In an SCF programme, suppliers receive payment early from the bank while the buyer is able to extend its payment terms, allowing both parties to benefit from improvements to their working capital position.
Large companies have turned to this form of financing in recent years, but attention is now being drawn to SMEs, many of which need all the financing support they can garner.
“It is moving down the food chain, both in terms of ratings and in the size of corporations,” says Phillip Kerle, chief executive of Demica, an advisory firm specializing in working capital solutions and technology services.
Banks, as the crucial component, have been quick to move in on this, with many of the leading banks reporting annual growth rates of 30% to 40% in their SCF businesses, according to a Demica report published last year.
The report said that retail, manufacturing, consumer products and pharmaceuticals companies are among those most likely to set up SCF programmes.
Dan Roberts, head of trade finance at Barclays in London, says the bank is now seeing a lot of interest from domestic companies – although these are still large businesses with annual turnover of typically £100 million and upwards.
While he says this interest does not yet extend as far down as mid-market companies in the UK, he is seeing interest from mid-market companies in other countries such as South Africa.
This represents a substantial shift, as a key principle of SCF is that the finance offered to suppliers within the programme is priced on the basis of the buyer’s credit rating, which is typically higher than that of the suppliers.
Philippe Lepoutre, CEO of the Compagnie Générale d'Affacturage, a subsidiary of Société Générale, says the bank is also seeing requests for SCF from smaller companies.
However, Lepoutre says the bank would only pitch this kind of financing to companies that are investment-grade rated or equivalent.
“Under Basel III, the risk-weighted-assets consumption is much higher when the rating is lower,” he says. “In order not to consume too much equity, we would reserve this type of programme for well-rated companies.”
Nevertheless, a good credit rating is no longer an absolute prerequisite for SCF, and the ability to get paid sooner is beginning to attract a wider range of buyers to explore the opportunities it presents.
“I’ve got one deal about to kick-off where a big supplier is participating in a programme with a medium-sized corporate buyer so that they can get their cash fast,” says Demica’s Kerle. “The corporate that is instigating the programme is sub-investment grade while their suppliers are investment grade, so it’s the reverse of the usual structure.”
Kerle says the investment-grade-rated suppliers are keen to participate in the programme because they are running up against headroom on their credit insurance. By selling receivables to the bank, the suppliers are able to sell more products to their buyer – and the margin on the product is greater than on the cost of funding.
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Innocent, the UK-based smoothie and veg-pot maker, which reported sales of £213.5 million in 2012, is one company in particular that is in the process of investigating the feasibility of SCF. “There is undoubtedly benefit,” says Alison Wilson, the company’s treasurer. “But one of the biggest challenges is getting the senior executive team to understand, value and prioritize a balance-sheet benefit when the company, not unusually, is very P&L [profit and loss] focused.”
Wilson says suppliers of this product could do more to help treasurers build a credible business case for the working capital opportunity, adding: “Having more cash on the balance sheet in a low-yield environment isn’t a great selling point.”
While there are indications that SCF is starting to appeal to smaller corporations, this type of solution is not necessarily the right one for every company.
Bart Ras, global head of business development at HSBC, says that while SCF is a useful tool there are other tools that can help companies’ supply chains and improve their cash-conversion cycles, such as factoring, receivables finance, consignment stock, change of incoterms and overdrafts.
“If a supply chain finance programme does work for an SME, we will support them and implement that programme,” he says. “But if the company doesn’t have the key requirements to make a programme successful, such as an advanced ERP [enterprise resource planning] to support an efficient accounts-payable process, I will advise them to look into other tools.
“There is a huge requirement to help mid-market companies and SMEs with their working capital requirements, but my advice is quite often not to use supply chain finance because other solutions will be more helpful to these companies.”