Investors in crowded sectors may look on the opportunities created by the supply chain as medieval adventurers once looked on the fabled kingdom of Prester John. Huge volumes of illiquid credit are created in sale transactions every day as goods and services are sold. This credit locks up working capital for sellers and limits their appetite to supply their customers. The effective yield on this form of financing is tied up in price negotiations.
This market is already supplied with credit by third parties through trade receivables securitisation, factoring and other variations on the theme of using trade debts as collateral on a recourse or non-recourse basis. In some cases this financing (for the right, usually larger corporate borrowers in the right sectors and locations) can be extremely cost effective. There are also many ways of transferring credit risk on sale transactions which may be paid for by the buyer or the seller. But a high proportion of trade transactions are not financed or protected in this way and the availability of credit in many sectors can be volatile or non-existent and pricing is inefficient. This all adds up to create opportunities for new capital.
If this is the opportunity, what are the challenges?
Continue Reading Unlocking the Supply Chain: challenges to widening the investor base for supply chain finance and some solutions