BlogsA broken chain
Practical difficulties seem to be choking off any progress in supply chain finance
By Peter Williams | Published 10:50, 17 October 11
The moment for supply chain finance (SCF) has passed. The idea came of age just after the credit crunch and the concept struck me as a fantastic one. Partly I was swayed by the consideration that CFOs - not often persuaded by new ideas - were clearly giving to this source of finance. And it seemed to make so much sense.
In one way SCF has always happened and always will happen: the very basis of commercial life is the extending and receiving of credit. But to formalise this key element of wealth creation in an increasingly globalised market seemed both sensible and logical.
The advantages for both parties were clear: the process of granting help with finance allowed the trade to take place. For mega-corporations the strain on the balance sheet of supporting key suppliers should have been negligible, while for those small suppliers the finance provided meant they could get on with providing goods or services, and growing their business safe in the knowledge that the finance was in place and not eye-wateringly expensive.
You might have thought that the banks would have been put out by someone else stealing their role as provider of credit. Far from it, they were delighted at the prospect of focussing what balance sheet they could afford onto the comparative safety of their large customers while playing an active fee-based role in providing knowledge, systems and administrative support.
Perfect. Except that despite the post-credit crunch promise, SCF has failed to leave the launch pad. The latest research from Demica - a working capital survey - suggests that optimism about SCF is falling. Talking to 40 European banks it found that 75 percent of them still believe SCF’s growth prospects remain “strong” or “very strong”. Which sounds like good news but Demica admits those figures reveal a “more cautious outlook” compared to previous research where the same figure was over 90 percent.
The bankers are still anticipating annual growth rates of between 10 percent to 30 percent a year in mature markets and 20 percent to 25 percent in emerging markets. We all know that since the credit crisis cash and liquidity management has become much more than a passing conversation between the CFO and the treasurer.
Despite all the factors that should have made SCF a growing tool for CFOs in both the domestic and the international markets, progress has stalled. Practical difficulties, such as overcoming different legal systems and getting the technology right, seem to be choking off SCF as a practical way forward.
Perhaps more importantly in this commercial and financial climate CFOs are unwilling to commit themselves and their limited financial headroom to these sorts of deals en masse.
Good arguments still exist for formally structuring the relationship between customers and suppliers in order to ensure continuity of supply but at the moment SCF is more talk than action.
In one way SCF has always happened and always will happen: the very basis of commercial life is the extending and receiving of credit. But to formalise this key element of wealth creation in an increasingly globalised market seemed both sensible and logical.
The advantages for both parties were clear: the process of granting help with finance allowed the trade to take place. For mega-corporations the strain on the balance sheet of supporting key suppliers should have been negligible, while for those small suppliers the finance provided meant they could get on with providing goods or services, and growing their business safe in the knowledge that the finance was in place and not eye-wateringly expensive.
You might have thought that the banks would have been put out by someone else stealing their role as provider of credit. Far from it, they were delighted at the prospect of focussing what balance sheet they could afford onto the comparative safety of their large customers while playing an active fee-based role in providing knowledge, systems and administrative support.
Perfect. Except that despite the post-credit crunch promise, SCF has failed to leave the launch pad. The latest research from Demica - a working capital survey - suggests that optimism about SCF is falling. Talking to 40 European banks it found that 75 percent of them still believe SCF’s growth prospects remain “strong” or “very strong”. Which sounds like good news but Demica admits those figures reveal a “more cautious outlook” compared to previous research where the same figure was over 90 percent.
The bankers are still anticipating annual growth rates of between 10 percent to 30 percent a year in mature markets and 20 percent to 25 percent in emerging markets. We all know that since the credit crisis cash and liquidity management has become much more than a passing conversation between the CFO and the treasurer.
Despite all the factors that should have made SCF a growing tool for CFOs in both the domestic and the international markets, progress has stalled. Practical difficulties, such as overcoming different legal systems and getting the technology right, seem to be choking off SCF as a practical way forward.
Perhaps more importantly in this commercial and financial climate CFOs are unwilling to commit themselves and their limited financial headroom to these sorts of deals en masse.
Good arguments still exist for formally structuring the relationship between customers and suppliers in order to ensure continuity of supply but at the moment SCF is more talk than action.
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