In the West, little has changed: since the 2008 and 2009 financial market crisis, the global economy has still not fully recovered, and has recently slipped back into widespread uncertainty following the latest events in Greece and Ireland.
SMEs, as we know, have been hit particularly hard by the crisis: with tight cash flow and limited access to conventional credit lines, they have seen their transactions and competitiveness threatened.
Yet they are not without advantages: indeed, their working-capital needs on the one hand, and their relationships with buyers made up of large corporations on the other, give SMEs easier access to alternative financing solutions such as Supply Chain Finance (SCF). In this way, they can benefit from the global economic recovery.
These SCF financing structures facilitate cash-flow management, reduce risk across the supply chain and improve transparency in transactions between suppliers and buyers. They also give smaller suppliers greater financial flexibility, at a cost determined by the creditworthiness of the buying company. This often translates into interest rates that are several percentage points higher — between 3 and 4 — than those of ‘traditional’ loans.
At present, Europe’s largest banks, the main financial players in this field, are seeing exponential growth in demand for Supply Chain Finance solutions, to the point that some of them view it as a replacement for the increasingly outdated letter of credit.
According to our latest qualitative study of the 40 largest banks in Europe at the end of 2010, the source of this surge is clear: credit is expensive, buyers and suppliers need access to capital, and SCF programmes provide a valuable solution by releasing working capital throughout the supply chain while reducing risk. As a result, many financiers have seen the number of SCF programmes double over the past two years.
The benefits of these programmes are not limited to unlocking cash flow; they also help ensure supplier quality. Buying companies, which are generally the initiators of SCF programmes, are rated at ‘investment grade’ level and therefore have better credit assessments than suppliers.
By definition, SMEs are fertile ground for progress and innovation, but without access to working capital, this competitive economic model could come to a sudden halt. That is why banks must place greater emphasis on SCF programmes so that they are accessible to productive SMEs paralysed by the prevailing economic caution.
Fortunately, 80% of Europe’s major banks are currently deploying all their marketing efforts to support their SCF offerings, as our study revealed. Respondents also highlighted the need for a customer-centric approach, and one of them stated: “The primary driver for services such as SCF is to be close to the client’s core business.” Banks expect growing demand for SCF solutions in industry, commerce, automotive and mechanical engineering, and agri-food.
The recent financial market crisis has pushed companies to seek alternative financing arrangements outside their credit lines, and SCF programmes finally offer them what they have long been asking their financial institutions for: an efficient and advantageous way to better manage their cash flow.
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