A company that wants to extend the time it takes to pay its suppliers can turn to either banks or third-party platforms to provide financing to vendors based on invoices the company has approved for payment, a practice sometimes called "reverse factoring." The interest rate on such financing is based on the buyer's credit rating, which means it's probably cheaper than the financing smaller suppliers could arrange on their own.

But Amy Fong, practice leader of Purchase to Pay Advisory Program at the Hackett Group, noted that in Hackett's 2015 Purchase-to-Pay Performance Study, just 60% of respondents that used supply chain finance said the program had improved their days payables outstanding (DPO)—the average number of days a company takes to pay its suppliers.

That suggests many companies are still turning to supply chain finance as a way to support their vendors, she said. While motivations vary from company to company, "there's certainly evidence that the financial stability of the suppliers and finding ways to balance the inherent conflict of interest between buyer and supplier, finding tools to balance those, is a focus right now," said Fong, pictured at left.

Fong noted that the supply chain finance market is still small. In Hackett's 2015 Purchase-to-Pay Performance Study, about 6% of the 100 companies surveyed (most with revenue of more than $1 billion) said they were making significant use of supply chain finance, while about 11% said they were making moderate use of it.

"The majority are not using it at all," Fong said. "But I would say the interest has increased over the last several years."

Johnson also sees room for growth in supply chain finance.

"There is something like $7 trillion of payables and receivables on companies' ledgers around the world, and obviously only a small fraction of that is being financed with supply chain finance structures," he said. "So there's a lot of upside in terms of the market potential."

Where Growth Is Occurring

To date, supply chain finance has been used mostly by large companies. But Johnson noted that as banks implement programs for large buyers, the middle-market companies that are brought on board as suppliers learn the value of supply chain finance.

"That is how we are really seeing it extend down into the middle market," he said. "It's basically middle-market companies starting as suppliers, realizing the benefits to them as suppliers, and then looking at the payables side of it."

Tom Roberts, senior vice president for global marketing at PrimeRevenue, a supply chain finance provider that has about 20,000 clients, said the hot areas for growth are North America—including the U.S., Canada, and Mexico—and Western Europe.

He sees a lot of interest currently in the food and beverages market. "That market is consolidating, which starts to drive trends across those spaces in terms of procurement and supply chain," Roberts said. "And commonality of suppliers, that turbocharges the market."

He also cited retailers and noted that that's another industry undergoing change, as retailers adapt to consumers' shift to buying online. "They're looking for ways to free up capital, so we're seeing a fair amount of interest there," Roberts said.

Supply Chain Finance for Receivables

Johnson said some companies are using supply chain finance on the other side of the equation—to accelerate the rate at which they collect payment on receivables, thereby reducing their days sales outstanding (DSO).

He gives the example of a company that has a buyer paying it in 120 days. "We'll buy those receivables early, maybe after 10 days," he said. "The buyer may not even be aware of us doing it—it can be disclosed or undisclosed."

The use of supply chain finance on the receivables side is not as prevalent as its use on the payables side, he said. "There's probably five payables programs for every one receivables program, but the receivables programs are gaining traction."

Johnson also noted that some of the fintech providers are offering dynamic discounting, in which the buyer offers to pay suppliers early but at a discounted rate that can change from day to day. "It may be Libor-plus-100 one day, Libor-plus-150 the next day," he said, and added that this approach can pose a challenge for suppliers since "they never know whether that liquidity will be available, at what price it will be available."

Enrico Camerinelli, a senior analyst at Aite Group, noted that in some geographic regions, such as Asia Pacific, companies are interested in using supply chain finance with distributors to ensure that their distributors have the financial wherewithal to buy the goods to sell on to end customers. The companies are typically those selling durable goods, such as tractors.

"The objective of the anchor company is purely to increase its sales volume, by virtue of having distributors getting financed by the bank," Camerinelli said. "The bank is able to do this because we're talking about goods that are resellable, so they can operate as collateral."

Self-funding

Supply chain finance took off when times were hard and liquidity was at a premium. These days, many large companies have substantial amounts of cash, but they also have a hard time finding rewarding short-term investments for that cash.

In the current environment, "we're seeing an increasing number of companies looking to self-fund either part of their program or all of their program," said Bank of America's Johnson, pictured at left.

Even if a company provides some or all of the funding for a supply chain finance program, the bank still provides the platform, enrolls the suppliers, and takes in approved invoices, he said. It's just the source of funding that changes.

And from the company's perspective, Johnson added, "they are finding a way to make a return on that available cash that's greater than they could in investing in money-market products."

PrimeRevenue's Roberts said that his company has 60 banks providing funding on its platform and noted that supply chain finance programs are a great investment. "Default rates are ridiculously low—they're approximately zero—and in a very-low-interest-rate environment, it's a great risk-adjusted investment," he said.

But while Roberts sees corporates interested in investing in supply chain finance, "we have not seen a lot of buyers self-funding their programs," he said. Roberts cited companies' concerns about the way their efforts to delay paying invoices are portrayed. "There is a fair amount of buyer sensitivity around that whole storyline," he said.

Roberts noted that PrimeRevenue is piloting a program in the U.K. called PrimeRevenue Capital Management, which aims to make it easier for nonbank entities such as corporates to invest in its supply chain finance programs.

Regulatory Concerns

Companies that were using or contemplating adopting supply chain finance got a jolt late last year when Moody's Investors Service said the supply chain finance program of a Spanish energy company, Abengoa, had "debt-like features" and increased the company's leverage. The Moody's report created concerns among finance executives whose companies use supply chain finance.

Aite Group's Camerinelli noted that the accounting treatment of supply chain finance programs varies from country to country, and suggested that regulatory concerns might discourage banks from providing international supply chain finance.

"This makes it unattractive to think of cross-border programs," Camerinelli said. "Anytime your anchor company says it wants to work with these suppliers, and these suppliers are in another country, it may become a problem."

Johnson said most of the concerns around the accounting treatment of supply chain finance have subsided. He added that U.S. companies have reasonably clear accounting guidance on this topic and needn't worry about having to reclassify their payables as debt, as long as they follow the rules.

"There is SEC guidance on the length to which you can extend terms," Johnson said. "If standard or customary terms are 90 days within a particular industry vertical, implementing a supply chain finance program and extending terms to 360 days would probably be unacceptable.

"As long as you're offering [the supply chain finance program] broadly and you're not doing things that are out of the norm by industry standards — say, not taking terms to double what is normal, you're not paying the buyer rebates — there is generally not an issue," Johnson said.

He added that BofAML has increased its efforts around educating clients about what supply chain finance practices are acceptable based on accounting guidance.