An unforgiving macroeconomic outlook makes multi funded supply chain finance a smart choice for small firms needing to secure liquidity, according to Ali Ansari, managing director, supply chain and payables finance at Taulia
As central banks attempt to ease inflationary pressures, the cost of capital is expected to increase in the banking sector. As such, we’re likely to see a diminished appetite to finance riskier assets as well as increase in the cost of borrowing. As lending tightens in this way, it’s likely many small companies will struggle to find liquidity.
Emerging from the previous liquidity crises, offering supply chain finance (SCF) solutions to suppliers least capable of getting access to cash has become one of the leading maneuvers for boosting supply chain resiliency.
However, even as providers help businesses to stay afloat during these challenging times, a potentially fatal flaw might exist: if the SCF program has just one bank funding it, there’s a risk of liquidity drying up. This is where multifunder solutions have a vital role to play in the industry and those who do not consider these models risk falling behind the curve.
Too many SCF programs are still reliant on single bank facilities and are leaving themselves open to significant risk due to a lack of diversification and transparency. Diversification employed with the right technology is the best way to hedge against liquidity risk, particularly during periods of economic uncertainty.
Having multiple funders within an SCF program is designed to provide resilience so that if one funding option fails, you can use another in its place.
One advantage of a multiple-funder over a single-funder model is creating a pool of liquidity that can reliably support financing a client’s entire supply chain. Sometimes the ability to provide global coverage goes beyond the capabilities of a customer’s relationship banks, so having a stable network of funders that clients can bring into the program is also essential.
Using multiple funders within an SCF program increases a company’s control in managing cash position and credit capacity. Companies may find their credit facility exhausted if they only leverage their primary bank in SCF funding. Conversely, if they have a lot of excess cash, they could also consider a low-risk investment by becoming a program funder.
The majority of SCF programs today are moving toward supporting multiple funders, using one of three models. Yet even with SCF providers improving the diversity of funding, not all solutions are created equal.
The first model employs a lead bank to fund all of the program assets and then includes other banks as sub-participants. The second employs multiple banks to fund the same program with suppliers allocated to particular banks in the syndicate for onboarding and direct funding. A third model allows for a technology provider to use special purpose vehicles (SPVs) to bring in liquidity from diverse sources with a common set of supplier onboarding procedures.
However, all options have flaws. The first approach limits the program to the operational and distribution capabilities of the lead bank and allows the lead bank to keep the first flow of assets to themselves, selling down via sub-participation only when their credit lines are full. This can cause friction with the client’s relationship banks.
The challenge with the second approach is the host of operational inefficiencies that tend to emerge when individual banks directly fund suppliers. These inefficiencies could consist of onerous onboarding documentation and processes or currency constraints. The client also has the added burden of matching the right funding source to each accelerated invoice. Lastly, direct funding requires a full-blown technical integration with each bank a client wants to bring on, meaning if a bank doesn’t have the capabilities, then they can’t participate.
The third option introduces additional operational risk on the SPV and relies heavily on the technology company to onboard a wide and diverse source of liquidity providers. Even then, it doesn’t work in all jurisdictions due to legal and regulatory challenges.
A technology platform that consolidates and seamlessly brings in all three models together, using all available liquidity pools in a dynamic and efficient manner. Consolidating the core program functions eliminates the need for integration with multiple banks for a company wanting to roll out SCF, also eliminates unnecessary tie-ups of suppliers to a single bank, and burdensome cash management when the buyer must sort repayment to many banks.
Centralisation also allows all banks to participate on a pari passu basis, with no one bank having the ability to hoard assets. This greatly eases relationship management among participating banks, which is critical to building funding resilience.
A centralised program configuration offers flexibility in selecting a range of funders to participate in an SCF program. However, funder transparency is also key. Clients should be able to select the funder they want to participate and not worry about supplier receivables being resold outside of the network to opportunistic investors.
Transparency is also critical in the records maintained in the program, for example, which supplier invoices are paid early and by whom, so that if a change in funder is made or an SCF provider becomes insolvent, others can step in.
SCF programs that employ multiple funders should also be evaluated not just in terms of risk mitigation but also in their ability to achieve the results customers are looking for. If the objective is to increase supply chain stability, especially for the long-tail, it’s worth considering how well the technology and processes your SCF provider uses support that aim.
The best multiple-funder programs in SCF are designed to provide a superior experience to suppliers. Ultimately, it doesn’t matter how many funders are in a program that won’t scale. Some of the technology and processes that make SCF programs with multiple funders more scalable include:
While enabling an SCF program with multiple funders might seem like a precaution, peace of mind is undoubtedly a vital part of the value proposition for those considering a multi-funded approach to SCF.
The main reason companies chose to roll out programs directly with banks is the additional risk a technology service provider brings to the program. However, over the years, multi-bank technology providers have shown resilience and more and more companies are comfortable working with these providers. Ultimately, multiple-funded programs tend to perform better over the long haul and have a much better chance of weathering the unexpected storms.
Looking ahead, we expect to see an uptake in multi-funder models thanks to the resiliency and transparency they provide. Particularly as inflationary pressures continue to broaden and intensify, certainty that businesses can access the liquidity they need to survive and thrive during these uncertain times has never been more important.
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