Moving Downstream – Supply Chain Finance Opportunities with the Middle Market

To date, Supply chain finance programs have been the domain of very large corporates.

Here are a few  reasons why these programs have been positioned with very large companies and not middle market companies.

    • Large companies have the biggest spend – Nestles spends $50bn year on ingredients, packaging, equipment, not to mention IT, Telecom, Marketing, Advertising, etc.
    • These large companies also have the leverage to push terms – Siemen’s DPO was about 36 days when it began its payables efficiency initiative, already below the industry average of about 45 days for global conglomerate companies.
    • Then there is the rate arbitrage – investment grade companies or near investment grade companies have significant rate advantages over many of their trading counterparties. This is not typically the case for middle market companies.
    • These programs are expensive to establish and onboard, therefore banks want to build scale as quick as possible.  It can take 12 to 18 months until credit utilization occurs to sign up a Fortune 2000 corporation, to determine funding needs, and to onboard suppliers.  Think about those people costs before one nickel of interest revenue is booked.

So are times changing?

Many regional and small banks and other financial institutions cannot support a Nestles or Rolls-Royce program, and can at best buy into a program through their capital markets department.

But what about originating a program with their middle market customer base? Think about that middle market retailer that is dealing with suppliers who must factor their receivables.  There are opportunities here.  Or think about that vitamin manufacturer that must buy key ingredients from much larger suppliers and pay them quickly and may need term extension in order to make their pills and capsules to sell globally.

But in developing SCF solutions for the mid market, a number of hurdles exist for banks:

  • The biggest hurdle tends to be credit policies and making the Credit Risk and other departments comfortable financing non customers.
  • Second, smaller and regional financial institutions are trying to figure out ways to make money in the new world, but are handicapped because solutions cross departments (commercial finance, factoring, trade, treasury, etc.) These silos don’t cooperate well.
  • In addition, middle market supply chains involve a heavy SME component deemed more risky.

If banks are going to up their game here, they need to understand solutions also involve a number of specializations and core competencies (onboarding, marketing, enablement, servicing, underwriting, analytics, etc.). Most banks do not have the total compentency skill set, certainly small and regional banks do not, and need to work with partners. But whom?

Global Business Intelligence is conducting market intelligence here to discover how are financial service providers and specialty lenders creating middle market supply chain finance.  What’s working?  What’s not?

Stay Tuned.

For those interested in the current research, contact me at dgustin@tradefinancingmatters.com

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