Supply chain financing has traditionally focused on the top end of the market, serving the larger corporates with funding to assist their suppliers, some or many of whom tend to be mid-sized players in their given sectors.
However, these mid-market enterprises (MMEs), which might not be credit rated and are unlikely to obtain supply chain funding directly themselves, have suffered from financing difficulties in their own supply chains.
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Robert Barnes, |
Seeing the gap in assistance that is leaving some small and medium-sized enterprises (SMEs) struggling for supply chain financing, alternative credit providers and challenger banks have been stepping up with new offerings specifically aimed at helping the smallest companies.
Clive James, business development manager at cash-management provider Cashfac, explains that banks often overlook the needs of the smaller companies, despite representing a large part of the economy.
“Banks are aligned with focus on the two opposite ends of the market," he says. "They look to either the largest multinational corporates or businesses run by individuals. The majority of SMEs fall down through the cracks.”
James says a lot of the products on the market for smaller companies are scaled-up or scaled-down versions of what has been devised for other businesses, adding: “A lot of SME solutions are trying to force a square peg into a round hole. They are pushed towards a retail solution which can be very basic and does not meet their requirements, or a complex solution that can be overwhelming.”
Seeing the gap, new players are stepping into the space. James cites the launch of both CivilisedBank and Atom Bank in the UK in 2016, and believes it will be an exciting time for change in the industry.
CivilisedBank will have one division focused on providing lending to small businesses, which have difficulty accessing supply chain financing. Neither of the banks will have branches, and Atom Bank claims to be the UK’s first pure digital bank.
New angle
The newer players in the market are angling their offering towards the needs of the smaller companies.
“Alternative providers will be looking beyond payments, offering cash-flow forecasting and reconciliation solutions,” says James. "These other providers will speak to the SMEs directly and offer them the services they require.
“SMEs are realising now it is not just the banks that can provide services. Fintech companies are getting into the space and can bring value-added tools and intuitive platforms.”
Among such developments include supply chain finance provider PrimeRevenue and AIG, which have established a financing vehicle focused on middle-market corporates. It responds to the specific needs of the mid-market, non-investment grade companies.
Provision of supply chain financing to this market segment helps the smaller SMEs down the supply chain to access more favourable payment terms, optimize their operating cash flows and minimizes risks across the supply chain, in general.
The financing is underwritten by AIG, removing the credit risk associated with financing unrated companies. Although focused on UK-based companies to begin with, the plan is to expand the offering to European and US businesses.
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Neil Ross, AIG |
Neil Ross, head of trade credit EMEA at AIG, says the facility was created to respond to the specific difficulties of the market.
“There is a lot of interest in the market since supply chain finance is generally not well served today except for large investment grade names," he says. "Supply chain financing remains the domain of the large corporations, but there is growing interest in the facility from across the industry.”
From working with the larger corporates on their established supply chain finance programmes, PrimeRevenue already has access to a number of potential corporate clients to launch the product.
Robert Barnes, managing director at PrimeRevenue, says: “There are already 20,000 suppliers ready to access the platform. They cannot run their own supply chain finance facility, but will have been aware of it in their own role as a supplier. There is a captive audience there to start with.”
Barnes says banks' reluctance to provide financing for smaller companies comes from the constraints they face around regulatory requirements, adding: “Banks in general are not offering supply chain finance to MMEs. There are so many regulatory issues they need to navigate to be able to work with all of the individual members of the chain.
"The banks will go through the required KYC [know your customer] processes, but each will have a different interpretation of what the requirements would be.”
He adds that the PrimeRevenue product will follow all of the necessary regulation, but as many of the companies that will be using their product have already been checked as part of a larger corporate’s supply chain financing programme, they do not need to carry out additional KYC checks.
Traditional banks also suffer from not having the necessary technology to work with a vast range of business sizes.
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Clive James, Cashfac |
Cashfac's James says: “Banks are still figuring out their proposition. If they build in-house, it takes a long time to do, so some are looking at how a tech partner can enhance their products. Challenger banks are building something new from day one. They have done their research and know what the SMEs want.”
While the business at the top of the chain currently has to be based in the UK, the SMEs in the chain can be located anywhere globally.
PrimeRevenue's Barnes says: “The facilities can be used cross-border. Suppliers that have access will gain extra leverage to their suppliers for open account terms. Having access to cash at a reasonable rate is an important requirement for them.
“The facility can go cross-border and into any business not under sanctions. It will always fund in the currency of the transaction.”
For SMEs, especially in overseas markets, accessing additional financing can be prohibitively expensive.
AIG's Ross says: “Smaller companies' cost of working capital can be considerably higher and supply chain finance can help them access more efficient working capital, leveraging the financial strength of their buyers.
“Supply chain finance can provide much-needed working capital for suppliers in emerging markets where local financing can be expensive or difficult to obtain.”
Ross forecasts there is a still a considerable amount that can be done to assist companies, concluding: “Supply chain finance is a relatively new product and penetration levels are still really low – there is huge potential to grow over the next 10 years.”