More and more companies wish to decrease letter of credit lines, reducing bank debt. When moving to open account payments, banks desire to have companies guarantee that once approved, there will be no change to the invoice amount approved for payment and that they will guarantee payment on the invoice. The bank desires to do this to approximate the guarantee of payment found in the letter of credit. With this transitive payment guarantee from buyer to bank, the bank is willing to extend financing to the supplier under open account payment terms.
Does this buyer payment guarantee on an invoice amount that will not change constitute a buyer liability to the bank, effectively turning the company’s accounts payable to a bank loan? This is an issue into which the United States Securities and Exchange Commission (SEC) has taken an interest; ensuring public companies are providing proper transparency to their financials. Under certain circumstances, the SEC has weighed in on companies’ open account supply chain finance programs, opining that under certain circumstances open accounts trade payables must be re-classified as bank debt. While consultants and accounts still debate the circumstances under which payables debt could be reclassified as bank debt, the following scenario could trigger a debt reclassification review: the company has actively engaged a bank to extend financing to its supplier, perhaps deciding when to finance a supplier.
The opportunity for banks, companies and their suppliers is to find a new open account supply chain financing model that truly removes the transitive payment guarantee from buyer to bank that would trigger the potential to reclassify trade payables into bank debt. Some companies are looking at new approaches to this issue, which in the end may substantially accelerate the growth in bank open account supply chain finance programs.
