Longer payables terms mean more cash on-hand, one of the fundamental principals in working capital management. For suppliers, many of whom are small- and medium-sized enterprises (SMEs), such terms hurt their ability to purchase raw materials and goods for production – leaving the whole supply chain at risk. However, a shrinking appetite amongs banks to lend to the SMEs makes the situation even worse.

Direct bank loans and facilities extended to SMEs declined over the course of the global financial crisis, according to the Asian Development Bank (ADB). In 2014, SMEs only received 18.7% of total bank loans in Asia, even though they contributed 42% of economic output in the region, the ADB revealed in September, 2015.

This is where indirect credit, such as supply chain finance (SCF), comes into play.  Relying on a buyer’s lines of credit with a relationship bank, SCF can allow a supplier to sell approved invoices to the buyer’s bank at a discount and immediately receive the capital needed for production from the buyer’s bank.

Bank offerings
Still, only the top 15% to 30% suppliers of a bank’s major corporate clients can secure financing via the SCF route, according to Anand Pande, former global head of trade at RBS and now founder of The Growth Paradigm Partnership. Banks are unable to serve the rest of the suppliers, said Pande.

Bankers may talk a good game, but fundamentally, SCF is not an area that they focus on. Even among the “SCF strong banks”, who claim to be leaders in this area, SCF only accounts for up to 25% of their trade revenues, Pande said.

Current bank SCF offerings mostly require suppliers to enlist with the buyer’s bank portal. A host of reasons – including rising levels of poorly performing loans, and compliance requirements on banks such as know-your-customer (KYC) or Foreign Account Tax Compliance Act (FATCA) – have impacted banks’ credit allocation to suppliers, limiting their scope.

While banks have the power to decide the end beneficiary suppliers from SCF offerings, buyers should bargain as hard as possible to influence this decision.

For example, as General Electric (GE) is building a plant in Nigeria to support its oil and gas work there, the company started a financing programme with its small- and medium-sized suppliers in the country.

GE brought about five banks “it knows very well” on board, and demanded that they offer financing to the local suppliers, John Rice, Hong Kong-based vice-chairman of General Electric, told CT at the 2016 Asia-Global Dialogue conference held in Hong Kong in January.

“In securing our [GE] business with the suppliers… you will secure yours with us,” Rice said, referring to the message GE conveyed to the banks. “Otherwise, they [the local suppliers] won’t get capital,” he added.

Get KYC clever
Of course, not every company has the bargaining power of a global conglomerate like GE. But there are less strong-arm approaches to making credit more accessible to suppliers.

For example, to tackle issues like KYC compliance, Thai Union Group (TU), a Thailand-based producer of seafood-based food products, chooses to partner with banks originating in the country of residence of the supplier.

“We connect a partner bank to our suppliers and arrange for the supplier to receive cash against its accounts receivable with TU,” said Joerg Ayrle, CFO of TU. The bank charges “more or less the same working capital interest” rate as they charge TU, according to Ayrle, and TU gets to extend payment terms by 30-45 days.

Alternatives?
More recent solutions involve non-bank players that rely on technology to ease the burden on suppliers.

Swift offers a BPO [bank payment obligation] solution by providing trade-data-matching service through a trade services utility (TSU). Using correspondent banking networks to reach out to a larger number of suppliers including SMEs, the TSU/ BPO can eliminate the need for the buyers’ banks to on-board suppliers, as well as the related KYC costs.