Supply chain finance
AccountingAn arrangement where a bank pays a company's suppliers early and is repaid later, which is borrowing presented inside trade payables.
Also written: reverse factoring, supplier finance
Under a supply chain finance programme a bank settles supplier invoices ahead of their due date, taking a discount, and the company repays the bank on extended terms. The supplier gets cash sooner, the company pays later, and the bank earns the spread.
In substance the company has replaced a trade payable with a financing liability. In presentation the balance frequently remains inside trade payables, so net debt looks lower than it is and operating cash flow looks stronger, because what is really a financing inflow has been recorded inside working capital.
The signals are visible to anyone who looks. Payable days rising sharply with no change in commercial terms, a note describing arrangements with a financing provider, and a working capital inflow that does not correspond to anything in the operations. IFRS now requires specific disclosure of these arrangements, which has made the balances easier to find than they once were.
For the bridge the treatment follows the substance. If the balance is a bank claim rather than a supplier claim, it belongs in net debt, and the cash flow statement needs the same correction, since a programme that stops being renewed forces the payable back to its original terms and consumes cash quickly.
Worked example
A group reports trade payables of 235, of which 55 sits under a supply chain finance facility with a bank.
Reported net debt of 250 becomes 305 once the facility is reclassified, and payable days fall back toward the terms actually agreed with suppliers.
The risk is not the 55 itself. It is that a withdrawal of the facility pulls 55 of cash out of the business inside a working capital cycle.