In recent years, supply chain finance has become a mainstream tool for increasing trade and boosting working capital. It makes perfect sense. A company can leverage its credit rating to extend finance to suppliers at a more favourable rate than they might otherwise receive.
It means they extend their own days payable outstanding while enabling suppliers to reduce days sales outstanding and finance their receivables. Supply chain finance, known as SCF, brings working capital benefits to both parties, while also strengthening relationships and improving the overall resilience of the supply chain.
But SCF is not universally adopted. Mid-market companies are neglected. Demica estimates the untapped potential of SCF to medium-sized companies to be as high as $3 trillion. It is also true that companies in emerging markets are struggling to find finance. This market failure is damaging both to the affected companies and the overall supply chain.
It is worth first defining what we mean by mid-market companies. While company sizes can range from $10 million to $3 billion depending on country, we are talking about companies at the higher end of the range with minimum revenues of $500 million.
So how can supply chain providers embrace these neglected companies and bring the benefits of SCF to all? First, let’s start with the reasons mid-market companies are in this situation.
Mid-market companies are less likely to have the same rate arbitrage over their suppliers as is typically found with large corporates. They are also less likely to have the bargaining power needed to extend supplier payment terms. Likewise, mid-market companies may lack the resources needed to navigate complex contracts and oversee supplier onboarding.
Banks may face obstacles when it comes to providing SCF to medium-sized companies. Large global banks may be less interested in providing SCF to companies of this size and while regional banks may have more appetite for smaller scale programmes, they may lack the product expertise and technology platform needed to operationalise them.
When supply chains extend into emerging markets the equation gets a whole lot worse. Most SCF schemes are structured on a domestic basis, with buyers offering SCF to suppliers based mainly in developed markets. Banks may struggle to onboard suppliers in countries outside their own regions. Reasons for this include diverse know-your-customer (KYC) procedures, multiple languages and differing compliance requirements.
Banks adopting a more regional focus means many are not in a position to support SCF spanning different regions and jurisdictions. It’s a regrettable trend when so many companies are building increasingly globalised supply chains.
Fortunately, there are solutions. A notable development is the arrival of fintechs, which enables a wider range of investors to fund middle-market companies with risk distributed across multi-funder platforms. One of the most notable is Demica, a rapidly growing fintech company providing working capital solutions to corporates and banks.
Demica has a long list of funding partners looking for assets and as a result has funded new working capital programmes with a value of more than $1.6 billion over the past year across Europe, Asia-Pacific and the Middle East.
Supplier onboarding is being shaken up by Demica, which has developed slick graphical user interfaces common in most consumer finance applications. Currently, we see suppliers that lack the resources needed to comply with highly manual KYC or onboarding procedures. It means they can fall by the wayside. The consequences are severe. Half the respondents to PwC’s 2017 SCF Barometer, for example, cited the supplier onboarding process as a key success factor, while 31 per cent flagged it as a bottleneck.
Demica’s goal is to help extend SCF to mid-market companies and to those trading in emerging markets
To extend reach into emerging markets, Demica has partnered with the FCI, the global representative body for the factoring and receivables finance industry, to develop FCIreverse, which is a plug-and-play platform enabling FCI members to provide SCF across multiple currencies and jurisdictions.
The platform allows funders to leverage FCI’s network of more than 400 banks to onboard and fund suppliers locally, while retaining the risk of the buyer and sharing the discount applied to the invoice purchase. FCIreverse radically improves onboarding across different jurisdictions using established FCI member relationships and Demica’s powerful online supplier onboarding tool.
While FCIreverse is the first solution of its kind, this does follow the established use of third-party technology platforms by corporates to extend beyond the traditional scope of one bank, one buyer and a group of suppliers. Being able to manage all bank funding partners across a single platform brings further simplification opportunities for corporate treasurers. This is not least because the platform provides reach into an extended universe of financial institutions, which have long worked together under the FCI.
Demica’s goal is to help extend SCF to mid-market companies and to those trading in emerging markets. As one of the world’s largest facilitators of SCF, spanning 135 countries with $110 billion in receivables and payables arranged each year, we see it as our duty to make supply chains as resilient as possible.
Our approach to supply chain finance is proving a huge hit with clients. The industry has recognised our efforts too. Demica is a winner of several prestigious industry awards, including last year’s BCR Supply Chain Finance Provider of the Year (non-bank), Global Finance’s Supply Chain Finance Provider 2019 (non-bank) and Trade Finance Global’s Supply Chain Financier 2019 award.
The market needs service providers that can give corporates what they need to optimise working capital management. This means a collaboration between relationship banks, often best placed to assess corporate credit, alternative funders to structure and price for risk, and platform providers to bring it all together. It is likely that the investment in technology to make this happen will come from a combination of new and existing market participants. Demica will be at the forefront of these trends to drive more capital into the market.
To find out more about Demica SCF please go to Demica.com