Covid-19 turbo charges take-up of Supply Chain Finance

The Covid-19 pandemic has prompted treasurers globally to take greater advantage of trade finance instruments to ensure quicker access to working capital for themselves and their suppliers.

While this type of financing had already seen a surge in popularity after the 2008 financial crisis, last year companies became once again concerned about the impact of late invoice payments at a time when access to liquidity was vital.

This has spurred the growth of Supply Chain Finance (SCF), which expanded significantly as larger corporate buyers sought to protect their own suppliers by setting up more and larger financial facilities for them. These facilities offered their suppliers quicker access to more, and cheaper, funding, based on the credit rating of them as buyers.

According to a recent SCF report by McKinsey, buyer-led SCF is now the fastest growing segment of the US$7 trillion trade finance market and is expected to post 20-24 percent growth in the five years to 2024.

Meanwhile, Oliver Wyman points out that SCF has outpaced traditional trade finance in terms of market revenues.

“The SCF market grew strongly from 2010 to 2014, and we expect similar rates of growth to return now after stabilisation over the last few years,” says Martin Sommer, partner at the US consultancy.

“If suppliers face slow or unreliable payments from their customers and have only uncertain and expensive financing options at their disposal, the cost of the goods and services they provide may be higher.

“Moreover, the reliability of the supply chain may be compromised if a supplier is unable to fulfil an order.”

Protecting the food supply chain

At world foods company Danone, international treasury director Stephane Chambon points out that his company now has multiple SCF programmes running in different regions of the world through different banks. This is for suppliers, which range from farmers to producers of commodities, such as sugar.

“At the very start of the pandemic, we made sure that we did everything we could to help our suppliers at a time when it was not clear how things would turn out. We had to make sure our suppliers had access to sufficient cash,” says Chambon, who has been dealing with SCF programmes for more than ten years.

“We increased the scale of our SCF programmes to make more money […] available to our suppliers immediately. This aimed to ensure that they would not go out of business and could continue to produce the supplies we needed on time.”

Chambon points out that SCF offers Danone’s suppliers early access to financing – before their invoices are due to be paid – at a lower rate than if they borrowed money directly from their own banks. This is because the financing is based on the higher credit standing of Danone itself as the large buyer.

Financing can also be arranged very quickly. “It means that instead of waiting two to three months for their invoices to be paid, suppliers can gain much more immediate access to cash in just one to two weeks. This is particularly important where those suppliers need cash to purchase raw materials for production purposes,” he says.

 “It also gives our suppliers a lot of flexibility in that they can use a SCF programme according to their needs. It really does depend on when they need additional cash. They can activate it for just some of their invoices or they can use a SCF programme for a continuous flow of invoices.”

Suppliers can easily access early finance via the SCF online platform, making this option very easy to use, he says. “They don’t need to review the SCF agreement in place every single time.”

 For large corporate buyers, SCF also brings huge benefits in that it not only eliminates many of the risks of supply chain disruption, but also enables firms to make payments later.

“Large buyers also benefit from setting up SCF programmes for their suppliers as it allows them to put longer payment terms into their agreements with those suppliers,” says Chambon.

 Trade finance options

Companies today are also taking advantage of trade finance instruments that enable them to sell or borrow against their accounts receivable to access more immediate working capital.

According to the McKinsey research, use of supplier-led trade finance will increase by 3-4 per cent in the 2019-24 period.

However, Chambon points out that whether or not a company takes advantage of supplier-led finance depends on the size of the company, and its access to other types of market liquidity.

“It is important for many companies to access additional liquidity by leveraging on their invoices. This is particularly the case for companies with a lot of invoices on their books, which need additional liquidity more immediately,” he says.

Chambon also argues that, while even during the pandemic companies like Danone were able to find “a lot of liquidity on the market” thanks to their larger size and stable credit rating, SCF can possibly give a company access to more liquidity at a cheaper price than it would normally get based on its own credit rating.”