Why it is Time to Take a Fresh Look at Supply Chain Finance
Supplier payment terms are extending to historic lengths—an average of 66 days globally—wreaking havoc on supply chains as even well-established businesses close up shop due to cash flow problems.
Tighter credit since the Great Recession and the increasing globalization of supply chains are driving demand for better supply chain finance solutions. Consulting firm Bain estimates that the market for supply chain finance is expanding by 15-25% a year in the Americas and by 30-50% in Asia.
But yesterday’s solutions won’t work in today’s market. Supply chain finance programs have been offered historically by big banks and financial institutions, but only to top-tier suppliers, not to the small and mid-sized businesses that need them the most.
However, technology players are now getting into the game and making a difference. Cloud platforms and marketplaces that handle transactions between buyers and suppliers are beginning to incorporate financing into their transactional flows. They’re creating more visibility for funders, opening up opportunities for them to be more flexible and underwrite a wider range of financing options, for a wider range of suppliers.
The positive economic impact could be huge. Of 1,000 UK SMEs surveyed by Crossflow Payments, two thirds said they’d hire up to five more people if working capital improved, leading to as many as 3.4 million new jobs. In the US, a survey by Fundbox estimated that unpaid invoices total five percent of GDP. According to a UK study by the Federation of Small Businesses, 50,000 business bankruptcies could be avoided each year if suppliers consistently got paid on time.
Relationships and Data
With so much at stake, why has it been so hard to extend supply chain financing programs to the very businesses that need them most? There are three reasons:
- These programs have been hard for buyers to set up
- It’s been difficult for finance providers to establish relationships with smaller suppliers
- There often hasn’t been enough data for financial institutions to underwrite financing for smaller suppliers or suppliers in emerging markets.
On the buyer’s end, setting up a supply chain finance program requires business process change. You need to get people used to putting everything on a purchase order. You have to figure out how the invoice processing workflow is going to change, and how you adapt your finance and treasury controls. It takes about a year, and a lot of internal discipline, to get buy-in and implement such a program.
Once you get the program set up and the processes in place, then you have to introduce the financing program to your suppliers and convince them to participate, which requires a big marketing communications effort. Most supplier enablement efforts start with tier-one suppliers and never make it down to the second and third-tier suppliers who are more likely to need financing.
Even if you do reach them, it’s a tough sell. In addition to asking them to take a discount, you’re asking them to enroll in program with a new third party and do business via separate channels of communication, and separate transaction flows.
On top of that, suppliers may only need financing sporadically. Maybe that’s seasonally related to a specific project or unforeseen circumstance. There may be different decision makers and different conditions within different business units in each supplier company. They might need the option to get funding in a variety of scenarios, without having to commit to discounting every invoice, or getting into a new relationship and having to log into and manage a separate portal to get paid.
What platforms and marketplaces offer is the ability to leverage the pre-existing relationship and the communication between buyers and suppliers that is already taking place on the platform in order to offer funds during critical moments of engagement. If you’re offering financing at the same time the supplier is sending a buyer an invoice or PO, you don’t need a marketing push, or a separate login.
More Data, More Offers
Platforms and marketplaces also help solve the data problem. Because cloud platforms have historical data on transactions between suppliers and multiple buyers, they can, with the parties’ permission, make that data available to a variety of funders for underwriting purposes.
For example, they could surface the transaction history between a particular buyer and supplier. They could show the history of each with other buyers and suppliers. They could surface supplier reviews. They could pull in multiple external data sources and use machine learning to assign risk scores. With visibility into more data, funders can better manage risk and offer more flexible and compelling financing options. They could decide they don’t need to wait for an invoice. They could fund on a purchase order, for example.
In fact, when a purchase order or invoice is created, suppliers could receive financing offers from several funders. They could accept offers on a purchase-order-by-purchase-order, or invoice-by-invoice basis. When you add the capability for buyers to make payments directly through the platform, as many platforms are now doing, the supplier can click a button to accept the most attractive financing offer and have money in their bank account the next day.
There could potentially be other funding points as well—receipt of inventory, or milestone completion, for example. When you expose the data and set up a competitive environment, I think you’ll see funders get more creative and dynamic with financing offers that are going to be attractive to suppliers.
Unlocking Economic Value
Previous approaches to supply chain finance required a lot of energy and effort—setting up separate business processes and business relationships. They required push marketing, business case creation, and straight-up selling. And, stringent underwriting processes coupled with lack of visibility into data meant that the vast majority of suppliers were excluded.
By bringing financing into an existing business process, onto a platform where transactions and conversations are already taking place, you eliminate the heavy lifting that’s required to get buyers and suppliers on board. It’s a scalable way to guarantee financing offers are communicated at the right time.
And, by giving funders more visibility into data captured on the platform, they can evaluate risk faster and more easily, and make more and better offers. That could significantly speed up business transactions and alleviate cash flow problems for a lot of individual businesses, and unlock a lot of economic value in the aggregate.