Large corporates are showing increasing demand for distributor finance (DF) programmes to enable downstream business in international supply chains, especially in emerging markets. In parallel, global banks are confirming their growing interest in offering DF solutions to their clients.
These are the findings of Demica’s latest qualitative research on the distributor finance market, conducted amongst a sample of international enterprises and selected global financial institutions.
Many SME distributors in high growth regions are confronted with high cost of funding, exacerbated by sellers’ pressure to increase sales. DF programmes support the working capital needs of a corporate seller’s distributors and gives them access to affordable finance, enabling them to increase sales and grow business volumes with lower capital requirements. This in return allows sellers to expand into new or under-served regions/segments and unlock sales potential. In most existing DF structures surveyed, receivables are purchased by the financier and form the main financeable asset.
Corporate respondents all exhibit rising interest in DF products, largely due to their ambitions to expand into emerging markets. Their primary objectives for implementing DF solutions are: to increase sales in high growth regions without applying more of their own working capital; to give the offered product a competitive advantage; and to reduce SME distributor risk.
Eastern Europe, Asia and Latin America are seen to be the focused regions for the introduction of DF programmes.
Global banks surveyed are generally keen to offer DF solutions as they witness an increasing desire from their corporate clients to provide efficient financing instrument to their distributors.
While some banks promote DF as a major flagship product or are increasing focus in this area, others regard this as a complementary product for key clients. The majority of the banks rely largely on sellers for due diligence of distributors and seller risk sharing is often a prerequisite for many banks, though some might put a heavier emphasis on supply chain linkage.
One of the main challenges of developing and implementing DF programmes is risk minimisation.
As SME distributors’ balance sheets often imply high credit risk and require enhanced efforts to monitor and analyse, support from sellers as well as an efficient technical platform are indispensable, as confirmed by both banks and corporates.
DF technology solutions capable of monitoring payment performance on a daily basis and down to the item level will therefore play a key role in risk management and mitigation.
“Financial supply chain solutions are becoming increasingly relevant for trading business in today’s uncertain economic environment," says Phillip Kerle, Chief Executive Officer of Demica.
Kerle notes that supply chain finance has been gaining traction in recent years as large companies seek to ensure the financial robustness of their strategic suppliers.
"They now also ought to take a proactive approach to the liquidity issue along the downward supply chain as undercapitalised SME distributors, especially in emerging markets, are often the bottleneck in corporate value chains," says Kerle.
Kerle explains that by allowing local distributors to draw on their banking relationships and credit ratings, global corporate sellers can open up new markets and unleash unexploited sales potential.
"DF solutions make a nice complement to supply chain finance products in providing efficient financing for SMEs both up- and downstream a major corporate’s supply chain, helping to support the full process to market with short-term working capital funding,” says Kerle.