Once a relatively niche product offered largely by banks, supply chain finance (SCF) has seen a surge in popularity amid the widespread disruption of global trade in recent years. But will the influx of new entrants, from social media networks to payments providers, translate into greater availability of funding for businesses? Eleanor Wragg reports.


If there is a lesson to be taken from the events of the last few years, it is just how important resilient supply chains are to the functioning of day-to-day life, and how vital trade finance is to supporting them. Amid what can best be described as an unending onslaught of upheaval and strife, SCF has represented a lifeline to larger buyers seeking to protect their suppliers from liquidity shortages and insolvency while also shoring up their own precarious working capital position. As a result, SCF, once a little-known technique – at least outside of trade finance industry circles – has entered into common parlance.


Tracing SCF’s Spanish roots

SCF is not a new concept. Indeed, as far back as the Bronze Age, Mesopotamians were using a form of invoice finance to fund their business dealings. The origins of modern-day SCF, however, are far more recent, and can be found in Spain.

With inflation running at about 7%, interest rates hovering around the 10% mark, and payment terms of at least 90 days, the late 1980s were a tough time to do business in the Mediterranean country. Facing high funding costs and difficulty in accessing finance, the only option for cash-strapped suppliers to bridge working capital gaps was often to discount commercial bills of exchange – an arduous and expensive process that also attracted the imposition of stamp duty.

In the early 1990s, concerned by the extent to which its suppliers’ struggles were impacting its ability to do business, a Spanish food company reached out to its bank, Santander, for help.

The solution was a simple one: the company would send the bank its confirmed payment orders before their due date, and the bank would advance the amount of the invoice in question to the supplier, enabling suppliers to obtain financing at competitive prices, and the buyer to strengthen its supply chain.

This technique – which Santander gave the Spanglish name el confirming in 1991 – was, in effect, the first iteration of reverse factoring, or SCF.

As Spain’s banks expanded their activities to international markets, they took the concept with them, while similar schemes popped up across Western Europe, led by Italian automotive manufacturer Fiat, French retailer Carrefour, and German retailer Metro Group.

These bespoke programmes were relatively few and far between, and tended to be provided solely by large banks. But in the aftermath of the global financial crisis of 2008, when the liquidity crunch drove buyers to systematically extend their payment terms, fintechs took their chance to enter the market with new concepts, such as the multi-funder platforms rolled out by companies like PrimeRevenue and Demica.


The Covid effect

In 2020, with the emergence of the Covid-19 pandemic, SCF really came into its own. As virus containment measures prompted a crash in consumer demand and a dramatic slowdown in shipping and air freight, supply chains around the world ground to a screeching halt, placing significant liquidity pressure on smaller suppliers and distributors.

The hike in SCF demand was both sudden and substantial. San Francisco-headquartered Taulia, for example, reported an increase in early payment volumes across its platform of more than 200% month-on-month in March of that year, while PrimeRevenue said the proportion of invoices traded for early payment on its platform rose from 77% in January 2020 to 93% two months later.

All of a sudden, SCF had gone from a useful tool in industries such as retail and automotive, with a wide spread between the credit ratings of suppliers and buyers, to a critical means of keeping the wheels of trade turning. Leveraging the fact that the strongest companies in every economy typically also have access to cheaper capital, large corporate buyers across industrial sectors rolled out SCF programmes in new geographies in a bid to help struggling suppliers.

Meanwhile, as policymakers pulled out all the stops to prevent economic collapse, SCF as a funding technique gained tacit approval from numerous governments, which poured money into export credit agency-backed working capital support initiatives.

However, despite SCF’s explosive growth, a large universe of suppliers remained unserved. In its 2020 Global Payments Report, consultancy firm McKinsey said: “Significant value in the global SCF market remains untapped. Nearly 80% of eligible assets do not benefit from better working capital financing, and the remaining one-fifth of assets are often inefficiently financed. Despite improvements made in recent years, advances have been largely incremental.”

It noted that SCF has historically focused on larger, well-capitalised multinational corporations and their supply chains, whereas smaller and less well-financed enterprises faced barriers to access. “Many catalysts – including digital delivery, fintech innovation, industry utilities, blockchain, and API technologies – could stimulate cheaper and more accessible SCF, but change has been slow,” it added.

“I think we had all expected to see more financing, but this has not happened at scale,” Sean Edwards, chairman of the International Trade and Forfaiting Association (ITFA) tells GTR. “There could be a number of reasons for this, including the need for new systems, regulatory issues and senior management focus on what might be perceived to be a marginal business.”


Democratising access to SCF

Recent developments, however, suggest that the SCF pie might be getting bigger. In the two-and-a-half years since the onset of the pandemic, a seemingly endless series of disruptive events, from the Suez Canal obstruction to the Russian invasion of Ukraine, has continued to challenge the world’s supply chains.

With inflation now running at 40-year highs and rate hikes making traditional borrowing increasingly expensive for smaller businesses, SCF’s value proposition as a relatively cheap source of cash for suppliers has been strengthened further still – and demand shows no sign of abating.

In response, more and more players are entering the market, as new ways are sought to get finance to where it’s needed.

In October last year, payments giant Mastercard linked up with working capital solutions provider Demica to embed SCF into its offering. Under the partnership, Demica’s technology platform – which powers the SCF activities of some of the world’s largest trade banks on a white-label basis – is being plugged into Mastercard’s Track Business Payment Service, giving suppliers access to reverse factoring, approved payables finance and similar working capital solutions, as well as what Mastercard calls “competitively priced” early payments.

Speaking to GTR when the partnership was announced, Maurice Benisty, Demica’s chief commercial officer, said that, far from cannibalising the existing bank business, the tie-up with Mastercard would “dramatically expand” the number of suppliers that have SCF available to them.

A few months later, SAP got in on the act, buying a majority stake in working capital solutions provider Taulia.

The enterprise software company said it would integrate the fintech’s SCF offering directly into its enterprise resource planning system, which is already used by more than 80% of Taulia’s customer base, including companies such as Airbus, Nissan and AstraZeneca, thereby enabling more businesses to get faster access to financing.

Tech giant Meta is another company that has joined the party, albeit on the seller-led side. Through its Invoice Fast Track service, launched late last year, it is offering to buy the invoices of US-based small businesses – a sector that widely uses Meta’s social media network Facebook for paid advertising.

“It’s clear that SCF is a product that is garnering interest from both the demand and the supply side,” Alessio Botta, senior partner at McKinsey and co-author of the 2020 report tells GTR. “But there’s an element of, is this really accessible to SMEs at the moment, especially in emerging markets?”

The accessibility point is an important one. For example, while Meta is targeting its scheme at companies owned and run by underserved populations, including women, racial and ethnic minorities, veterans, people with disabilities and those from the LGBTQ+ community, restrictions apply. The invoices must have a minimum value of US$1,000 and be with corporate or government customers that have a credit rating of B+ or equivalent. The programme is also a relatively small scale one: although Rich Rao, Meta’s vice-president of small business, told CNBC last year that it would support “approximately 30,000 small businesses”, a Meta spokesperson tells GTR that since registration opened in October 2021, the social media giant has funded a total of US$58mn of invoices to “over 100” companies, with an average invoice size of US$25,000.


Flight to quality

Although the influx of new names – and new money – into the space is to be welcomed, so far at least, the flurry of activity in the SCF sector appears to be concentrated towards the higher end of the market, says ITFA’s Edwards.

“Supply chain finance is a fairly mature industry at the top end with safe credits and corresponding low margins,” he tells GTR. “Where there has been some activity and innovation recently is in the mid-market, where some platforms such as Taulia and the to-be-launched Supplier Pay at Marco Polo Network are potentially producing opportunities through reduced operational cost and easier on-boarding – although this has not fully tested or scaled yet.”

Not only does SCF not always extend to smaller suppliers – the so-called “long tail” of global supply chains – but it is still not widely available in all markets, although Edwards points to encouraging signs that this is set to change.

“There are noteworthy attempts to spread SCF into new territories, such as SupplierPlus in Estonia, which is spreading education and understanding of the products alongside tech infrastructure,” he says. Originally founded as a peer-to-peer invoice finance platform, the Estonian company has recently hired Maria Mogilnaya, former principal banker in the European Bank for Reconstruction and Development’s trade facilitation programme, to lead its expansion efforts.

Also focusing on closing the gap between SCF haves and have-nots are multilateral finance institutions, many of which ramped up their activity in the space during the pandemic.

The Asian Development Bank (ADB), which provided roughly US$250mn in SCF support to countries across Asia in 2020 alone, has spent the past few years setting up its SCF programme, partnering with private sector lenders such as HSBC and Standard Chartered in emerging markets.

“Our strategy has been to get into this space with the bigger players to share risk with them, thereby enhancing their capacity to support primarily, but not only, SMEs in our developing member countries that are supplying larger corporates,” says Steven Beck, head of trade and supply chain finance at ADB.

He adds that, even given the number of participants in the SCF space, there is still plenty of room for growth.

“We’re still in the process of scaling the supply chain business,” he says. “I expected there to be a lot of players in this space with pretty big programmes. When I started looking into it, I realised that even the big players still have quite small portfolios. A lot of it has to do with convincing buyers that it’s in their interest to solidify the supply chain, and to essentially allow the use of their credit line for the benefit of their suppliers. It’s difficult for smaller financial institutions to be able to do it at scale responsibly, and after Greensill, there’s been a flight to quality, at least to some extent.”

The ADB says it is now working with local and regional banks in its member countries to help them put in place the operational and organisational structure to be able to offer SCF – thereby widening the pool of potential SCF providers even further. “After three or four quarters of intense training, we will sign agreements with those that we’re comfortable working with, and then it’ll build from there,” says Beck, who adds that the development bank is also working with governments to implement regulatory changes in several markets where barriers to the use of SCF exist.


Taking SCF to the masses

At a time when the cost of financing is high and mere access to financing represents a challenge for many small suppliers, a growth in the number of institutions offering SCF – be they banks, fintechs, or otherwise – can only be a positive thing.

Because it focuses more on the strength and longevity of suppliers’ business relationships than on their balance sheets, SCF offers a viable alternative to SMEs that wouldn’t otherwise pass muster in a traditional finance application. But unless more new entrants look beyond the low-hanging fruit of large multinational corporates and their top-tier suppliers, it will be difficult for SCF to meet its potential to inject real, lasting resilience into the world’s supply chains.