: Any growing business that needs to fulfil new orders for materials or looking to import items of equipment.

Typical scenarios;

  • Importing of equipment – typically mainstream lenders will not provide equipment finance against an asset until it arrives in Australia and meets certain conditions. Fifo Capital’s Trade Finance can assist by making payment direct to the company’s overseas supplier, allowing the piece of equipment to be immediately dispatched to Australia.
  • New purchase order / awarded contract – Fifo Capital’s Trade Finance can provide payment to a company’s supplier for the order of materials / goods, perfect for when a company has been awarded a new purchase order or contract.

If this edition of the Ledge Q&A has sparked any questions, please contact your Ledge Finance Executive directly, or contact our offices here.

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