ON PAPER, supply-chain finance seems like a neat solution to a perennial problem. Companies are often paid by their customers late. One recent survey of small manufacturers in Britain found that they receive payment, on average, nearly 35 days after they had delivered an order. And making those goods can consume a lot of cash. So specialist firms pay suppliers in advance, and then collect the payment due from their customer weeks later.
In theory shorter-term loans, such as those involved in most supply-chain finance, should be low-risk. It is much easier for a lender to guess how much cash a firm will have in a few weeks, when it is paid for an order, than at the end of a ten-year bank loan. But Greensill added more complexity. Like sub-prime mortgage firms before the global financial crisis, the startup sliced and diced its collection of bills and invoices, packaging them into bond-like investments.
Greensill liked to present itself as a financial innovator. Yet its model was a variation on an old idea. Britain’s industrial revolution in the 19th century was financed through a form of supply-chain finance. Firms raised funds to cover the cost of producing and shipping goods by selling bills of exchange, with the promise that they would be repaid on a certain date when payment for an amount of goods had been received.
Historians think that careless lending, clients who over-egged their assets or future income, and tightening credit conditions did for Overend. The full story of Greensill will take time to emerge. Its task of assessing creditworthiness may have been made harder by modern company accounts. It is easier to assess the value of tangible assets, such as loaves departing a 19th-century bakery, than intangible ones such as a website owned by a 21st-century firm.
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