Supply chain finance ABS helpful in financing SMEs in China

Large-scale enterprises and assets have long been dominant in the asset securitization product market, leaving little space for participation by small and medium-sized enterprises (SMEs). However, in recent years, with such groundbreaking products as the Vanke Group’s supply chain finance ABS breaking the mold, supply chain ABS has become a new means of financing for small and medium-sized suppliers tied to large real estate enterprises. Since the beginning of 2018, with the successive approvals of a batch of ABS that serve the new economy, of which the Ping’an-BYD Supply Chain Finance Asset-Backed Plan handled by the author’s team is representative, this model has rapidly moved from the traditional real estate industry to covering the new economy, internet and other such sectors, becoming an important asset-backed securities product for enterprises.

Compared with traditional modes of financing, supply chain finance ABS, relying on the core enterprise, is helpful in opening new modes of financing for upstream enterprises, can effectively reduce the reliance on traditional bank credit, and accelerate the recovery of funds, thus having great significance for revitalizing the accounts receivable assets of SMEs and resolving their financing difficulties.

Reverse factoring is an effective channel for aggregating supply chain payables. The core enterprise’s supply chain payables (i.e., the supplier’s receivables) serve as the underlying cash source for supply chain finance asset securitization. The reverse factoring model achieves the aggregation of claims by transferring the supplier’s accounts receivable from the subsidiaries of the core enterprise to the factor. In this model, the factor considers the creditworthiness of the core enterprise rather than that of the supplier. Through confirming the accounts payable and the transfer matters, the core enterprise, as the debtor, provides a certain degree of credit enhancement for the factoring financing, allowing a small or medium-sized supplier to recover accounts receivable early for relatively minimal funding costs while also permitting the core enterprise to realize effective management of its suppliers, accounts payable terms and cash flow.

Zhou Tao is a salary partner at Grandway Law Offices in Shenzhen. He can be contacted on +86 755 2399 3388 or by email at zhoutao@grandwaylaw.com

He Qian is an associate at Grandway Law Offices in Shenzhen. He can be contacted on +86 755 2399 3388 or by email at heqian@grandwaylaw.com