Despite the uptake by a number of global companies such as the likes of Nestlé, Volvo and Syngenta, the full potential of supply chain finance has not been realized by many organizations in the Asia-Pacific region.
That's according to a recent study of more than 1000 Asian-based treasurers/CFOs by Asset Benchmark Research (ABR), which discovered that only 36% of respondents had already implemented a supply chain finance programme. Of those 36% companies that revealed a take-up, the majority of them were running an accounts receivable purchase/factoring programme where companies sell their receivables to a third-party such as a bank, thereby allowing these companies to obtain cash faster from their sales, boosting cash flow.
While there is evidentially room to grow in Asia, the region has nevertheless been adopting factoring solutions at a rapid pace. According to data from Factors Chain International (FCI), 2017 saw the highest factoring volume in Asia in the past seven years, generating 597 billion euros last year, an 18% increase compared to 2016. Within Asia, China has seen the most growth, increasing 34% in factoring volumes in 2017 compared to 2016.
However, while companies are able to improve their cash flow, they risk alienating their customer base who may not be comfortable paying to a third party. As an alternative to receiving cash earlier, businesses can also opt for extending their days payable outstanding (DPO) through the use of supplier finance/reverse factoring where the company can instead assist its suppliers to finance their receivables. This once again allows them to be paid earlier via a third party.
Of the active supply chain finance programme companies engaged by the ABR survey, only three out of 10 companies were running a supplier finance/reverse factoring programme. The others were running a receivables finance programme. In fact, the reverse factoring concept is still just a small part of the overall factoring market, estimated at around 4% of the entire market in 2014, according to the Association of Chartered Certified Accounts.
This situation comes in spite of the fact that supplier finance has potential to forge a closer relationship between a company and its suppliers. For the supplier it represents an alternative form of financing away from general bank financing. Moreover, for the company it means that outstanding debt can be removed from its balance sheet.
Companies, however, looking to remove debt from their balance sheet need to be aware that some industry analysts are highly sceptical of using reverse factoring as a method of cleaning up a balance sheet. Earlier this year, Fitch Ratings released a report warning that this type of solution could be an "account loophole", cautioning that reverse factoring was a key factor in UK company Carillion's sudden collapse and subsequent liquidation.
Nevertheless, companies located in Asia are increasingly interested in implementing these types of supply chain finance solutions in the near future, with ABR research revealing that 17% of respondents were considering deploying a supply chain finance solution in the next six months.