Once regarded as a niche solution, supply chain finance (SCF) has seenconsiderable take-up in recent years. However, that is not to say thattake-up is plateauing. A survey published by McKinsey in October 2015states that SCF revenue “has grown at 20% per year since 2010 and isexpected to continue growing at around 15% for the next three to five years.” The survey also says that the SCF business, currently worth $2 billion globally, could be tapping into a potential revenue pool of $20 billion.

In the last few years, the original concept of SCF has expanded toencompass numerous benefits for both buyer and supplier, from

working capital optimisation to business continuity. At the same time,the types of programme on offer have multiplied, with companies nowable to access a variety of different tools and techniques in order tomeet their particular needs.

While many companies have already adopted supply chain financesolutions, the McKinsey report makes it clear that there are plentymore opportunities for growth. Indeed, experts report that companieswhich may have held back from adoption in the past are now askinghow this type of solution can help their businesses. “I think supplychain finance is living a second youth,” comments Enrico Camerinelli,

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SUPPLY CHAIN FINANCE

A second youthAs supply chain finance matures, the types of solutions on offer – and the rationale foradopting them – have continued to evolve, writes FX-MM’s Rebecca Brace. Companies today are implementing supply chain finance for a wider range of reasons than in the past. Meanwhile, despite continuing growth in recent years, there may still be significantuntapped opportunities in this area.

Senior Analyst at Aite Group. “There are largecompanies that have stayed at the window towatch and are now convinced they must do SCF as well.”

Why SCF?Also known as supplier finance or reversefactoring, supply chain finance is a type ofreceivables discounting solution which brings

benefits both for the large buyer setting up the programme (the‘anchor’) and for the company’s suppliers. By implementing aprogramme, the anchor allows chosen suppliers to finance theirreceivables, receiving payment much sooner than they otherwisewould. The cost of funding for suppliers is based on the buyer’s creditrating, resulting in a lower cost of credit than suppliers are typicallyable to access.

“Suppliers might subscribe to a supplier finance programme sothat they have the option to accelerate collection of their tradereceivables,” explains Almila Arikan Sarbanoglu, Product Manager forSupplier Finance at Barclays. “They bear the financing cost only if the receivable gets discounted; a non-discounted receivable

gets paid in full on the due date. Enhanced cash flow visibility with the ability to track allapproved invoices on the technology platform isanother reason suppliers might look to supplychain finance.”

Where the buyer is concerned, SCF pro -grammes are sometimes set up as a means ofsoftening the blow when extending the paymentterms offered to suppliers. Payment terms

extensions, while improving working capital for the buyer, can be highlychallenging for suppliers – as demonstrated by Rio Tinto’s decision inApril to reverse plans to extend payment terms for some suppliers from45 to 90 days, less than a week after the plan had been announced. SCF can help to make such arrangements more palatable for suppliers.

However, the reasons for adopting supply chain finance varyconsiderably between companies. Betrand de Comminges, StructuringHead, GTRF at HSBC, notes that there are four main reasons whycompanies may put in place a supply chain finance programme today:■ Improve working capital metrics and release cash from the

business through the extension of days payable outstanding(DPO), improvements in working capital metrics and/or free cashflow. “SCF has an immediate impact on a company’s efficiencyratios and, in some cases, its valuation,” says de Comminges.

■ Manage risk through a supplier base. “Allowing strategic suppliersto access your credit lines enables them to react more rapidly tochanging requirements, without challenging their credit standing,”he explains.

■ In mature markets, de Comminges says that suppliers areincreasingly demanding access to SCF credit lines in exchange forbetter commercial terms.

■ SCF can also be used to provide liquidity to outsourced strategicinvestments. “For example, in situations in which the client needsits supplier to commit to a considerable capex position, the SCFfacilitates the supplier’s financing through the release of workingcapital on their books.”

These motivations have shifted somewhat in the last few years as theadoption of supply chain finance has become more wides-pread. Camerinelli says that while working capital efficiency continuesto be the main motivator for companies adopting SCF, some large‘anchors’ are also now looking at SCF “as a system that ensuresbusiness continuity by preventing key suppliers from going underfinancial distress”.

Risk is another factor which is becoming more significant forcompanies adopting supply chain finance. “Historically, the workingcapital benefits would have been the key driver for SCF programme

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Enrico CamerinelliAite Group

Peter JamesonBank of America Merrill Lynch

Some large ‘anchors’ are also now looking at SCF “as a system that ensures

business continuity by preventing key suppliers from going under

financial distress’’

adoption,” says Peter Jameson, Co-Head of Product Management,Global Transaction Services, EMEA at Bank of America Merrill Lynch.“More recently, and particularly during the financial crisis, I wouldargue the risk mitigation driver has risen up the agenda – e.g. byproviding a financing solution to their supplier, the buyer reduces the

risk that their supplier might fail, negativelyimpacting their ability to supply a particularcomponent, hence impacting the buyer’s overallsupply chain.”

Meanwhile, regulatory pressures such as thearrival of Basel III have reduced the availability ofbank lending. “This has unequally impactedsub-investment grade companies as banks pullback from previously acceptable risk profiles,”

says Eric Riddle, EVP, Global Head of SCF at Kyriba. “This has led toinvestment grade corporates deciding to ‘lend’ their credit strength to their supply chain vendors less fortunate.”

Using supply chain finance to support growthSupply chain finance may have found its feet during the financial crisis,when companies were facing considerable economic challenges.However, this type of solution can be equally valuable as a means ofsupporting business growth.

During periods of growth, suppliers maystruggle to finance higher volumes of customerorders. If this leads to orders being delayed or evencancelled, there could be a significant knock-oneffect for large customers. By offering supplierssupply chain finance, the purchasing companiescan help to keep the wheels turning and avoid anysuch disruption.

“From the supplier’s perspective, delays in payment from thebuyer often restrict the ability of SMEs to plan for the long-term andinvest in infrastructure, equipment or innovation,” says Sarbanoglu.“Supplier finance offers SMEs the additional liquidity, which will helpthem grow and potentially offer better value to their clients. It can alsoimprove cash flow for suppliers by converting receivables into cash,without increasing debt.”

In this way, supply chain finance can support growth fordistributors as well as suppliers. “On the supply side, supply chainfinance helps the steady supply of goods by granting working capital tosuppliers during the pre-shipment production process,” saysCamerinelli. “On the distribution side, it allows small distributors topurchase the goods they have to sell.”

Innovation and developmentThe area of supply chain finance has developed considerably over thelast few years. Initially focusing on bank-run programmes, the area hasexpanded to include a range of different providers and platforms.Techniques such as dynamic discounting have been developed, whichenable suppliers to take advantage of early payment discounts in a

flexible way, with the level ofdiscount determined by how early apayment is made.

“Technology has transformeddynamic discounting so that it’s possible for buyers and suppliers tocollaborate in a working capital marketplace on early cash flow at a ratethat’s profitable for both,” says Andrew Burns, Director, BusinessDevelopment at C2FO. “This model gives suppliers the ability to chooseearly payment when they need it, at rates that are often less expensivethan their alternative cost of borrowing.”

Developments continue, and new tools and techniques are stillemerging. One area of focus is on the long tail – in other words, acompany’s smaller suppliers. While these smaller suppliers may bemost in need of supply chain finance, buyers tend to focus first andforemost on larger suppliers when setting up a programme.

“A typical restriction placed on traditional reverse factoringprograms is that due to know your customer (KYC) rules, the suppliersinvited to the buyer led programs are typically limited to the largestsuppliers,” says Riddle. He adds that “new technology and businessmodels allow for a more expeditious route to supplier enablement” – which may bring early payment opportunities to a larger portion ofthe supply chain.

Meanwhile, purchase-to-pay (P2P) platforms represent anotherinteresting area of development. Such programmes typically use dataanalytics algorithms to extract information from sources ranging from

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SUPPLY CHAIN FINANCE

Eric RiddleKyriba

The area of supply chain finance hasdeveloped considerably over the last few

years. Initially focusing on bank-runprogrammes, the area has expanded to

include a range of different providers and platforms

customer orders to social media in order tobuild a risk profile of companies that may be toosmall to obtain a credit agency rating.

Camerinelli says that traditional SCFprogrammes look at a company’s profitability,cost of goods, sales figures and growthprojections – and that collecting and interp -reting data can take weeks, given the lack ofstandards in both documentation and pricing

methodologies. “New programmes leveraging big data from globalbusiness network are revolutionising business across all industries,and now also SCF,” he adds.

Evolving SCFAside from these developments, the way in which companies usesupply chain finance are also continuing to evolve. Jameson says thatbusinesses are increasingly looking at more holistic supplier paymentsolutions – “for example, how to integrate a supply chain finance andcard solution, enabling them to provide SCF for more strategicsuppliers and leveraging P-card for ‘tail spend’ – i.e. for the largernumber of smaller suppliers they may have.”

Burns adds that companies are looking to adopt solutions toencompass their entire supply chain. “Traditional SCF is mostappropriate for large suppliers, whereas dynamic discounting modelssuch as C2FO are ideal for the broad midsection of spend and well into

the long tail,” he says. “Choosing to offer a variety of SCF options helps de-risk the entire supply chain, including lower tiers that benefit indirectly.”

At the same time, companies are increasingly looking for scalablesolutions. De Comminges says, “The market isn’t about just having atemplate solution in Country A or Country B any longer – these days it’smore likely that the client recognises that SCF works and wants to workwith a partner that can allow them to leverage this at a regional and/or global level.”

Untapped opportunitiesWhile the flow of new to market RFPs has decreased slightly over thelast two years, de Comminges says the bank is sustaining healthy

growth in SCF. Indeed, the McKinsey reportindicated that despite the scale ofprogress so far, there remains a hugeuntapped market for supply chain finance.So where are these opportunities?

Burns says that many opportunitiescome from industries that have beenslower to adopt technology-based process

improvements. “Another area of tremendous growth potential is inmultinational companies extending SCF to their suppliers across thegrowth,” he adds.

Jameson adds that “those that have not adopted SCF may beincreasingly influenced to consider doing so, given their need to helpsupport suppliers through more challenging economic times, andmanage the risk within their own supply chains.”

At the same time, companies which have already adopted supply chain finance may also seek out opportunities to improve upon their current programmes. The 2016 Treasury Survey publishedby Kyriba and the Association of Corporate Treasurers found that over 20% of treasurers are responsible for supply chain finance.However, only 8% of respondents felt they performed ‘extremely well’in the area of supply chain finance, with 28% deeming theirperformance to be poor.

In addition, Jameson points out that those who have alreadyadopted supply chain finance may be looking at how to broadenadoption – “For example, by implementing SCF in new markets, or byadding other capabilities like P-Card to capture spend that waspreviously not practical to address.”

The test of timeSupply chain finance has stood the test of time in the years since the financial crisis and it seems likely that uptake will continue in thecoming years, as innovation and development continues to add to the solutions on offer. The supply chain finance market may bematuring in several western economies – but as de Comminges pointsout, “It’s important to note that maturing is not the same as slowing.”

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SUPPLY CHAIN FINANCE

For further information: www.fx-mm.com

Andrew BurnsC2FO

Those that have not adopted SCF may beincreasingly influenced to consider doing

so, given their need to help supportsuppliers through more challenging

economic times, and manage the riskwithin their own supply chains

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