GROWING up on a sugar-cane farm in Australia, Lex Greensill had a front-seat view of the strains suppliers suffer as they wait to be paid. After harvesting his crops, Mr Greensill’s father had to wait a year or more to receive payment. Across industries, buyers are eager to conserve their cash. Delaying payment is one way to do it: among the most important for some, such as big retailers, says Mr Greensill. Many buyers expect their suppliers to accept payment months after delivery. Even so, many still pay late—47% of suppliers surveyed by Taulia, a fintech firm, said they had this problem. In 2011 Mr Greensill founded Greensill Capital, one of a cluster of new fintech firms overhauling how supply chains are financed.
The details vary but their basic approach is to take advantage of buyers’ low credit risk to pay suppliers’ invoices promptly. The buyer—a large supermarket chain, say—approves a supplier’s invoice and transmits it to the fintech lender. (The lender can raise money in different ways: Greensill raises funds in the capital markets.) The lender pays the supplier on the agreed date or, if requested, earlier, less a small discount. With interest rates at present low, the period of finance short and the credit risk that of the supermarket chain rather than the supplier itself, the discount may be so low as to be almost unnoticeable. The lender later collects the full value of the invoice from the buyer. This improves the cashflow for suppliers without shortening payment terms for buyers, freeing up working capital for both parties and creating a healthier, more secure supply chain.
In America and Britain, government initiatives have encouraged supply-chain financing as a means for corporations to support small businesses and meet social-responsibility goals. The more integrated approach also means buyer and supplier are not pitted against each other, squabbling over when the cash will be forthcoming. According to Mr Greensill, his clients have enjoyed improved relationships with their suppliers.
Though banks have offered this form of financing since the 1990s, it remained a bit of a backwater until the financial crisis. As revenues fell stagnant, companies tried to squeeze the most from their internal resources by improving the management of their working capital and extending payment terms, says Richard Hite, director of supply-chain finance at Barclays, a big British bank. This further compounded the plight of suppliers, many of them small and medium-sized enterprises already struggling to stay afloat. The crisis created an acute need for a better system to strengthen supply chains. It helped galvanise an inchoate industry.
Mr Hite sees the market for supply-chain finance expanding as more companies start to understand its benefits. It has tended to cater to manufacturing and retail businesses; now it is taking off in other industries such as oil and gas, where lower oil prices prompted companies to cut costs. In 2004 no one knew what supply-chain finance was, says John Monaghan, who runs Citigroup’s programme. Now companies come to the bank asking for it.
Best factor award
But much of the growth is being driven not by banks but by fintech firms. Old-fashioned “factoring” to turn invoices into cash was time-consuming, laden with paperwork and an expensive form of credit—the resort to which was sometimes seen as a sign of financial stress. Fintech firms offer new technologies that make early payments possible at the click of a button. They can quickly set suppliers up on their platform. Banks’ early-payment programmes have also typically been reserved for the largest suppliers. But fintechs have made supply-chain finance available to the tiddlers, too.
The market was also ripe for innovation in other ways. Globalisation has made supply chains longer and more complex. For every buyer there are an increasing number of suppliers, many of them now in Asia, which lags behind other regions in working-capital efficiency. A survey by KPMG, a consultancy, suggested that more than 70% of businesses worldwide still lack a supply-chain financing programme. A report by McKinsey, a consultancy, shows market penetration has remained very low: only about one-tenth of the potential global market for supply-chain finance has been captured, it reckons.
Fintech firms are not taking business from banks so much as expanding the market, says Prabhat Vira of Tungsten, a supply-chain financier. Of the suppliers Tungsten serves, 80% are small or medium-sized enterprises. Fintech firms may be more nimble, but banks have greater resources. Both sides talk up the benefits of working in partnership. As they gather more data, it may become possible to start paying suppliers even before invoices are approved. That, says Ganaka Herath, a partner at McKinsey, “is the holy grail”.