The continuing evolution of supply chain finance

As a staple funding solution in trade finance, it is easy to forget that supply chain finance (SCF) is still, in fact, relatively new. Its beginnings are largely believed to date back to the early 1980s, when it was used as a working capital tool during a rising interest rate environment. But it was not until the turn of the 21st century that SCF started to make its mark across the global banking community. Since then, its advancement has been remarkable. Now, as global trade increasingly transitions to a new digital era, the potential for SCF to enhance supply chains and the working capital of businesses is entering a new phase.

Foundationally, supply chain finance is a solution that enables buyers to manage their accounts payable terms while providing suppliers a vehicle to obtain financing for their invoices at a favourable rate. The success of SCF reflects the very real opportunity in the market for a solution to support corporates’ working capital needs.

SCF delivers a host of benefits for buyers and suppliers. For buyers, this is a tool to help them improve their days payable outstanding (DPO) and become more competitive. Equally, buyers have a vested interest in the financial health of their suppliers in order to maintain the security and continuity of their supply chains.

On the flip side, by leveraging the buyer’s credit rating for lower cost financing, suppliers benefit by accelerating their days sales outstanding (DSO), creating certainty of payment and, in turn, ensuring greater control of their cash flow.

Supplier awareness of the capabilities that SCF can bring has risen considerably during the past decade. And, despite some initial hesitance from larger suppliers due to many of them being cash-rich, SCF uptake has risen. It is not uncommon, for example, for Fortune 500 suppliers to use SCF as an off-balance sheet tool, leveraging the ability to sell their accounts receivable for quarter- and year-end discounting.

Momentum continues to build more broadly. Prior to the last decade, SCF was most notably successful in the industrial, automotive and beverage industries. But as the product continued to grow, so did acceptance across other industries. SCF has quickly expanded to sectors such as healthcare, oil and gas, and consumer and retail. Interestingly, when an SCF programme is first adopted in a new industry, it acts as a springboard for greater uptake, with the trend for competitors in that industry to quickly follow suit as they seek to put themselves on an equal playing field.

Certainly, what SCF makes possible for a corporate and its suppliers from a working capital perspective is an all-important differentiator: The longer companies can hold on to their cash, the more they can make it work most effectively for them — whether by reinvesting back into their business, R&D, or expanding their workforce, among other opportunities.

The scope of SCF is also increasing in terms of the type of supplier industries it is attracting. Historically, it was largely the domain of direct suppliers, such as packaging and logistics. But recent years have seen indirect suppliers of services, such as advertising, media and staffing joining SCF programmes.

In the recent market of high interest rates and lending costs, SCF is incredibly valuable as a working capital optimisation tool. Its flexibility means that a supplier has the option to discount an invoice at any time within the tenor, selectively delaying the discount to make the programme work best for their financial needs.

But it is not just during periods of high interest rates that SCF is a useful tool. In a low interest rate market, suppliers can leverage SCF as a low-cost financing solution and subsequently avoid borrowing from their costly bank lines. In such instances, many suppliers opt for auto discounting in order to be paid as quickly as possible.

Irrespective of market conditions — be they the high rates caused by the 2008 financial crisis, the low rates resulting from Covid in 2020 (when the rate market dramatically fell to historical lows) or the more recent high rates brought in by the U.S. Federal Reserve Bank to hedge inflation — SCF consistently and reliably continues to demonstrate its worth, growing and flourishing as a cash management tool.

Looking to the future, banks and fintechs are increasingly working together to enable trade finance and SCF to realise their full potential and bring the funding of global trade into the digital era, transforming access to finance for all. Huge strides have been made in this respect, with three notable developments in particular:

• Tail-end solutions. Digitalisation is enhancing the speed of the onboarding process, thereby opening SCF thresholds to include lower-spend suppliers. Democratising access to finance in this way enables buyers to support their smaller suppliers, which make up approximately 80% of a company’s supplier base.

• Open Account Automation (OAA). This new solution enhances the buyers’ procure-to-pay process, allowing them to approve invoices faster and at a lower cost. Designed to help buyers more effectively manage their supply chain, OAA automates the three-way matching process — which involves checking that the purchase order, supplier invoice and delivery receipt details align — making it considerably faster.

• Supplier analysis enhancements. Automating the supplier analysis processes has made it much easier for comprehensive supplier files to be generated, providing strategic guidance to help companies target suppliers and launch a successful programme to most efficiently meet their working capital goals.

SCF has come a long way since its inception. And with the industry embracing digitalisation, and banks and fintechs collaborating to deliver ongoing enhancements, this transformational tool is only positioned for further growth and innovation. Indeed, with widespread acceptance and awareness of SCF’s far-reaching and enduring value, buyers and suppliers alike are embracing the benefits of this robust, reliable and lower-cost solution. By partnering with a trusted financial institution with a track record in providing client-centric servicing models and funding solutions, companies large and small can realise end-to-end supply chain and working capital enhancements.

This article was recently published in Global Trade Review