Nedbank's Mike Brandon reveals how companies can use supply chain finance to manage Covid-19.
On 27 August, CFO South Africa, in partnership with Nedbank CIB, hosted a webinar in which Nedbank CIB trade specialists Mike Brandon and Lloyd Caughey unpacked some of the realities that South Africa is facing in terms of supply chains.
“The Covid-19 lockdown has had a dramatic impact on the level of trading in the economy, which has placed supply chains under immense pressure and will continue to do so, overlaid across global events that are rapidly shaping a change in the traditional trade flows,” Mike said.
Stemming from where South Africa finds itself in the current economy and the pressure on supply chains, he explained that the immediate question is where does this pressure come from? “People are trying desperately to optimise their working capital in the best way possible to maximise their cash flow so that their businesses can weather the storms that are going on around us,” Mike said.
As an example, Mike referred to banks, which are increasingly innovating to come up with new ways to help companies achieve the objective of having enough liquidity in their business to be able to operate. “But remember, we all work in an ecosystem, so what we do on one hand in terms of optimising our own cash flow, will have an impact on our suppliers, and how we extend terms to our debtors in the market, will have an impact on how competitive we are.”
Lloyd, in turn, provided an international trade perspective. “From the beginning of Covid-19, we’ve really gone through a torrid time and, if ever there was a black swan event, it’s what we’ve all faced now,” he said. “The important thing to always remember is, if you set your business up right before the black swan event, it does make it a lot easier to navigate through.”
USD/ZAR exchange rates
Lloyd then shared some of the trends Nedbank CIB has been seeing over the past few months around the USD/ZAR exchange rate and how this impacts businesses and supply chains.
According to the slides, around the end of April and beginning of May, South Africa experienced a rand-dollar rate that went up to 18,80. “If you are an importer and you had done your budget on the 13,00 to 14,00 rate we were running on before April, you suddenly found yourself having to pay up to 25 percent more for the same goods,” Lloyd explained. “And if you have to sell them at the old price, it means you’re going to take a loss.”
At the same time, these businesses are going to find that their import duties and everything linked to the exchange rate on the day that the goods come through customs, are inflated by the same amount. “Either you’ve reduced your profit or you’ve gone into a loss on your import.”
The trend went down again at the end of May, but kept fluctuating well into July. “This shows you, when fear overrides the fundamentals in a market, it takes a considerable time for it to come back to normal rates, and we’re not there yet.”
Attendees were then asked to fill out a poll that asked about the impact of the exchange rate volatility on pricing and costing, which revealed that some businesses have experienced a failure of a material supplier in the past six months that has lead to a business interruption. Another poll revealed that many businesses didn’t have a contingency plan in place to mitigate the risk of supplier failures on the company’s ability to continue trading. Most of the attendees also said that they have been requested by suppliers for early settlement of their outstanding invoices. Almost all of the attendees saw an impact from the current volatility in exchange rates on their businesses’ costing and margins.
“If you haven’t had a supplier at risk in terms of potential failure and the impact that it could have on your supply chain yet, you’re very likely to face that type of challenge in the foreseeable future,” Mike said, stressing the importance of having a contingency plan in place.
He explained that, having a contingency plan in place doesn’t necessarily mean looking for a different supplier. “Because we speak to senior leaders in finance at major JSE companies across all sectors of the South African economy, what has become very clear to us is that there is a real and genuine desire by corporate South Africa to look after the health of its supply chain.”
He explained that, given some of the factors around the volatility Lloyd described and the results of the poll, these forces are acting on companies. “They’re making it very difficult to price our own goods and services competitively and they’re making it very difficult to know who to sell to and what terms to offer to our debtors,” Mike said. “They’re making it very difficult to know what terms we desire from our suppliers and to what extent we wish to extend our own days payable, as well as the impact that it will have on the supplier.”
Managing these forces
Mike then advised the audience around the key working capital leavers and the solutions that Nedbank CIB uses to help its customers mitigate the impact of term extensions on their businesses, on the liquidity of the business and what it does to the health of suppliers.
“If we take a scenario common to any business where you are looking to compete with a number of other companies in order to market your goods and services, you go to the market, prepared to offer extended payment terms that absorb cash in the business,” he explained.
However, in the current environment, businesses are concerned about what they can do to continue to offer these terms to the market while ensuring the liquidity of their business. Luckily, Mike said there are a number of options available to consider.
“The one that we see the highest demand for at Nedbank CIB is what we call ‘selective invoice discounting’,” he explained. “You have a prime name debtor that you offer terms to where you have a significant amount of working capital tied up in providing those terms. You come to the bank, we do an assessment of the debtor and what we are often willing to do is purchase that invoice from you. This means that you can convert that debt into cash on your balance sheet and we take the risk on the debtor paying down the line.”
Nedbank CIB also offers supply chain finance, which allows businesses to avail the extended supply terms from their suppliers without impacting the company’s supply liquidity. “Your supplier provides his goods and services as he does in the normal course of business. You then approve that invoice and mark it as good for payment. That invoice is then made available to the supplier, typically on a digital platform to elect to receive early settlement. That payment instruction then comes through to the bank, the bank will settle your supplier on approval of the invoice and we will acquire the right to become your trade creditor. On maturity of the invoice, you would simply settle the bank.”
Mike explained that the most important win for the supplier under a solution like this is that the discount for that paper is benchmarked to the risk of the corporate buyer.
SMMEs that have a corporate as a debtor have to find a way to finance terms to that debtor. “However, if that corporate is on supply chain finance and they are willing to onboard the SMME onto the program, it means that the SMME can access funding at the rate that the corporate qualifies for, which is typically a rate that would help you, as a supplier to a corporate, use your balance sheet to grow your own business.”
Mike explained that this is good for corporate buyers because they’re helping suppliers grow and, when the supplier can grow, they can improve the quality of the goods and services they render to the corporate business.
Supply chain finance in the global trade
Lloyd then discussed supply chain finance in the context of global trade, using importing motor vehicles from China as an example. “I’ve been dealing with the supplier of these vehicles for many years and they’ve given me open account terms. That means that, pre-Covid -19, it would take around two to three weeks by ship to get the vehicles to South Africa. By the time I get those vehicles I have to clear them, then I have to get them to the dealerships, I need to sell them and I should have the cash in my bank account between 70 and 110 days. At that point, I would have already had to pay the Chinese supplier,” Lloyd explained. “But with the current crisis, the Chinese suppliers worry about the risks of not getting paid and want the cash upfront or a letter of credit.”
However, Nedbank CIB has created a product in the international space called SCF+, which is similar to the local supply chain finance Mike was talking about. “In the example where I’m buying from the Chinese manufacturer, I can also offer that we do SCF+, where Nedbank will confirm that we have a certain facility available and when he presents documents, we will pay him on an open account basis.”
Lloyd concluded that it’s important to be aware that there are more than just overdrafts that you can use to fund your working capital. He mentioned the UPAS letter of credit, (Usance L/C paid at sight) and foreign bills for collection as other means to structure your outward payment. He also mentioned that export letters of credit can be discounted to receive funds earlier on your exports.