KS-TF AG launches a modern trade receivables and payables processing platform with the inclusion of an advanced credit management tool, client onboarding (KYC) tool, and AI-integrated technology to manage customer service

The team of KS-TF AG, based in Baar, Switzerland, has developed similar platforms in the past. One was acquired by a large fund to mainly operate their specific business. Now, this new tool, the ATS environment, will be operated on behalf of and in cooperation with Apex, a leading administrator of securitization programs with over 13,000 employees and access to thousands of professional and institutional investors.

The new platform will allow companies to outsource the management of their receivables, finance them or even request the extension of terms with their customers without increasing their receivables credit risk or DSOs, while still increasing sales. The latter is referred to as “Distribution Financing”.

Kendall Stevens, KS-TF AG CEO, comments: “For the first time, we are decoupling the Seller/Originator of receivables from the Funders/Investors. Banks can also participate in the programs or outsource the administration of complex-to-manage receivables-based programs to ATS”.

The ATS environment will cover administration, legal, compliance, credit, reporting and processing services – a one-stop shop for the most complex-to-manage receivables-based operations. The focus is on selecting programs that address complexity rather than just demand.

Who are the ideal users of the ATS environment? Large corporates (Originators) with extensive portfolio of customers worldwide, Credit Managers, Treasurers, CFOs, and Heads of Operation. They will strongly optimize their working environment by making use of the ATS environment. Key programs, if requested, will be tailored to the specific Originator’s processing and reporting requirements. Purchase Orders can also be processed by ATS, ensuring that these are confirmed for credit protection and financing before confirming them to the respective customer.

The ATS platform is a client-neutral environment that can also be considered by independent FinTechs for processing businesses they are not technically able to host.

Welcome to the second of our two-part series publication on products within the Supply Chain Finance (SCF) industry. In this instalment, we will delve into buyer-sponsored SCF solutions. If you missed the initial release of our series, where we discussed vendor-sponsored products, you can access the article by following this link.

In our recent publication, we emphasized the critical role of taking a comprehensive approach when structuring and managing Receivables-based products, as well as the importance of leveraging advanced technology. This principle equally holds for Payables-based products, where a buyer sponsors a programme. Buyer-sponsored products include Supplier Finance and Trade Payables Financing.

Supplier Finance, also known as Reverse Factoring, predates SCF products. Despite its emergence in a tech-limited era about 30 years ago, it is often incorrectly perceived as the sole SCF offering.

In these programmes, a buyer obtains extended payment terms from its suppliers. In exchange, suppliers are enrolled in a programme where they can anticipate their receivables by selling them to a funder at a more favourable rate than they could secure independently in the market.

If the buyer is credit-strong, the programme is usually not highly lucrative, but is straightforward to process and relatively secure in terms of credit risk. As a result, it is a popular product amongst commercial banks in Europe and the United States. However, the onboarding process for the hundreds or thousands of suppliers in these programmes is costly and time-consuming, further reducing already slim margins due to high competition. In some cases, funders may charge a higher discount rate to compensate for the challenges of onboarding, resulting in excess arbitrage relative to the buyer’s credit rating.

In terms of credit risk, these programmes usually lack strong legal binding with the obligor (buyer). Consequently, a robust agreement (receivables purchase agreement) is essential with the suppliers, adding complexity to the onboarding exercise.

These programmes are often attractive for smaller, lower-rated suppliers, which can leverage the strong credit rating of the buyer. However, if the buyer itself has a weaker credit rating, the programme’s credit risk quickly increases.

Additionally, if the buyer is not commercially dependent on the supplier, the risk associated with the programme increases. In cases of commercial disputes or supplier bankruptcy, the buyer, especially if less creditworthy, may avoid paying its obligations related to that supplier.

Overall, these programmes display low profitability or a heightened credit and business risk.

In contrast to Supplier Finance, Accounts Payable programmes, specifically Trade Payables Financing,  focus on the relationship between one buyer and one supplier. These programmes offer a safer and less risky environment. The crucial difference lies in the programme structure and legal framework, with a careful selection of the buyers which can participate in such programmes.

Trade Payables Financing is a proven successful product in the market with steady growth. All parties benefit: buyers grow at a competitive cost, suppliers consequently increase sales, funders receive adequate returns, and credit insurers, if any, operate in a low-risk environment.

Implementing this product requires a more detailed compliance and credit onboarding of the target buyers, as well as proper automated and close monitoring of processes. This ensures a level of (low) credit risk similar to traditional distribution finance products.

By having technology which automates the onboarding and the credit monitoring, as along with appropriate payables payment servicing procedures, KS-TF unlocks unique opportunities to support buyers optimize their payments, while providing a safe environment to investors.

At KS-TF, we possess the expertise needed to succeed in structuring SCF programmes, developing state-of-the-art technology, and adeptly managing related credit risk. We offer consulting services to companies seeking to establish or enhance their presence in the industry, drawing on our extensive experience in SCF.

If we sparked your interest, do not hesitate to contact us and stay tuned for our upcoming publications.

Widely recognized in the realm of trade finance, Supply Chain Finance (SCF) refers to a set of solutions that enables companies to finance their supply chain and improve working capital cycles. These solutions emerged as an alternative to traditional loans, providing an additional avenue to bridge the trade finance gap, which currently exceeds USD 2 trillion[1].

Originally conceived in the 1980s, SCF has evolved significantly. It now extends beyond mere payment term management to encompass a comprehensive approach to working capital optimization. Technological progress has played a crucial role in driving this evolution. While some market players continue to operate with limited technology, advanced tech is essential in today’s landscape. It enables superior solutions while meeting rising market expectations.

SCF products distinguish themselves based on various factors, including the involved counterparties, legal framework, compliance and credit monitoring procedures, and programme sponsorship. Programmes can be sponsored either by buyers (Accounts Payable programmes) or vendors (Accounts Receivable programmes).

Accounts Receivable or Receivables-based programmes allow vendors to anticipate their receivables, unlocking working capital and decreasing Days Sales Outstanding (DSO). Usually, these programmes reduce the vendor’s financial debt and enhance their balance sheet, especially if they achieve true sale of the receivables. However, the recent increased scrutiny from auditors and rating agencies, now demanding greater disclosure of SCF programmes in financial statements [2],[3],may appear as a significant challenge. Nevertheless, this challenge can be overcome through careful programme structuring and the engagement of independent and technologically advanced third-party servicing.

In Factoring, for example, the factor advances payment for receivables to the vendor at a discount. These programmes usually have limited engagement with the portfolio of buyers, who are often unaware of the programmes. In these cases, a significant portion of programme servicing falls on the vendor, including the reconciliation of buyer repayments. This increases performance risk and endangers the considerations for true sale by not externalizing the receivables management.

Distribution Financing, on the other hand, is the most comprehensive programme type in SCF, combining the anticipation of receivables with payment term extension. Thanks to the tailored legal structure and continuous credit and compliance risk monitoring, the risk associated with these programmes is substantially reduced. This solution enhances the vendor’s competitiveness and drives more sales from the enrolled buyers, whose working capital improves by the extended terms obtained.

Due to the typically large number of buyers involved, servicing these programmes is a key function. Currently, many service providers still rely on simpler technologies that are not sufficient to operate complex, multi-jurisdictional programmes. More advanced platforms improve the programme’s performance and reduce risk through automated monitoring processes, alerts, and notifications.  Additionally, they include the capability for in-system dispute and dilution management, allowing buyers to promptly utilise their credits against the vendor.

Moreover, third-party servicing of the programmes increases transparency for all parties involved, which positively impacts the rating and fiscal treatment of the programmes. However, only very few providers offer the necessary flexibility and fully automated end-to-end processing for smooth administration, and currently, only a few are financially and operationally stable.

Our team at KS-TF developed a formula to navigate the complexities of these programmes and stands ready to assist organizations aiming to establish or elevate their presence in the SCF industry.

If you enjoyed this piece about Accounts Receivable products, we invite you to stay tuned for our upcoming article on buyer-sponsored products.

Contracts may seem like tedious documents, often long and filled with standard language that can be difficult for anyone to understand. However, they play a crucial role in trade finance, ensuring that agreements between parties are clear and legally binding.  One of the primary reasons insurers may refuse to pay a claim under a trade finance insurance policy is that the contract and the insurance policy covering that contract does not accurately reflect the legal structure or the true agreement between the parties involved. For instance, in a recent case, Bond&Credit Company (BCC) refused a claim alleging that the nature of the underlying trades was not envisaged by the policy it had underwritten (see Stuck in the middle | Global Trade Review (GTR) (gtreview.com)). Similarly, in the Greensill saga, Zurich Insurance asserted that the receivables purchase agreement between Greensill and Liberty Commodities was “a sham”, citing claims by Sanjeev Gupta that financing was actually arranged verbally as a three-year facility, different from the written agreement, and that it included potential future receivables that never materialized (see Zurich claims Greensill-Liberty financing was long-term lending, not receivables | Global Trade Review (GTR) (gtreview.com).

Indeed, in the receivables and payables financing programs, finding expert lawyers who truly understand the underlying business and processes, can be challenging.  As a result, many agreements end up being based on standard templates approved by international organizations, which may not accurately reflect the intricacies of the transaction.  Alternatively, excessively lengthy agreements with numerous definitions are drafted, to cover all possible scenarios, but may still fail to accurately reflect the specific processes involved. This issue becomes even more relevant when insurance is used to mitigate the risk.  Major insurers often rely on template policies that only partially align with the reality of more innovative structures. While everything may seem fine initially, conflicts or claims can reveal discrepancies, leading to challenges and rejections of claims.

Important points to consider from a legal perspective are:

• Parties to the transaction: who are the parties to the transaction and is the relationship among them properly reflected?
• Sale of receivables or advance payment: is the nature of the transaction clearly reflected in the legal documentation?
• Insurance policy alignment: does the insurance policy accurately align with the underlying transaction details outlined in the contractual documentation? Would the insurer be able to challenge the underlying transaction based on it not being the one described in the policy? Does the insurer thoroughly understand the intricacies of the transaction to properly underwrite the risk?
• Service agreements alignment: does the service agreement with the programme servicer accurately reflects the processes that are foreseen in the main agreement with the customer?
• Effective purchase and repurchase events (for receivables programmes): when is the receivable effectively purchased and as of when is the risk passed to the purchaser? Is there recourse to the seller and to what extent? Does it endanger the “true sale”?
• Support of the vendor: is the support of the vendor contractually tied up? Is the vendor expected to stop shipment if required? Would the vendor support collections?
• Formalities: are any formalities required for validity or enforceability in the country of the vendor or of the buyers? Recently, is there an all-electronic way to comply with such formalities?
• Securities: are there specific securities customary or relevant in the countries of the buyers? Does it make sense to incorporate those into the legal structure, in consideration of the credit amount granted to the buyers and the formalities and cost to put in place such securities?
• Regulatory: does the offering raise the need of license or authorization in the country of the customer, even at the stage of solicitation?

Ultimately, it is essential to understand the underlying transaction and processes thoroughly to ensure that the contractual documentation and the insurance policy accurately reflect that reality. At KS-TF we have experts that understand not only the legal requirements, but also the processes and the financial background of the transactions, and who are able to craft agreements tailored to the programmes, taking into account the interests of all parties involved.

Of course, it is then required to set up the controls to ensure that the expected reality conforms with what happens in real life, but this is the subject of how to mitigate fraud risk, and this is another topic, to be discussed at a different time.

Carolina Jara

KS-TF AG