Businesses around the world could be missing out on between US$60 billion and US$120 billion by failing to exploit the potential of reverse factoring (or supply chain financing), one of the least used methods of alternative finance.
With reverse factoring, businesses can finance themselves against the credit ratings of their major customers and achieve prompt payment in exchange for a discount.
New research published by the Association of Chartered Certified Accountants and Aite Group also demonstrates for the first time the breakdown of benefits from reverse factoring, with suppliers capturing between 25% and 45% of the total savings through reduced cost of capital.
"It is incredibly inefficient that the businesses that find it hardest to access finance are effectively relied upon to finance so much of the global economy’s working capital," says Manos Schizas, ACCA’s senior economic analyst.
Apart from the potential benefits to the sustainability of supply chains across sectors, there are between US$255bn and US$280bn worth of savings to go round; that at least should spur businesses into action.
However, Schizas warns that the breakdown of costs and benefits can vary a lot, and unscrupulous buyers, however rare, can give such facilities a bad name by capturing all gains for themselves.
"But even then, by making the cost of financial working capital transparent and predictable, supply chain finance at least allows suppliers to make informed commercial decisions," says Schizas.
In Innovations in Financing SMEs, a paper published earlier this year, ACCA’s Global Forum for SMEs highlighted supply chain finance as one of the innovations most likely to change the SME financing landscape in the future.
However, the Forum also noted the alternative finance model has a poor reach.
The study did, however, warns that reverse factoring involves a host of costs that the parties involved often fail to take into account.
To address this, the study provides a simple conceptual framework and a checklist for CFOs trying to make or assess the business case for supply chain finance.