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Frequently Asked Questions

Q. How does the SCF program work?

A. A Supply Chain Finance (SCF) platform is a secure, web-based portal that links payment information between companies, their suppliers, and third-party financial institutions. The process begins as companies electronically upload approved supplier invoice information to the platform well in advance of the payment maturity date. With a web browser, suppliers review their approved invoices – their receivables – and, should they choose, select those receivables they wish to be paid the next business day. Liquidity is provided by third-party banks that fund the early payment request, and, at payment maturity, receive funding directly from the originating company that has the payment obligation. Financing rates assessed to the supplier are typically based on the companies promise to pay. In the case of a government-backed SCF program, financing rates will be extremely attractive as the risk will be low given that the ultimate obligor is the Federal Government.

Q. Do all automotive Original Equipment Manufacturers (OEMs) need to participate in this SCF solution for it to work?

A. No. Any one or more of the three can roll this program out independently. The auto OEMs have rolled out these programs in the past but discontinued these when their credit risk deteriorated to the point that banks stopped funding the programs due to their risk. The OEMs have experience with these solutions and understand its value.

Q. What does a government backstop provide?

A. The backstop or guarantee provides that the OEM’s payables to their suppliers that have been sold to participating SCF lenders will be paid to those lenders by the US government in the event of OEM default and inability to pay those advanced receivables.

Q. Why does this program need a government backstop?

A. Banks who would fund advance payment of OEM suppliers’ receivables would take Federal Government risk for non-payment, not OEM risk. Without the government backstop, the program could not work because banks would be unwilling to lend on OEM risk, or, alternatively, if they did, the financing rate would likely be prohibitive to attract supplier engagement.

Q. Will the Federal Government need to provide a backstop indefinitely?

A. No. The guarantee can be discontinued at any time by the Federal Government. If the government discontinues the guarantee program the OEM payment terms with its suppliers may need to be renegotiated and the cashflow issues may return for the OEM to pre-backstop or other term. Once the OEMs recover from the current financial crisis the SCF program may stay in place, continue to provide liquidity to the suppliers - with or without the government backstop. In the event the SCF program continues without the government backstop, risk for the lenders will convert from government risk to OEM risk.

Q. If the backstop was triggered what would the money flows look like?

A. If the OEM could no longer pay their suppliers’ payables due to OEM default, the backstop would be triggered to effect government payment directly to the lenders for unpaid receivables where suppliers sold their receivables to the lenders in exchange for early payment. Monies would go directly to the lenders, and not flow first through the OEM.

Q. Does the SCF program interfere with the current bailout being proposed by Congress?

A. No. This program can be deployed independently of, or in concert with, of the current proposed automotive relief proposal.

Q. Should this program be considered in replacement of a loan or other assistance?

A. No. PrimeRevenue is not suggesting that the SCF program is a cure-all, nor does it replace the need for Big Three loans or other assistance that may be required and is currently under consideration by Congress. PrimeRevenue believes SCF to be complementary to other programs as it would provide cashflow benefits for as long as two years, which is a significant window to help automotive companies work through this current economic crisis. Additionally, the SCF solution does not require taxpayer dollars to start. Unlike a loan, potentially, not a single dollar of taxpayer funds would be paid in support of this program. And yet, by simply providing the backstop or guarantee, OEMs and their supplier can start receiving cashflow benefits.

Q. Is new Congressional action required to establish a government backstop?

A. No. An SCF program could be re-deployed for the Big Three under the authority of either the Troubled Asset Relief Program (TARP) or, alternatively, the existing authority of the Federal Reserve.

Q. Why do the OEMs need to run an SCF program if they get a backstop from the government? Can’t lenders simply offer lower rates to suppliers because of the backstop?

A. If the lender uses the backstop to reduce their risk to the OEM for payment, there is a chance the reduction in risk would not be passed on consistently and transparently to the supplier in the form of a lower rate as multiple programs would need to be deployed to support these transactions. Similarly, there would likely be a significant operational and enablement lag that would frustrate the objectives of the initiative. Additionally, from an oversight perspective, in a non-automated environment it would almost impossible to track and audit the thousands of relationships between lenders and their customers.

With an SCF program the solution can be deployed in a single, secure, and controlled environment to enable transparency of underlying transactions and activities.

Q. How does this SCF program provide working capital benefit to OEMs and their suppliers?

A. The following scenario may help to illustrate the dynamics involved.

An OEM has an invoice payable to supplier in 45 days for goods and services delivered. If the OEM were to move their payment term from 45 days to 90 days that would greatly assist the OEM’s cashflow needs.

However, a payment term extension pushes the cashflow burden onto the supplier. The supplier would need to get funding from some source to meet this new cashflow demand, and, depending on the creditworthiness of the supplier, that financing most likely will be very expensive, if that liquidity is even available in today’s environment.

What the SCF program provides is for the OEM to move their terms to 90 days (or more) in order to create ultimately billions of dollars in cashflow for the OEM. This cashflow helps the OEMs stay in business.

For the suppliers, the SCF program - together with the government backstop - permits the sale of receivables early. Participating lenders provide the funds direct to the supplier's bank account at a financing rate that is extremely attractive, and weeks or months in advance of the initial payment due date. For example, the supplier could be paid in 10 days vs. 90 days or more thus helping supplier cashflow needs. The backstop from the Federal Government ensures that the financing rate or discount paid by the supplier is extremely attractive than if the risk was with the OEM.

Accordingly, the cashflow generated from this program is to the benefit of the OEM and supplier.

Q. How did PrimeRevenue calculate the $50 billion in cashflow benefit for the OEMs?

A.The calculation of cashflow benefit that would accrue to the OEMs and their suppliers was based on publicly available data from the Big Three that included auto company spend, relevant spend groups, prevailing payment terms, assumed term extension periods required, and cash burn at the time of assessment by PrimeRevenue. The true cashflow impact value may be less, or significantly greater, depending on program set-up assumptions. For more information, please email us at usauto@primerevenue.com.

Q. Are the OEM suppliers required to participate in this SCF program?

A. No, SCF program participation would be optional for suppliers. However, for the OEM to achieve the cashflow needed to stay in business the terms of the suppliers will most likely be pushed out (for example 45 days to 90 days or more, depending on the circumstances). The suppliers do not need use the SCF program to sell their invoices to meet cashflow needs they can use other sources to meet those demands.

Q. Can any bank or lender participate in this program and provide liquidity?

A. Yes. There are no restrictions on what lenders can participate and provide liquidity.

Q. Has PrimeRevenue obtained indications of interest from its banking partners with respect to its ability and desire to fund transactions in this government backstop?

A. Yes. PrimeRevenue has received strong indications of interest from its participating banking partner community with respect to participation in the program. It is anticipated that banks and financial institutions outside of the PrimeRevenue funding partner community would also be interested in participating and, as stipulated earlier, the program would necessarily be open to non-partner banks.

Q. How much money would be needed to fund this SCF program for the OEMs?

A. While liquidity levels required would depend on which OEMs deployed this solution and how many suppliers participated, it is fair to say several billions of dollars of liquidity would be required to support this program. The government backstop is required because lenders will not provide the billions of dollars needed for this program if they were taking OEM risk.

Q. How much time would it take to deploy this solution and start receiving the benefits?

A. GM, Chrysler and Ford have experience with these programs, hence deployment could be quick. Of the three, based on initial assessment, Ford could be live in a couple of months, while GM and Chrysler could be live as quickly as a few weeks given their most recent, direct experience with SCF programs. Similarly, many of the OEM suppliers are very familiar with these programs having participated in variants of these in the past - hence it is anticipated that on-boarding would be expeditious.

Q. Are SCF programs new or have they been around for some time?

A. Programs like these have been around for decades. The automation of these programs and use of the internet as a delivery mechanism have been in operation for about 10 years.

Q. Are SCF programs like this only available to, or appropriate for, companies in the position of the 'Big Three'?

A. No. There are many corporations from investment grade to non-investment deploying SCF solutions around the world in a variety of industries. If a company is looking for working capital initiatives for them and their supply chains this is a solution that can help.

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