Crisis fall-out brings new supply chain finance opportunities for factors
For factors, the crisis has proved to be a bit of a curates egg. For some, the reduction in availability of credit insurance cover has meant that non-recourse arrangements, particularly cross-border deals, have been badly affected. But for others, the spread between the cost of borrowing and discount rates charged to clients has widened considerably - meaning that as long as risk can be kept under control, significantly improved profits can be enjoyed. So, depending on the availability of funding and the predominance of international deals, business for factors has been typically mixed at the two extremes either very good or very difficult.
For 2010, this trend looks set to continue for a while at least, although improvements in credit cover availability are filtering through, which should improve matters for international factoring and possible interest rate rises may reduce spreads a little.
But as any economics or management undergraduate will tell you, apart from the obvious impact on general commerce, a crisis also usually comes with unfolding pockets of opportunity as industry and business dynamics are altered by the economic environment.
For factors, the opportunity could be in providing supply chain finance, particularly to mid-sized corporates. Prior to the crisis, supply chain finance was a service that banks were trying hard to sell to large corporates with the promise of better cash flow and processing efficiency for both the corporate and their suppliers. Although these large corporates showed interest in the idea, there was not the take-up that was initially expected.
However, since the crisis, the positions seem to have been reversed. With large and medium sized companies having to pay much more attention to their cash flow positions and traditional funding routes more restricted, corporates are turning to supply chain finance with real enthusiasm. In fact, such is the call for supply chain finance that one trade finance banker said recently that he expected demand to soon outstrip supply.
A factors expertise is in managing and financing receivables and since receivables finance is usually at the core of most supply chain finance operations, factors are in a unique position to take advantage of the rapid growth in demand.
In fact, in certain markets like Spain and Italy, factors are already operating supply chain finance. Only in these countries it is known as reverse factoring.
To offer these reverse factoring operations along with distribution finance in order to provide finance along different links in the chain - and extend them to other factoring markets seems a potentially substantial new business opportunity for factors. This particularly applies to the mid-corporate sector where the factors parent banks have not quite such a relationship hold.
The challenge for factors is in how to draw on existing expertise and transpose this into a linked service across more than one part of the supply chain and at the same time investigate opportunities in other markets beyond those already offering reverse factoring. Factors may also need to think about new routes to market and to perhaps target larger corporates than have previously constituted typical factoring clients.
Supply chain finance opportunities for factors forms a major part of BCR Publishings forthcoming Receivables Finance International conference in Frankfurt on 18-19 March. For more information and the full programme visit Events at www.factorscan.com or e-mail firstname.lastname@example.org