Why are many supply chain finance (SCF) programs focused on large suppliers when small suppliers and medium suppliers (SMEs) stand to benefit the most from improved working capital?
For banks, it’s “easier” to focus only on the largest, most profitable suppliers who represent the least risk in the marketplace. But it is the SMEs who should benefit the most from SCF, if implemented correctly.
So let’s take a minute to consider all of the facts and address this myth head on.
Is supply chain finance (SCF) only helpful to large suppliers?
No. Contrary to popular belief, a proper multi-bank supply chain finance (SCF) solution is helpful to all types of suppliers, both large and small. Small suppliers actually stand to benefit the most from SCF programs if they are implemented correctly, because SMEs are the ones most vulnerable to payment term extensions and tight credit markets.
When I say that the SCF program needs to be “implemented correctly,” what I am really referring to is the type of funding model that the SCF program uses. A bank agnostic or multi-bank funding model is superior to a single source solution for several reasons, but for the sake of this discussion let’s just focus on small suppliers and midsize suppliers.
The trend we’ve seen in the industry is that single bank SCF solutions tend to leave SMEs out in the cold. When left to their own devices, without any competition from rival banks, most large banks will cherry pick the larger suppliers to trade receivables with, and offer nothing to the smaller suppliers seeking early payment because they are deemed too “risky.” SMEs are once again left to fend for themselves by going elsewhere, seeking advance payment in the form of traditional factoring or other high interest loans.
Syndicated single-bank platforms are no better. They suffer from the same problems because all of the subsidiary banks are forced to play under the rules of the primary lender.
Only a true multi-bank platform allows the SCF program to take advantage of the best of each bank’s capabilities and create competition for fair pricing. Once one bank takes an interest in an SME’s invoice, others tend to follow. That’s the beauty of a multi-bank SCF solution — the banks are all acknowledging the creditworthiness of the corporate buyer, and are willing to finance the suppliers’ receivables accordingly.
From my many years working in procurement and supplier diversity, I’ve seen firsthand that the “long tail” of SME suppliers need capital the most. Supply chain finance can deliver capital to this segment of the market, but the corporations must take the multi-bank approach to make sure it happens.