Increasing numbers of corporates are turning to supply chain finance as a result of the financial crisis, according to research from working capital solutions provider Demica. Over 90% of major European banks are experiencing ‘very strong’ growth in demand for supply chain finance (SCF) solutions.
The report shows SCF is growing in popularity because it reduces counterparty risk and frees up cash flow – both important aims, boosted in importance by the financial crisis – and improves transparency of transactions.
By using supply chain finance in a transaction, banks extend credit to the purchaser. That means the supplier is paid promptly – removing that element of counterparty risk – and the buyer can extend its payment period. If the buyer has a better credit rating than the supplier, this is particularly advantageous – the credit price is based on the buyer’s credit rating, which results in cheaper debt than the supplier alone could have received. Indeed, respondents to the survey told Demica some suppliers are saving between three and four percentage points on their cost of borrowing.
“As the physical supply chain has run out of steam in terms of its potential for further efficiency gains, the notion of the financial supply chain has rapidly gained attention from directors and financiers,” says Phillip Kerle, Demica Chief Executive. “The result is that some financiers are experiencing quite phenomenal rates of growth. As the global economy builds up a new head of steam, SMEs – who make up the larger part of many essential supply chains – desperately need access to reasonably priced finance, but are currently unable to do so in their own right. By joining an SCF programme they benefit from credit that is secured on their large corporate customer’s credit rating – an extremely attractive proposition in the current tight lending market.”