Companies are increasingly using their own unpaid invoices – known as receivables – to secure financing and achieve lower funding costs as their usual lenders have become more reluctant to provide conventional lending facilities in the wake of the credit squeeze.
So-called supply chain financing was already a growing business before the credit crisis struck, but its use has spread rapidly as financial conditions have worsened. SCF is designed to raise cash against company assets known as receivables, which mainly consist of unpaid invoices.
Banks have reported a 65 per cent increase in the volumes being funded through SCF over the past year, according to a survey from Demica, a consultancy. More than 90 per cent of top banks offer SCF to their corporate clients, up from just a half a year ago, Demica said.
SCF involves companies and their suppliers agreeing to extend the payment period to the supplier, who still obtains early payment from the buyer’s bank. The buyer gets the benefit of longer payment times, the supplier lowers its working capital costs, which it can then pass back to the buyer in lower prices. The bank in the middle has the invoices to secure its lending and earns a margin on the loan.
Phillip Kerle, chief executive of Demica, said: “Banks in our research were emphatic in their view that SCF is a strong and rapidly growing market, and one which will provide an alternative source of funding for those corporates facing difficulties obtaining traditional bank credit.”
For banks, SCF can be a more efficient use of balance sheet capital. It also gives an opportunity to develop a relationship with corporate clients and offer more technology-led services, such as electronic invoicing.
The technique’s growth comes in spite of ongoing problems in the asset-backed commercial paper market, where banks sell short-term debt backed by assets such as receivables or mortgage debt. The market all but closed last August as investors shunned any ABCP deals and although it has at least partially re-opened since, volumes of new paper are still down on their pre-squeeze levels.
Banks felt that investors were now comfortable differentiating between strong credits such as company receivables and weaker paper such as that backed by subprime mortgage debt, Demica said.
For companies, the practice marks an evolution of the age-old struggles of the supply chain where buyers try to extend the time before they have to pay their suppliers, while simultaneously pushing to make their customers pay up sooner. For example, Dell famously used its powerful market position to achieve a rare “negative” cash cycle whereby it was paid by its customers before it had to pay its suppliers which helped to lower costs.