Supply Chain Finance (SCF) also known as supplier finance or reverse factoring is a set of solutions that optimizes cashflow by allowing businesses to lengthen payment terms to their suppliers while providing an option for the supplier to get paid early. It is instructive that typically, buyers wish to extend payment terms as far as possible, while suppliers woud prefer cash on delivery. Supply Chain Finance therefore provides a win-win situation for these conflicting objectives. The buyer optimizes working capital while the supplier generates additional operating cashflow thereby minimizing risks across the entire supply chain.
Whereas trade in Mesopotamia around 3,000 B.C used some basic forms of supplier finance (see Infographic), the documented history of SCF in its current form is traced to U.S.A. around 1980 as an offering by large US Banks. Early adopters were were retailers, followed by automotive parts distributors. The uptake was however heightened following the 2008 financial crisis as it helped buyers with strong ratings to protect their supply chains (both locally and internationally). SCF has since grown into a maintream trade finance product offered by global banks, regional banks and independent fintechs.
The potential market for SCF for OECD Countries is significant and estimated at USD 1.3 Trillion in annual traded volumes. This is considered far from capacity with experts estimating that only 10% of the global available marketplace has been satisfied with SCF solutions. The market is expected to continue to grow at approximately 20-30% annually.
The driving forces behind the growth of SCF programs are varied and include, but are not limited to:
- Increasing risks in Supply Chains arising from globalization. This has significant impact on financials of large corporates.
- Working capital has risen to the top of the agenda for CFOs and treasurers.
- There is a strong interest from suppliers who require lower financing and predictable liquidity for planning purposes.
- Open account trade terms now account for over 85% of global businesses (vs 15% documentary credits). This trend – which is unrelenting – has opened up opportunities for both exporters and importes to use cheaper working capital options of which SCF is the natural alternative.
- Governments globally – e.g. UK, US, France, Netherlands, etc – have intervened in supply chains through legal legislations aimed at protecting SME suppliers. This legal force has created opportunities for SCF providers to facilitate early payment for suppliers.
- Perhaps a key significant factor has been the emergence of fintechs that are using the power of data and automation to seamlessly link buyers, suppliers and funders thereby eliminating information assymetry between the parties. This has significantly reduced the risk to the funder while creating convinience to the buyers and suppliers.