An estimated $350 billion of invoices are typically involved in supply chain finance programs. Known as "reverse factoring," this process assists suppliers in obtaining the capital needed to keep supply chains humming, as described by Aite Group. Opposed to traditional receivables financing or factoring, reverse factoring is driven by the buyer and its relationship to a bank or finance provider, with capital being made available to suppliers based on the relationship parameters.
Banks are happy to step in, within specific jurisdictions and credit profiles. Research firm Coalition reports that banks logged approximately $12.7 billion in revenue in the first half of 2020 via total supply chain finance volumes. However, limitations are significant, and often times, the suppliers that need financing the most are excluded from such programs.
The complex nature of global supply chains includes trading partners of various sizes, geographies, and financial strength, which makes a one-size-fits-all approach to financing a non sequitur. In a typical supply chain finance (SCF) program, larger suppliers are most likely to be active participants while smaller long-tail suppliers often lack access based on the restrictions imposed by the finance provider, leaving supply chains vulnerable.
But the limitations of a single bank relationship SCF program can be overcome.
A multi-bank network can provide a marketplace approach where several finance providers are active participants in a supply chain finance program, with each provider servicing suppliers based on their risk appetite, geographic reach and other differentiators.
The major benefits for buyers and their suppliers include:
- Greater coverage of the supply chain as more suppliers have access to capital.
- Opportunities to deliver capital earlier and when its most needed, including pre-shipment.
- Reduced risk and greater assurance of supply.
- More options for treasurers to pull from (self-funded early payment, 3rd party financing, pre- or post- shipment)
The International Chamber of Commerce stated in September that trade finance underpins somewhere between 80 – 90% of global trade, acting as a vital source of working capital for suppliers. But recent economic volatility and credit uncertainty puts suppliers at risk.
This risk will only continue to loom given traditional approaches to supplier financing. But there is a way out. One of the primary lessons of 2020 has been the importance of digitization and network connectivity to navigate a disrupted and risk-filled landscape.
For treasurers and supply chain leaders that have embraced SCF to strengthen their supply chains, a cloud-based multi-bank network approach is the next natural extension of your existing program.
And, as always, contact ICCG to help provide you with insight and information. Schedule a complimentary consultation to review your questions.