According to research from Demica, firms in the supply chain are unable to sustain further stretching of payment terms. The report, which surveyed over 1000 firms with over 50 employees in the UK and Germany, showed that although many buyer firms at the end of the supply chain are keen to extend payment terms with their suppliers, current pressures on cash flow, along with a scarcity of traditional credit, are making this impossible.
The research chose to interview firms in UK and Germany as these two countries are representative of business polarities in Europe – the UK being a highly service-sector-dependent economy, while Germany remains greatly focused on manufacturing industry. The report’s findings raise critical concerns for supply chains where essential suppliers are hard to replace, and where damage to the supply chain in the form of supplier failure would not only threaten the buyer company’s business, but have wider economic ramifications than a single buyer-supplier relationship. In fact, the research report revealed that 88% of UK firms and 55% of German companies have identified that key suppliers are unable to sustain further lengthening of payment periods.
As a solution for this situation, banks are developing alternative financing products in supply chain finance, usually secured on outstanding invoice debt in the supply chain. This category is generating enthusiasm among banks and their corporate customers as a means of substituting for lower credit availability. SCF structures not only allow large corporations to extend their credit terms with suppliers, but also to use the credit quality of receivables owed to allow their banking partner to finance their suppliers’ outstanding invoices at a favourable rate.
The research has been able to quantify this enthusiasm, revealing that some 61% of UK firms and 43% of German companies are planning to monetise their receivables outstanding to provide liquidity within their supply chain. This research updates and extends the second report of the supply chain finance market published by Demica in 2008, which observed that an overwhelming majority of major international banks were offering their corporate customers supply chain financing solutions. The latest figures confirm that there is a surging corporate demand to match, as 83% of firms in the UK and 55% in Germany stated that their banks relationships with their business customers had been irrevocably altered and restructured during the past 18 months.
Phillip Kerle, chief executive officer, Demica, comments: “Scarcity of traditional credit has become a real problem in supply chain management this year, especially since many supply chain structures developed in the last few years have been predicated on the easy availability of low-cost liquidity. The situation is becoming critical, particularly in business structures where the ability to swap suppliers is very limited because of the specialist products or components they provide. While the situation regarding extension of payment terms is problematic in Germany, it appears to be overwhelming in the UK.
“Liquidity in Germany is perhaps a little more fluid than the UK as the banking system is used to rating and lending to the unlisted, family-owned Mittelstand companies that make many supply chains. In the UK, business demographics display a more extreme polarity between large and small companies. In a recession, small companies often suffer from blanket reduction of credit availability because, from the banks’ point of view, the amounts being lent do not justify the cost of detailed individual credit assessment.
“In both countries studied, however, we should recognise that over half of companies believe that payment terms can be stretched no further. So the problem has definitely reached a critical point in Germany and the UK. Pressure is still heavily on major firms at the end of the supply chain to free up cash, but if that means putting essential suppliers out of business, then the whole chain can collapse like a pack of cards. Moreover, many supply chains are interdependent, as we saw when one high street retailer, which also acted as the major wholesaler in music and film retail, recently went into receivership. However, the good news is that the banks have been not been idle, and have been developing a range of supply chain finance tools, in the most part secured on outstanding payables owed by the major, highly-rated firms at the end of the supply chain. We can expect take-up of these products to soar as the year progresses.”
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