2020 was a record year for supply chain finance (SCF) as corporate buyers strived to bail out suppliers hit by the pandemic by providing earlier payments. Even as global trade dwindled by nearly 10 percent, as reported by the World Trade Organization, supply chain finance participation rose by 5.5 percent. Although there is no official source of supply chain finance data, bank earnings and supplier participation are a good indicator for trends in the bank and non-bank supply chain finance sector.
Supply chain finance, also known as reverse factoring, is a financing system used by the world’s largest corporations which optimizes cash flow for both buyer and supplier. In recent years, SCF has gained popularity among middle market businesses, typically defined in the United States as businesses under 500 employees, according to OECD. Several factors are influencing this uptick in middle market SCF programs worldwide.
Digitalization and Attainability
Banks have traditionally been reluctant to provide supply chain finance to middle market businesses due to costly and time-consuming buyer and supplier onboarding processes, including Know Your Customer (KYC) and Anti Money Laundering (AML) practices.
With the growth of fintech and digitalization, non-bank SCF providers have emerged that incorporate working capital, vendor management and accounts payable functionality. By eliminating paper transactions, assessing credit risk from transaction data and having visibility on all trades, these providers are able to offer SCF to a new business segment.
Harbor, a tech-enabled trade finance provider, focuses on bringing supply chain finance to middle market businesses that trade globally. Their SCF program provides tools that improve efficiency and accuracy for the procure-to-pay process.
“Historically large corporates were the only beneficiaries of tech-driven supply chain finance,” said Andy Suen, chief operating officer, Harbor. “It’s exciting to bring this powerful tool for working capital and administrative efficiencies to all businesses with goals for growth.”
Lessons Learned from a Pandemic
Middle market businesses on both the supply side and demand side were adversely affected by supply chain disruptions due to Covid-19. Suppliers faced illness and quarantine causing a lack of labor to manufacture goods. For buyers, a sudden drop in consumer spending coupled with delays in shipments from suppliers caused businesses to suffer.
As the global economy recovers, businesses are taking steps to prevent future supply chain shocks. Buyers are bolstering their supply chains by expanding their supplier base, mitigating the risk of disruption in the unpredictable event of illness or natural disaster. Expanding the supplier base requires tools to maintain a healthy cash conversion cycle, specifically to optimize trade payables with new suppliers. SCF achieves this while supporting suppliers through accelerated payments.
Maximizing Working Capital
Supply chain finance is an attractive option for middle market businesses because it boosts working capital and promotes growth without interrupting existing financing. Unlike other forms of financing, SCF is not debt; rather it is a trade payable for the buyer and an accelerated receivable for the supplier. This unique distinction makes SCF desirable for businesses that wish to maintain senior credit facilities like asset-based loans or revolvers.