HPD Lendscape CEO Kevin Day speaks to the Financial Times’ European Banking Correspondent Owen Walker on how supply chain finance has evolved over 4,000 years
The trading of invoices by intermediaries is nothing new. It is a practice that has helped economies grow for thousands of years and was prevalent in medieval European commerce, the expansion of the British Empire and the 20th Century US textile industry.
A key innovation, however, has been the supply-chain finance model. Whereas previously banks or lenders would provide capital to the buyer of goods to then pay the merchant on receipt of their order – this new model sees banks and lenders paying the majority of an order upfront to merchants, and getting back the money from the buyer once the goods have been received.
“It fulfils a need and the banks are all very comfortable with what they are doing” explains HPD Lendscape’s Kevin Day, since it presents the merchant – traditionally a smaller company than the buyer – with a stable cash flow, ensuring it is not out of pocket in the time it takes for goods to get to the buyer. For banks and lenders, the arrangement works well as their clients rarely default on payment thus mitigating risk.
Whilst consultancy firm Oliver Wyman notes up to 80% of supply chain financing is conducted by larger banks – a growing number of lending startups are getting involved in the sector. Kevin Day comments that in some of these cases – including the recently demised Greensill – such lenders are searching for “quite high returns” adding that “this is not a high return sector… It’s supposed to be low risk. If you are expecting to get high returns, you will take high risk… people are using structures that are complex for things that are actually quite simple.”
Whilst one can point to a problem in some areas of the sector in regard to a lack of regulation, if done correctly, supply chain finance can be the vital link to strengthen supply chains, exposed in parts as fragile by the pandemic. The sector, which now has global revenues of $26.6bn, up from $20.6bn in 2010, can help advantage lender, purchaser and merchant alike.
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