The cross-border supply chain finance (SCF) market space for larger companies employing over 500 employees domiciled in the UK, France and Germany is estimated to be over €460bn, according to a research report by Demica. The report, entitled
‘Passport to Liquidity’
, finds that Germany offers the greatest market potential for cross-border SCF (€230bn), followed by France (€125bn) and the UK (€115bn).
European banking professionals surveyed in the research believed that currently only 5-10% of the available marketplace has been satisfied with cross-border SCF schemes, revealing ample space for further growth, says Demica. Driven by a rising volume of open account trade and corporate buyers’ increasing desire to protect strategic but vulnerable suppliers, banking respondents expected, on average, a double digit growth rate of cross-border SCF programmes for the next few years.
Over 80% of financiers interviewed reported that large buyers in the three countries studied are exhibiting strong demand for international SCF schemes. In particular, suppliers in emerging economies and the Far East, where growing businesses have an intense need for liquidity and options for alternative financing techniques are limited, demonstrate a high level of interest in SCF programmes. Nevertheless, the viability of utilising this financing facility in these markets will depend on the ease of overcoming differences when conducting business under the local legislatures and accounting regimes.
Respondents also highlighted the top three challenges in developing global SCF schemes. On-boarding suppliers remains the biggest hurdle to be cleared. As vital as conducting due diligence on local suppliers, banks need to command local knowledge and expertise in servicing smaller suppliers in growth regions. Strong understanding of local legislation will be a pre-requisite for banks when setting foot in emerging markets.
“Our research shows that the substantial potential market for cross-border SCF is – as yet – largely unexploited,” said Phillip Kerle, chief executive officer (CEO) of Demica. “As a result, precious capital which could be deployed to add liquidity in the supply chains to the advantages of both buyers and suppliers remains idle.
“In a globalised world where international trade and business outsourcing are norm, SCF is becoming an increasingly vital financing tool for suppliers who struggle with high borrowing costs and restricted access to alternative finance facilities. The refinancing issue is hindering suppliers in developing economies from expanding their businesses and impairing their ability to keep pace with the requirements of large buyers.
“Smaller suppliers are less resistant to economic volatility and as disruptions in one part of the supply chains can trigger a domino effect, it is in the best interest of buyers to ensure the financial robustness of their strategic suppliers. In addition to optimising their own working capital, buyers are increasingly leveraging SCF as a relationship management tool with their suppliers. While corporates’ growing awareness of this finance facility helps drive uptake, banks also play a pivotal role in deepening market penetration. With the help of technology platforms which can facilitate suppliers on-boarding and administration, SCF can prove to be a winning proposition for all parties involved.”
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