The supply chain has traditionally been a battleground with extended tugs-of-war taking place between buyers and suppliers over payment terms. On one side, buyers are seeking extended payment terms and lower costs of materials, on the other suppliers seek to receive timely payment and minimise the level of discounts they offerto their customers. As buyers insist on ever-extending payment terms, suppliers’ cash flow suffers. The buyer may seem to have won the battle but their ultimate goal of cost reduction is not met and the buyersupplier relationship, instead of being one of mutual benefit, becomes one of constant conflict between the two parties.
But across the US and increasingly in Europe, things have begun to change.
Supply chain financing programmes are being established as a result of market demands that have, in turn, developed as a result of the increasing cost of finance and strained buyersupplier relationships.
A Demica research report that is soon to be published investigates the supply chain finance market to ascertain the depth of demand for this type of finance and the principal factors behind the growing importance of new funding techniques.
The study’s preliminary findings indicate that a large majority – over 70 per cent – of large European companies are trying to extend the payment terms offered by their suppliers in a bid to alleviate the working capital pressures they find themselves under. Supply chain finance programmes address this issue. They release the tension between the conflicting demands of buyers and suppliers by enabling buyers to get extended terms from their suppliers, and suppliers to receive payment as early as days following invoice approval.
This process is facilitated by a lender who provides funding to the suppliers. But in assessing the credit, it looks at the buyer who is obliged to pay the invoices. Such programmes are underpinned by a sophisticated reporting technology platform which allows invoices to be viewed by buyer, lender and supplier in real time, streamlining the transaction.
The initial findings of our research reveal that top corporates expect supply chain finance to exhibit the second strongest growth in use over the next two years, slightly ahead of other types of finance such as inventory financing, and second only to traditional lines of credit from relationship banks. In addition, the research also shows that a number of leading banks already have supply chain finance products in place and that many of the others questioned are planning to offer this type of product in the near to medium term future.
The banks’ adaptability has kept them well ahead of alternative finance providers in recent years and their focus on the supply chain is evidence of their responsiveness to client and market needs. Interestingly, banks view the automotive, retail, food and drink and manufacturing industries as the main markets for their supply chain offerings, with buyersupplier relationships in these sectors seen to be under the greatest strain.
It is to be hoped that the emergence of these new financing programmes will help turn erstwhile tugs-of-war into situations in which buyers and suppliers begin to pull together in the same direction.
Avarina Miller, is Senior Vice President at Supply Chain Finance House, Demica