Supply Chain Finance Market Growth

There are many reasons to be cautious when talking about trade finance growth in 2013. Back in January last year both the International Chambers of Commerce and International Monetary Fund predicted a dip in the demand for trade finance products. Many cited the lack of credit and liquidity for banks in some way due to the capital restrictions imposed by Basel III, combined with economic uncertainty within the Eurozone and the United States.

Can we say that much has changed at the start of 2013? Europe seems to be stumbling through its problems without actually resolving anything, the United States has only just agreed short-term measures to tackle its debt issues and this lack of resolution has caused growth rates in the Chinese, Indian and Brazilian markets to shrink. Combine this with the economic ramifications in the Middle East and North Africa due to the political instability arising from the ‘Arab Spring’, supply chain disruptions caused by natural disasters in the far East, and you would be prudent to think that the outlook will be once again cautious.

However there are emerging views that challenge this outlook based on the new technology driven supply chain finance (SCF) models. In particular buyer-driven (post-shipment) finance has emerged in recent years as a viable SME financing model and is seen as a growing market. Added to this are other technology driven models based on pre-shipment finance and early payment discounting, along with alternative finance channels that are beginning to finance the supply chain.

A recent global report from the International Finance Corporation (IFC) surveyed corporate heads of SCF, the report revealed steady growth in 2011/12 in Western Europe and North America. Inclusive of buyer-driven finance and receivables finance (factoring), the report also indicates there is no reason to think this trend will not continue in 2013 and expand into new markets. While the report does not give quantifiable statistics, the SCF market is predicted to grow (in terms of turnover) by between 10-20 percent.

Large SCF programmes are now reaching an annual turnover of over €300m. Dependent on technology-driven platforms, corporates are seeing the benefits of helping their suppliers with working capital challenges and the process efficiencies and cost savings of B2B integration and e-Invoicing. The primary example offered by the IFC report is the SCF program run by Petrobras – ‘Progama Progradir’ reaching $1.1bn in its first year.

It appears the political, economic and geographic risks that are reducing the financing of larger capital projects are fuelling the requirement to mitigate supply chain risk through new alternative finance models. Let’s face it the demand is there, small and medium enterprises (SME) globally are still struggling to get access to credit and by leveraging the credit rating of their customer through buyer-driven SCF, they have an alternative finance option at competitive rates.

By offering their SME suppliers buyer-driven SCF, corporates gain a double benefit. Dependent on the arrangement of their program, buyers optimise their working capital by holding on to their cash for longer and they also help mitigate the growing concern of insolvency risk within their supply chain. Unsurprisingly, by helping key suppliers reduce working capital concerns this helps their suppliers businesses run efficiently and allows them to invest in other areas such as research and development or acquisitions, thereby promoting growth.

The buyer-driven model has received so much attention that the British government has initiated a SCF program led by the Prime Minister to work with Britain’s leading companies and banks, this program is predicted to grow the UK SCF market by 10 percent alone.

But do not think that these alternative finance models are being funded by banks alone, in some cases governments see themselves as the financier such as the IPP program currently being employed by the US Treasury which leverages electronic invoicing to ensure suppliers are paid on time or early. On a different tangent, new Value Added Tax (VAT) rules have come into effect in Europe that raise the limit on cash accounting for SMEs with a turnover less than €2m. Using standard VAT accounting SMEs pay VAT on sales whether or not the customer paid but using cash accounting VAT is not payable until the customer has paid. So even the tax authorities are relieving the working capital pressures on SMEs!

Other models are beginning to acquire funding through the capital markets and alternative finance channels such as asset financiers and commercial debt funds. The Petrobas example cited earlier uses a combination of banks and investment funds to finance the program. The risk associated with many thousands of suppliers within a single supply chain can be too much for one bank to take and syndications offer an opportunity to spread that risk.

Pre-shipment models based on technology are being used to replace letter of credit and bill of exchange documents. The O-Bill and bank payment obligation (BPO) models use sophisticated matching technologies to check B2B messages such as electronic invoices and purchase orders against a pre-agreed rule set. These technologies are far cheaper than existing paper based processes and with the BPO receiving ICC accreditation this year, they should receive greater attention.

It seems that supply chain finance is growing not only in terms of turnover, but also in scope and appeal. The general consensus is that these technology based models can only become more popular and widely adopted , this is good news for B2B integration generally – as these finance models join the physical supply chain processes with the financial supply chain – both being powered by B2B integration.