Supply chain finance could provide much-needed liquidity to small businesses in Italy struggling with the impact of Covid-19 and facing an increase in cancelled orders and delayed payments from their customers, says Federico Caniato, director at the SCF Observatory. Caniato was speaking to SCF Briefing following the annual conference of the SCF Observatory – part of the Politecnico Milano School of Management, where he is professor of supply chain and procurement management. The conference was live-streamed on April 17, rather than being held in person as it has been in previous six years. Italy’s strict lockdown – in place since early March – has only just started to be eased. It is one of the worst-affected countries, with the spread of the virus causing immense human suffering. The country, along with the rest of Europe, is now grappling with the longer-term impact on its economy as well.
The potential market for SCF in Italy stands at €483 billion-worth of receivables, says Caniato, basing the estimate on the latest available data gathered from companies in 2018. Yet only a relatively small proportion (31 percent) of this total is supported by SCF solutions. The most popular solutions remain the more long-standing offerings such as traditional factoring, which accounted for €61 billion-worth of receivables. However, more recently-developed products are rapidly growing in popularity. Reverse factoring accounted for €6.2 billion-worth of receivables and had increased by 36.8 percent, credit cards accounted for €3 billion, increasing by 15.4 percent, while invoice trading saw growth leap by 225 percent, accounting for a €0.13 billion-worth of receivables. Securitization products appeared for the first time in the data this year, accounting for €8.5 billion-worth of total receivables. “There is a broad space for further growth,” Caniato says.
While the research data is pre-Coronavirus, Caniato’s presentation does demonstrate some of the existing challenges businesses – particularly SMEs – already face within their supply chains that will likely be exacerbated by the economic aftermath of the virus. Payment terms in Italy were already considered long compared to other markets, Caniato explains. Small companies often wait for 106 days for payment, the research showed, whereas larger companies enjoy an average Days Sales Outstanding (DSO) of 52 days. (For more data, including graphs, watch the SCF Community’s free webinar).
The cash-to-cash cycle for Italy’s small companies was significantly worse than for larger firms. The presentation shows large firms with a cash-to-cash cycle of minus 8 [a negative reading being most desirable] while the smallest firms have a reading of 57. Given today’s worsening economic crisis, there will be an even greater demand to free up liquidity that is trapped in these cash-to-cash cycles, Caniato says. SMEs also already face a much higher cost of financing, the research found, whereas interest rates on loans for larger firms are lower and have been decreasing at a comparatively faster pace in recent years. “This is why SCF is heavily needed in Italy,” Caniato explains. “Of course, this research is before the virus, but at the event we discussed what are the implications of the virus – and there is a big liquidity issue now with cancelled orders. We have an even greater need for SCF to support SMEs in particular – this is a key message we gave.”
This is not just a challenge for Italy, he added, explaining that payment terms in both the wider US and European markets have already been rising before the pandemic. The Observatory’s research looked at the top 400 companies in the US and Europe and found that companies in Europe were taking on average 20 days longer to pay their suppliers. More worryingly for suppliers, the DPO rate in both regions has been rising, the research showed.
“Large companies are already taking longer to pay their suppliers and now that we are face a crisis hitting everywhere and the SME suppliers are exposed to this. If corporations think they can continue to increase their DPOs to cope with the crisis, they will probably kill off their suppliers,” Caniato says. His research also looked at Italy’s SCF market size in comparison with other markets, finding that the country accounts for three percent of the global potential supply chain finance market, which at the end of 2018 was worth around €16,500 billion. The leaders in the market are the USA, China and Japan, respectively. The livestreamed conference also included research into the decision-making process that buyers and suppliers go through before deciding to participate in an SCF programme. Antonella Moretto, director at the SCF Observatory and senior assistant professor at Politecnico di Milano, tells SCF Briefing how it was important to understand the distribution of the bargaining power between the buyer and the supplier to allow the buyer to select the most suitable solution.
Her presentation included a matrix that could be used as a managerial tool for buyers to help with the decision-making process. “There are 3 main questions to ask,” she says. You need to consider the bargaining power between the supplier and buyer; the volume of goods or services being purchased, and what are your goals and what do you want to improve with a SCF programme, she explains. Working through these considerations can help determine whether the ideal solution is a dynamic discounting platform, a reverse factoring product, inventory financing, or purchase order financing among other options. Buyers need to pay attention to the reasons why suppliers may not want to participate in a programme. This can come down to not having the time or understanding to assess the proposal, Moretto says.
“It can also be because they simply don’t trust the buyer and they prefer to find solutions available by themselves.” she says. “Taking into consideration the point of view of the supplier can be effective for the buyer in order to increase the likelihood of the success of the programmes,” she says. It is important the buyer effectively conveys the value an SCF programme could bring to a supplier, she adds. The livestreamed conference also featured discussions on the potential of AI capabilities within supply chain finance products. Paolo Leschiutta, senior credit officer at rating agency Moody’s Investors Service gave a presentation on how SCF should be treated on balance sheets. There were also talks from CEOs and CFOs from major Italian firms including skin and bodycare company Cosmint, electricity and gas company Europe Energy and household appliance manufacturer Haier Europe.