Supply chain financing (SCF) is a major $2 trillion market according to a survey by McKinsey. McKinsey had conducted the survey by interviewing 70 CFOs and 250 suppliers from 21 countries. They found out that only 10% or a mere $20 billion of the need is being financed by the market right now. In other words, the SCF field is wide open but why is it not being filled?
Three Reasons For Lack of Fulfillment
McKinsey gave us three reasons.
1.Lack of senior management support
2.Overreliance on investment grade invoice financing
3.The mismatch between banks and client’s SCF requirements.
According to McKinsey, bank’s senior management had been focus on other priorities instead of giving SCF the appropriate support they need. This should change because regulations after the global financial crisis now favour SCF over traditional trade.
The second reason behind the small fulfillment of SCF demand is the preference over investment grade invoices. According to McKinsey, there are $1 trillion worth of investment grade and $0.8 trillion worth of non-investment grade invoices.
$18 billion worth of investment grade invoices are financed, but only $2 billion worth of non-investment grade invoices are being financed. This forces most companies to take traditional business loans over when invoice financing would suffice.
The third and most important reason behind it would be the mismatch of the bank’s capabilities and their client’s SCF requirements. Banks are good at integrating their software with both the buyer and supplier’s system and providing them with the geographical reach.
However, their clients require better supplier onboarding process and support to actually access the banks’ SCF. For instance, an event company would be in business with several suppliers from talent companies to venue operators and materials. They are usually paid by 1 client after 60 days but their suppliers might not want to wait that long. Therefore, they would need to sell their invoice quickly with the relevant support.
While banks are not paying sufficient attention, McKinsey noted that fintech companies such as Demica and Orbian are filling this void. McKinsey ended the study by urging banks to leverage on their corporate finance relationship to bring their clients on board and to build on their SCF capabilities.