Growth in Supply Chain Finance and the associated Red Flags

There has been a massive disruption in global trade due to the pandemic as businesses struggled to stay afloat. However, there has been an increase in revenue in the first quarter of 2020 in Supply Chain Financing.

Supply Chain Financing Growth

Many companies have turned to Supply Chain Financing to cash out on their invoices as it will give them the money required to stay in the game. Reports suggest that Supply Chain Financing grew by 3-4%* globally, particularly by growth in Europe and the US. Asia-Pacific is in the lead to emerge as the fastest-growing regional market due to the accelerated expansion of the economies and industrial development in the said region.

The demand for factoring services in SMEs is higher in China and India, wherein China is the key exporter of electronic components, chemical materials and other industrial products and India now gradually transforming into a manufacturing hub. HSBC Holding PLC, one of the world’s largest trade finance banks has witnessed a 30-40% increase in supply chain and receivables finance in the Asia-Pacific region on the back of long-tenors, additional suppliers and new deals coming through.

In March, PrimeRevenue Inc. a platform that pools funding from banks into hundreds of organisations’ Supply Chain Financing programs, facilitated a whopping $10 billion* in early payments, a 5.6% increase YOY. The volume of invoices traded for early payments on its platforms rose to 93% as compared to the usual 70-80%.

Potential Risks

There are, however, a few red flags. Corporate buyers typically use a supply chain financing program to broker a better payment deal with the suppliers. Past data has shown that companies have extended payment terms up to 364 days*, creating a working capital equivalent of almost a year’s payable without recognizing borrowings. This sets a misleading picture as the actual financial health of the company cannot be measured.

Another risk associated with supply chain financing is banks pulling the plug on their customers based on low credit quality, deteriorating market image, or a broad credit market disruption. In this pandemic situation, the potential risk of the Supply Chain Financing bank backing out can overthrow a business. As a company seeking Supply Chain Financing, one must be vigilant and look out for these red flags while enjoying the benefits of SCF.

There will be an uptick in the SCF industry but with the increase in volumes there will be a lot of room for fraudulent practices to occur. A SCF or Factoring business must at all times look out for these red flags by conducting a timely audit to avoid any damages.

* Source: S&P Global Marketing Intelligence