Over 90% of top European banks are experiencing ‘very strong’ growth in the demand for supply chain finance (SCF) solutions, with some reporting a doubling of volumes in the last two years. According to research by Demica, the financial markets crisis has been a significant driver for SCF as corporates and their banks sought to free up cash flow in the supply chain, while also reducing risk. European bankers also envisage further strong growth in SCF driven by awareness of, and demand for, SCF programmes among larger corporates.
SCF programmes enable large buyer organisations to extend their payment periods, while allowing their suppliers to be paid more quickly. Suppliers can take advantage of the credit ratings of their debtors to secure funding priced against the debtors’ credit profile, and are therefore able to obtain early payment services from the programme financier at highly advantageous rates of interest.
The Demica research report also shows that key attractions of SCF programmes are:
- Improved cash flow management.
- Reduced risk (especially of essential supplier failure) in the supply chain.
- Improved transparency of transactions between suppliers and buyers.
Some respondents reported that suppliers are saving 3-4 percentage points on their cost of borrowing by participating in SCF programmes.
Other findings from the report show European banks envisaging growth in the SCF market replacing the decline in letter of credit (LC) business. As a result, over 80% of top European banks are putting major marketing efforts behind their SCF offerings, with some finding that when SCF programmes are implemented with clients, these implementations also open the door for a raft of other financial products which the bank can provide.
Phillip Kerle, Demica chief executive officer (CEO), said: “The last few years have seen SCF programmes grow from a product to a market in the eyes of corporates and their Tier1 banks. Our banking respondents see demand for SCF programmes coming principally from the manufacturing, retail, automotive, mechanical engineering and food production industries. However, more modest demand levels are also expected from sectors such as pharmaceuticals, technology and telecoms.
“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. 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 [small and medium-sized enterprises] – 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 a SCF programme, their cashflow can be eased through access to credit that is secured on their large corporate customer’s credit rating – an extremely attractive proposition in the current tight lending market. No wonder, therefore, that financiers are reporting such interest in SCF,” he added.
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