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Rapid Growth Ahead for Construction Supply Chain Finance?

A recent report from global consulting firm McKinsey & Company highlights the rapid growth of supply chain finance (SCF) programs - and urges business managers to take notice. Spurred in part by technical innovation and changes in credit availability in the wake of the global financial crisis, SCF programs have evolved into a rapidly growing market that is attracting attention from multiple sides, including technology companies and institutional investors. And the growth shows no signs of slowing.

Supply chain finance unlocks working capital tied up in everyday business practices – such as accounts payable – and according to McKinsey, the market for payables finance is large and valuable. The report, “Supply Chain Finance – the Emergence of a New Competitive Landscape” (click link to download PDF) estimates some $2 trillion in highly secure payables are available for financing globally, with a large potential for growth over the next three to five years. The most mature markets, Europe and the United States, currently make up the largest share of businesses using SCF programs, but the report notes programs in Asia and Latin America are quickly gaining popularity. The automotive and retail sectors are leading in the use of SCF programs, but as awareness about SCF grows the opportunity to expand the use of supply chain finance in a variety of industries – including construction – is presenting itself.  

Through the use of financial techniques, SCF allows buyers to pay suppliers faster, often using a third-party funding source and trading on the buyer’s typically stronger balance sheet and credit position. These programs help buyers maintain or improve their cash position, while offering their suppliers access to working capital at a potentially much more favorable cost compared with traditional bank-based lending. Increased adoption of SCF programs can be linked to multiple factors, including new banking industry regulations and challenging credit conditions for small and medium-sized enterprises following the global financial crisis of 2007-8. In addition, the SCF market is being transformed by technology companies helping facilitate the transactions.

The maturation of technology is especially important to the adoption of supply chain finance in the construction and engineering sector. Traditionally, funders have shied away from investing in construction-focused alternative finance due to the opaque and complex payment processes of construction projects. However, sophisticated payment management applications  bring a level of efficiency and transparency, boosting funders’ confidence in that payables are suitable for accelerated payment.    

Here on the Improving Construction Payment blog, we have written often about the potential of SCF programs to address external and internal challenges of construction payment processes. Finding ways to maximize working capital management can help construction companies thrive. Construction SCF programs can help subcontractors address challenges arising from long industry payment waiting times, while also addressing general contractors’ need to optimize their own working capital performance. Supply chain finance is changing the way businesses address the working capital gap, and it’s time for financial managers to pay attention.

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