Supply chain finance used to be viewed as a niche product. This changed with the arrival of the financial crisis in 2008. As corporations became increasingly focused on optimising their working capital positions, the benefits of supply chain finance became more apparent and uptake steadily increased.
“In the last six years or so, supply chain finance has gone from being a really niche solution to an acceptable product in the market,” says Michael McDonough, head of supply chain finance at J.P. Morgan.
Supply chain finance is a structure whereby large corporations ask their banks to finance their suppliers’ receivables. Rather than having to wait 30 days to receive payment from a company, suppliers taking part in such a programme may be able to receive payment within a couple of days.
In a standard structure, finance is provided by the company’s bank and is based on its credit rating, rather than the credit rating of the suppliers, therefore enabling suppliers to benefit from cheaper financing than they would be able to access on their own. As a result, the company may be able to extend its payment terms from 30 to 60 days, thereby improving its own working capital position, while suppliers benefit from early payment.
These benefits continue to apply, but the argument for using supply chain finance has been gradually evolving. Enrico Camerinelli, senior analyst at Aite Group, says that while supply chain finance was originally used by companies looking to optimise their working capital position, it is increasingly being viewed as a strategic instrument for improving relationships with suppliers and distributors.
“In the past, many corporate buyers wanted to create programmes that would channel value to them at the expense of their suppliers,” says Philippe Lepoutre, chief executive of the Compagnie Générale d’Affacturage (CGA), a subsidiary of Société Générale. “This is less the case now and what is being stressed is more or less a kind of social responsibility: big corporate buyers are focusing on helping their supplier base secure sufficient liquidity to sustain their businesses.”
The argument for using supply chain finance has been gradually evolving
Another growing trend is that of corporations choosing to set up supply chain finance programmes with more than one participating bank. Phillip Kerle, chief executive of working capital solutions provider Demica, reports that the company is seeing more multi-bank supply chain finance deals. “Corporates have recognised that you need to bring in different banks in different jurisdictions,” he says.
The emergence of multi-bank supply chain finance is prompting companies to look at different types of platform, including non-bank options. “Once you’ve selected a bank to work with, it’s operationally quite difficult to change bank,” says Dan Roberts, head of trade finance at Barclays. “We are seeing more businesses thinking about platform neutrality whether that’s by adopting syndicated structures or by using third-party platforms with a number of banks providing finance.”
As the economic recovery continues, it is valid to ask whether the argument for using supply chain finance could become less compelling. After all, this is a structure that has seen significant take-up as a result of the financial crisis. However, supply chain finance can also play an important role in supporting companies through a growth period as they look to increase production volumes.
“Supply chain finance plays a critical role in enabling suppliers to adjust their production and boost their inventory in a time of economic growth,” says Bart Ras, global head of business development at HSBC. “By understanding their position and the key drivers in the supply chain, they can also work on innovation in a growth period.”
Mr Ras adds that companies are increasingly asking their suppliers to innovate for them or with them, but funding constraints may mean that suppliers cannot afford to meet their requirements. Again, supply chain finance may be able to facilitate this. “I have seen clients effectively telling their suppliers they will put them on supply chain finance and make sure they get early payments, but in return, the buyers will then expect a certain number of innovations over the coming year,” he says.
Uptake of supply chain finance may have accelerated as a result of the financial crisis, but as companies become more accustomed to this type of programme, it is likely that further benefits and applications will continue to emerge. Where supply chain finance is concerned, it’s just the end of the beginning.