Supply Chain Finance Observatory Conference “Supply Chain Finance: a new increase in the interest rate?”

Federico Caniato

date: March 25, 2024

Between inflation and rising interest rates, a new strategic role for Supply Chain Finance in accessing credit for Italian firms The most commonly used solutions are Factoring (€60.4 billion) and Invoice Advance (€54 billion). However, there is growing adoption of Reverse Factoring, Dynamic Discounting, and B2b Credit Card solutions Low liquidity for 30% of SMEs, but traditional solutions are still preferred for financing

Milan, March 19, 2024 – Between inflation and rising interest rates, business liquidity in Italy decreased in 2023, and Supply Chain Finance has taken on a new strategic role in accessing credit, allowing for the financing of working capital by leveraging the role and relationships within the supply chain. After reaching €560 billion in 2022 (with a growth of +10.2% over the previous year), the potential Supply Chain Finance market in Italy continues its expansion in 2023, with an estimated growth between 0.5% and 3% to reach a value of €563-575 billion in trade receivables.

Approximately one-quarter of the potential market is already served by Supply Chain Finance solutions (23%), which reached a value of around €130 billion in 2023. Among the different solutions, the most used in 2023 are Factoring (the sale of commercial credits to specialized operators) for a total value of €60.4 billion, stable compared to the previous year, and Invoice Advance, also stable at €54 billion. Following at a distance is Reverse Factoring (partnership to facilitate the sale of invoices to suppliers by leveraging the client’s creditworthiness), which saw a record growth of +10%, reaching a value of €8.9 billion.

Then there is Confirming (the solution where the selling debtor authorizes the financial operator to pay suppliers), €1.6 billion with a year on year decrease by 2%, and Purchase Order Finance (using an order received from a customer with high creditworthiness as collateral for financing), up by 1% to €1.1 billion. Although they still have limited volumes, there is significant growth in B2B Credit Card (+13%, €3.5 billion), Dynamic Discounting (technological solution allowing early payment in exchange for a discount proportional to the advance days, +32%, €0.7 billion), and Invoice Trading (marketplace for credit assignment allowing third parties to invest in invoices issued by companies, +24%, €0.5 billion), demonstrating increased awareness and adoption of these tools as well.

These are the results of the Supply Chain Finance Observatory of the School of Management of the Polytechnic University of Milan*, presented during the conference “Supply Chain Finance: a new increase in the interest rate?”

“During 2023, the macroeconomic slowdown amid geopolitical tensions and inflation introduced new challenges for global supply chains, while the continuous rise in interest rates further increased financing costs for businesses” says Federico Caniato, Director of the Supply Chain Finance Observatory. “In this complex scenario, Supply Chain Finance is a key element in offering facilitated access to credit for struggling businesses. An ally capable of meeting the liquidity needs and financing working capital, leveraging supply chain relationships that could reduce the cost of capital.

“Supply Chain Finance still has great potential for adoption, especially among small businesses” explains Antonella Moretto, Director of the Supply Chain Finance Observatory. “From our research, Italian SMEs express the need for new financing solutions, but they still know little about SCF opportunities. Businesses need support in educating them about the most innovative financing forms, which must also ensure fast and streamlined approval processes, along with human support to guide and support SMEs in financial decisions.”

Working capital and cash cycle. In 2022, inflation influenced both revenue growth (+27.2%) and purchase costs (+32.1%) for Italian businesses. Working Capital increased by 11.2% due to the increase in Trade Receivables and Inventories, more than proportionate to Advances and Trade Payables. Trade Receivables were at €560 billion (+10.2%), Inventories at €455 billion (+18.2%), while Trade Payables were at €643 billion (+14.8%) and Advances at €105 billion (+13%).

The average cash cycle decreased slightly to 30 days (-5%): average collection times decreased (61 days, -13%) as did payment times (84 days, -13%), possibly due to increased use of liquid funds for payment advances, but also due to businesses’ ability to work with their customers for faster collection times. However, there is a significant disparity between large businesses, which maintain a negative cash cycle due to their ability to generate liquidity leveraging contractual power, and micro-enterprises that have an extremely long cash cycle (103 days), with high financial vulnerability.

SCF market. Analyzing retrospective data, in 2022 Supply Chain Finance solutions covered 23% of the potential market value of €560 billion. The market served by these solutions saw significant growth, reaching €129 billion. Among the most used solutions, Factoring (€60.4 billion, +5%) is followed by Invoice Advance (€54 billion, +15%) which showed a good recovery after some signs of decline. Reverse Factoring showed stable growth (€8.1 billion, +13%). Other significant increases were seen in B2B Credit Card (€3.1 billion, +53%) and Invoice Trading (€0.42 billion, +90%). Purchase Order Finance (€1.03 billion, +2%) reached its historical peak, while the Dynamic Discounting (€0.5 billion, +83%) and Confirming (€1.6 billion, +38%) also grew, although with still limited absolute volumes.

SMEs. A study conducted in collaboration with Workinvoice shows that liquidity and working capital management are particularly relevant for Italian SMEs: 33% consider their liquidity to be low or very low, requiring access to financing sources quickly. Indeed, 57% need access to credit sources within a week, and among these, 30% need it within 24/48 hours.

However, to meet financing needs, SMEs mostly adopt traditional solutions, such as bank loans and self-liquidating credit lines, which they are more familiar with compared to Supply Chain Finance solutions, with Factoring being the most adopted among these. Analyzing the level of knowledge and adoption of some financing solutions, alternative and digital solutions such as Minibonds, Invoice Trading, Dynamic Discounting, and Supply Chain Finance are still not well known and utilized. In addition to low interest rates, it is important for SMEs that solutions have fast approval processes and constant human support through customer service. Micro and small enterprises primarily require streamlined processes with minimal documentary requirements and then consultancy support during the adoption of financing solutions.

SCF megatrends. The direction in which Supply Chain Finance is moving involves an increasingly greater use of digital tools for collaboration among stakeholders and the digitalization of solutions, continuing sustainable transformation, and regulatory developments supporting both digital and sustainable transformations of Supply Chain Finance.

Specifically, the Observatory has highlighted 4 megatrends that could revolutionize the Supply Chain Finance landscape in the coming months. Firstly, the role of digital platforms, where the integration of advanced technologies, such as APIs or Artificial Intelligence, can occur to improve, streamline, and accelerate all internal processes.

Secondly, the introduction of predictive risk management, enabled by AI solutions that can support credit risk prediction through an analysis of partner default probabilities in SCF solutions. The use of these technologies can increase confidence in the use of financing solutions thanks to greater visibility on partners and supply chain risks.

Thirdly, attention to sustainability, driven both by regulatory evolution and companies’ focus on sustainable SCF solutions, also thanks to the dissemination of sustainability ratings and supplier evaluation solutions. In this context, defining standards and harmonizing evaluation criteria is crucial, and it is necessary to integrate sustainable solutions with supplier training programs.

Fourth megatrend, regulatory evolution that could have a significant impact on operators and businesses. The proposed European regulation of mandatory payments within 30 days could shake up companies’ financial performance. There is also an expected increase in disclosure of adopted SCF solutions, as it will be mandatory from January 1, 2024, to declare them. Finally, the initial discussions on digital euro in the B2B field could lead to the digitalization of the entire order cycle, including automatic payment and the possibility of integrating and digitizing payment for Supply Chain Finance solutions.

The Buy Now Pay Later B2B. Finally, a new Supply Chain Finance solution is highlighted, the Buy Now Pay Later B2B, a payment method that allows client companies of a major upstream supplier to purchase its products or services by postponing payment by 30, 60, or 90 days compared to traditional payment terms, based on the standing of the supplying company that provides its customer portfolio for evaluation by a financial institution. Clients can receive goods or services without an immediate outflow of cash, while the major supplying company receives immediate payment from the credit institution, net of a service fee. The solution can be a good financing alternative for all companies that need to support their sales to smaller customers.

Federico Caniato

Federico Caniato is a Professor at the MIP Politecnico di Milano, Graduate School of Business. He is also the Director of the Osservatorio Supply Chain Finance. Federico has taken up the Chairmanship of the SCF Community from 2023. His research focuses on supply chain management and supply chain finance and he has been a part of the industry for over 25 years.