-

Taking supply chain finance to the next level

The Covid-19 downturn is changing the landscape of supply chain finance. It is driving a focus on increased supply chain visibility, more sustainable relationships, and longer-term benefits for buyers and suppliers, both of which will need swift support to get back on their feet.

In our article, James Binns, Global Head of Trade and Working Capital at Barclays, leads discussions with a number of FinTech providers on what is possible for strengthening supply chains and creating a positive outcome for all.

Increased focus

Since the outbreak of Covid-19, much has been said about the fragility of modern supply chains, which will be tested even further in coming months as lockdowns lift and businesses come under pressure to ramp up again. 

At the same time, the substantial government-led financial measures that have been extended to companies worldwide in the wake of the pandemic will likely be phased out, bringing increased strain to businesses that have been relying on this support.

The transition to a so-called ‘new normal’, whether that comes sooner or later, will keep the pressure on company cash reserves, many of which have already taken a hit. 

Supply chain finance (SCF) has been highlighted as a way of helping companies secure critical liquidity, but also a means of improving the stability of their supply chains and, importantly, relationships with their suppliers.

Bringing benefits to all

SCF programmes have mostly been used by buyers to eliminate inefficiencies and frictions within their supply chains in order to apply consistent purchasing terms. Another objective – and one that has traditionally garnered less attention – is to enhance the overall wellbeing of supply chains. It is that piece which has been brought to the fore with Covid-19, and which is developing an increased focus on a more holistic, ecosystem-based approach that’s of benefit to all parties across the supply chain, including the long tail of smaller suppliers. 

“Large investment-grade buyers are increasingly realising the importance of not just looking at supply chain finance from a simple point of view of their own balance sheets and working capital generation, but more strategically in terms of the health of their supply chains, and in particular, the availability of systemic funding to those supply chains,” says James Binns, global head of trade and working capital at Barclays. 

It's about trying to achieve a situation where the buyer, using its financial strength and higher credit rating, works with suppliers to create a win-win solution for both parties.

James Binns

Global Head of Trade and Working Capital at Barclays

Buyers are recognising that if they don’t step in to support their suppliers where they can, the links holding together those supply chains may break in ways that cannot be easily repaired. 

Over the last few months a number of large corporates have taken action to help their suppliers stay afloat when sales are down with early payments and favourable loans. 

One of the big themes out of the crisis is the desire and the need to turn the attention and the focus to the SMEs in the supply chain. They're often seen as the engine room of growth and vital for both economies and supply chains.

Colin Sharp

Senior Vice-President EMEA at C2FO

A need for increased efficiency

The global need for liquidity over the last few months has played out across SCF platforms. 

A lot of suppliers have seen their sources of liquidity disappear, so access to a supply chain finance programme is growing increasingly critical to keep their daily operations running.

Dominic Capolongo

Executive Vice-President and Global Head of Funding at PrimeRevenue

This is triggering a surge in requests from these companies to join programmes.

Other SCF platforms report similar trends, including record levels of programme expansion and onboarding of new suppliers – the technology and processes for which attract platform providers’ ongoing investments.

“Automated supplier onboarding tools are really critical to make it efficient to onboard SME suppliers,” says Matt Wreford, CEO of Demica, whose automated tools were used last year to onboard 1,000 suppliers to one SCF programme in just two months. 

Automated supplier onboarding tools are really critical to make it efficient to onboard SME suppliers.

Matt Wreford

Chief Executive Officer at Demica

Demica’s automated tools were used last year to onboard 1,000 suppliers to one SCF programme in just two months. It is this kind of efficiency that is leading to increased interest in third-party platforms, as clients realise the benefits that these solutions bring. 

With their strong focus on user experience and state-of-the-art technology, third-party platforms can reach deeply into a buyer’s supplier base. They are also nimble in terms of how they approach innovation, meaning that they’re quick to add new features and solutions in line with various stakeholder requirements.

Equally important to clients is the fact that third-party platforms facilitate the need for just one technical connection and legal agreement, making such programmes simpler and swifter to get off the ground than those led by a single bank, which may not have the capacity to onboard suppliers across all regions of the globe, necessitating the addition of more banks and the implementation of numerous agreements. 

“Customers don't want to deal with an individual bank or manage multiple connections. They’re asking for one point of contact to manage their entire programme and take care of the administrative burden, so then they can plug in additional people along the way: suppliers, funders, etc,” says Capolongo. 

The recognition of the benefits that third-party platforms can bring, and the need to ensure that clients can harness them, has driven banks to dedicate much effort to building the connectivity between the platforms and their own systems.

At Barclays, our strategy is about offering clients increased choice. So, we’re working hard to ensure connections are established with the leading third-party platforms.

James Binns

Global Head of Trade and Working Capital at Barclays

As banks and providers facilitate this integration, their clients can take advantage of the additional merits of third-party platforms, such as access to an increasingly diversified funding mix. A relatively recent functionality offered by some third-party players, such as Demica, is the combination of SCF and dynamic discounting – two distinctly different solutions – by the same provider on the same platform. This is often done in a seamless manner which sees the buyer company put on the programme as a funder alongside banks. If there’s economic value to the buyer to participate as a funder because they have excess cash, then they can do so through the platform. But, if the buyer is unable to fund the programme for whatever reason, banks can step in. 

The combination enables clients to use any additional cash generated by SCF to capture early payment discounts to their suppliers using either their own capital, bank funding or a combination of the two, depending on their focus and needs.

It means an optimised financial supply chain for buyers, who can earn return on their availability available liquidity, as well as suppliers – including the long tail – who can gain access to early payment terms without the need for banks, who would ordinarily have to undertake KYC on these smaller names. Banks, in turn, can focus on larger suppliers where their funding and resources can be more efficiently applied. 

The enhanced flexibility presented by this kind of solution fosters a symbiotic relationship between all players. “The longer-term benefits for corporates will be much greater than the short-term advantages of just trying to extend payables out as far as possible,” says Binns. “It starts to bring unit prices down through lower funding cost, allows more optimal stock levels, and really drives better supplier-buyer relationships.”

Facilitating the ESG agenda

In addition to technological advances, environmental, social and governance (ESG) considerations, already a key issue for supply chains before the pandemic, have come into sharper focus over the last few months, and will be a major factor in how supply chains are managed and financed. 

Buyers’ responsibilities to their consumers and their funders – both ever more insistent on improved ESG performance – are forcing them to take a closer look at their supply chains to ensure such issues are being addressed. 

At the same time, Covid-19 is making buyers understand that they need to diversify their supply chains in the hope that it will mitigate against future disruption. Measures being taken include reducing concentration risk on individual companies and nearshoring operations, where possible.

Any new strategies will mean bringing in new suppliers, which presents an immediate opportunity to select suppliers against the latest criteria to ensure that they consider ESG factors. 

For already existing supply chain programmes, buyers have been increasing their efforts to financially reward suppliers based on their sustainability ratings to encourage a move towards sustainable practices: the better the rating, the more cost-effective the financing. 

The functionality to support different pricing tiers for ESG-compliant suppliers is one that a number of third-party platform providers have integrated into their systems. 

Some, such as C2FO, have taken the next step and are working on ways to link their platforms with sustainability vendors and ratings databases, to validate supplier ESG compliance and understand whether they qualify for a discounted rate.

It is this kind of innovation and technological expertise that banks will increasingly need to harness as they evaluate what their clients’ needs are, find the best solutions to address them, and ensure that they can be part of delivering the end result.

Read related insights

Insight

What is possible? International Insights

Your hub for international corporate insights. The latest on international trade, global corporate treasury, FinTech and other topical content.

Solutions

Financing

Discover flexible, expert financing solutions built around your business – from meeting day-to-day expenditure to funding your ambitions for growth.

insights

Transatlantic Trade Opportunity

We explore the transatlantic trade opportunities for the US, UK and EU, and why now is the time for banks to rethink the way they support exporters.

insight

The shifting dynamics of Europe-Asia trade flows

As trade corridors between Europe and Asia continue to evolve, we look at what is possible for India as it scales up its manufacturing capabilities.