Just how financially resilient a supply chain becomes apparent only in a time of crisis. The Covid-19 pandemic and supply chain challenges have nudged treasurers worldwide towards the wider use of merchant banking programs to provide the company and their suppliers with faster access to working capital and to actively maintain supply chains.
The rapid emergence of more holistic supply chain finance solution providers such as Global Trade Corporation (GTC), Cflox and Traxpay indicates that singular trade finance instruments are gradually losing ground in terms of market share. These providers utilize platform solutions to enable, among other things, dynamic discounting, reverse factoring and the dynamic adjustment of payment terms, in some cases in conjunction with multi-bank interfaces. Today, companies such as Danone operate multiple Supply Chain Finance (SCF) programs across different regions of the world, which can be managed through different platforms.1 Such platforms can incorporate a wide range of suppliers along the entire value chain and can be integrated into the existing IT infrastructure using interfaces. This helps cut the administrative burden to the bare minimum.
Preventing the collapse of supply chains
If suppliers are faced with slow or irregular payments from their customers with only uncertain and expensive financing options available, the goods and services they supply are likely to cost accordingly. On top of this, corporate targets concerning working capital management are difficult to maintain under such circumstances. As a result, the suppliers' customers are exposed to a non-negligible operational risk, as supply chains become less reliable and can collapse if individual participants become insolvent. This is a risk that remains material due to the expected backlog of corporate insolvencies.2
At best, supply chain finance programs need to be in place before a crisis occurs, especially at a time when uncertainty about future developments is particularly high. In the event of a crisis similar to the current Covid-19 pandemic, it is critical to ensure that suppliers have access to sufficient liquid funds. With supply chain finance programs already in place, it is possible to react flexibly to crises, for example by increasing the programs’ scope. This results in invoices being paid in one to two weeks instead of the two to four months often seen in practice. Buyers, in turn, benefit from being able to extend payment terms longer than usual, allowing them to manage and improve their working capital more actively.
How supply chain finance is gaining in importance
While this form of financing had already seen a popularity surge after the 2008 financial crisis, companies were again alarmed about the potential impact of late invoice payments last year, at a time when access to liquidity was critical to many companies' survival due to, in part, slumping sales.
This fueled the rise of supply chain finance solutions, through which larger buyers aimed to protect their own suppliers from liquidity shortages, even insolvency, by setting up more and larger financial facilities for them. Those facilities offered their suppliers faster access to more and cheaper financing based on the creditworthiness of the buyers. As a result, money can be borrowed at a lower margin than if the company were to borrow the money directly from its own bank.
Conclusion – Supply Chain Finance expands the entrepreneurial wiggle room, and not just in times of crisis
The providers of digital supply chain finance platforms offer high levels of flexibility. How intensively the programs are used depends on when companies need additional cash. Indeed, this is no longer a relevant issue only in times of crisis. For instance, programs can be activated for individual invoices in a specific time period or be used for a continuous stream of invoices. This is a strategy that should not only be used during crises, but also beyond that for additional flexibility when, for example, devising a purchase strategy. This allows for seasonal liquidity shortages to be compensated or new purchasing strategies with an increased number of units to be implemented. Over the entire year, incoming and outgoing payments balance each other out to a certain extent, creating greater planning confidence with regard to liquidity.
Source: KPMG Corporate Treasury News, Edition 116, November 2021
Authors: Börries Többens, Partner, Finance and Treasury Mangement, KPMG AG; Julian Fisahn, Manager, Finance and Treasury Mangement, KPMG AG
1 The Global Treasurer, „Covid-19 turbo charges take-up of Supply Chain Finance” (18 October 2021)
2 Technik+Einkauf, „Was tun bei einer Lieferanteninsolvenz?“ (12 May 2021) [“How to deal with supplier insolvency?”]
Partner, Financial Services, Finance and Treasury Management
KPMG AG Wirtschaftsprüfungsgesellschaft