Over 90 per cent of Europe’s major banks are experiencing very strong growth in the demand for supply chain finance, with some reporting a doubling of volumes in the last two years, research by Demica has revealed.
The report found that Europe’s top 40 banks also expect further strong growth, driven by demand for supply chain finance programmes among larger corporate clients.
The financial markets crisis has been a significant driver for supply chain finance as corporate firms and their banks sought to free up cash flow in the supply chain, while also reducing risk.
Supply chain finance allows 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 advantageous rates of interest.
The report found that the key attractions of supply chain finance schemes are: improved cash flow management; reduced risk (ie of essential supplier failure) in the supply chain; and improved transparency of transactions between suppliers and buyers.
Some respondents reported that suppliers are saving three to four percentage points on their cost of borrowing by participating in supply chain finance programmes.
The report said that European banks envisage growth in the supply chain finance market replacing the decline in letter of credit business. Demica reckon that as a result of this trend, over 80 per cent of top European banks are putting major marketing efforts behind their supply chain finance offerings.
Chief executive Phillip Kerle said: “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 – 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 supply chain finance programme, their cash flow 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.”