Supply chain finance has been tested by the events of the past two years – and emerged more robust than ever before.

The past 18 months have been a testing time for businesses everywhere – this is also true of supply chain finance (SCF).

A global pandemic and the high-profile collapse of a significant SCF provider might have caused even the strongest advocates of SCF to pause for thought.

Yet SCF has emerged, if anything, stronger than ever before, having risen to the challenge of funding vulnerable supply chains throughout the pandemic, seen former Greensill clients quickly refinanced, and found new applications as a way to help companies meet their environmental, social and corporate governance (ESG) objectives.


So, where does SCF go from here?

Bob Glotfelty, VP Growth at Taulia, is in no doubt. “I believe it’s going to help drive more and more value for small businesses and drive value through supply chains. It’s proven to be resilient; I think it will continue to grow rapidly, and it will help a lot of businesses throughout the world.”

Glotfelty isn’t alone. Among both users and service providers, there is a growing sense that SCF has weathered its first great crisis and is now ready to play a prominent role in global recovery.


The pandemic’s silver lining

The pandemic, terrible though it has been, was also a proving ground for supplier finance. SCF grew to maturity during the longest bull market in history (2009-2020). However, some investors and commentators were not at all sure how SCF would fare during a recession. Would banks and other funders pull out? Would supplier finance programmes be resilient enough to survive?

The answer, we now know, is that SCF did not just survive the global shock of the pandemic: it thrived.

“We saw a huge spike in demand,” says Glotfelty. “A lot of companies had a strong need for cash, right at the beginning of Covid. As a result, many different financial institutions put more money into SCF to finance them, so it proved itself during that time. I would even go as far as saying SCF was more robust than people had expected.”

What’s more, as Ali Ansari, Director for Global Supply Chain and Payables Solutions at Taulia, points out, the cost of funding did not rise to alarming levels, as some had predicted it might. In fact, for most businesses, the cost of SCF decreased substantially through the period as costs are linked to interest rates such as Libor.


Life after Greensill

Arguably a bigger shock than the pandemic to the supplier finance system was the failure of Greensill Capital, one of its most high-profile proponents. What rapidly became clear was that Greensill had extended its activities well beyond what most industry observers would regard as supply chain finance.

SCF is generally understood as Approved Payables Finance, a buyer-led programme within which sellers in the buyer’s supply chain can access finance.

It is based on:

  • Real economy transactions
  • Unencumbered buyer credit risk
  • End-to-end support

At Greensill, the definition had become sufficiently blurred to include many other questionable practices, such as loans based on ‘future payables.’

In the end, what was remarkable about the Greensill collapse was how little impact it had on SCF programmes. Those funded by Greensill were quickly transitioned to other funding providers, demonstrating both the robust nature of the product and the continuing appetite of banks and other funders for this type of asset.

Taulia, for example, uses a multi-funder structure to fund SCF transactions with the ability to shift funding across a variety of international banks. As a result, banks committed US$6.5bn into Taulia within seven days after Greensill Capital collapsed.

The combination of a technology platform like Taulia’s with multiple funding sources points the way to the future of SCF.

Technology, agility and innovation, coupled with the stability, funding, and client knowledge of banks, are forging a path for all participants in the supply chain to be confident that SCF is here to stay.

As Ansari puts it: “Banks focus on risk and liquidity, and that’s what they’re good at. They’re not so good at technology, something they’ve been trying to change for the last decade, but it hasn’t happened.

“Technology companies can bring in expertise in connectivity and provide data insights, using the terabytes of data available in platforms to facilitate digital, real-time and transactional decisioning. Banks will continue to be the main source of liquidity and risk capital but will have to work with technology companies to generate these assets.”


SCF for a better world

At its inception, supply chain finance was seen as a tool for optimising working capital – a way for corporations to free up cash ‘trapped’ in the supply chain and help their suppliers. Today, it is growing into much more than that.

Environmental, social and governance (ESG) refers to non-financial aspects that investors are increasingly considering when identifying the risks and growth opportunities of businesses. These may include a company’s energy use and conservation, business relationships and treatment of workers, accountancy transparency, or political contributions.

These factors are being monitored, not just within a company but across its entire supply chain: a blameless record at home can count for nothing if evidence of bad practice is uncovered in a supplier on the other side of the world.

Supply chain finance is one of the few ways that a business can provide its suppliers with a ‘carrot’ for good behaviour. For example, a company can offer better SCF rates based on its supplier’s ESG rating. If their rating improves, the rate for early payment gets reduced, creating a financial incentive for others to do the right thing. Examples of this approach already exist, but the potential for SCF to do much more is becoming more apparent every day.

An example of how this works in action is Bridgestone, which has set up a supplier finance programme on the Taulia platform, funded by JP Morgan. It uses the independent EcoVadis sustainability rating: the higher the rating, the larger the sustainability discount. If a supplier initially doesn’t have the EcoVadis rating, they pay the base rate temporarily until they do.

Ansari sees this as an accelerating trend. “This is a natural fit. On one hand supply chain finance programmes can create visibility on underlying transactions, which financiers can use to increase their financing of sustainable activities. On the other hand, companies with strong credit profiles can use supply chain finance to drive the right behaviour from their suppliers in exchange for getting them access to financing at attractive rates. I expect this practice to grow beyond supply chain finance into mainstream banking.”


Visibility through technology

As the digitisation of global trade continues, so the amount of data available increases. As a result, it’s now possible to examine supply chains in more detail than ever before. For Ansari, that’s the next step: deeper visibility into the supply chain, allowing better management of risk. One good example is the financing of inventory.

“We don’t yet have full use of drones, sensors and IoT devices that may provide visibility and control on movement of goods. Once we can fully leverage this technology across industries, you will see more finance becoming available at an earlier stage of trade transaction,” he says.

“Investors will feel more comfortable financing invoices before they are approved because they will know that goods have been shipped from the seller’s warehouse, and are now in control of a trusted party. The connectivity of physical and financial supply chains is going to change how we assess risk today.”

In Ansari’s vision of the future, expertise from technology providers will make finance available wherever there is activity. “ERPs, P2P platforms and digital marketplaces will be connected to investors to deliver integrated, insightful and on-demand financing in real-time; It’s already happening for consumer transactions and is destined to make its way into the world of trade and change the way we finance today.”


A brighter future

The measure of a sector’s maturity is how well it stands up to shocks. SCF has proved its resilience. It is now a mature product, ready and able to continue to provide working capital benefits to buyers and suppliers alike. But it’s much more than that. Used intelligently, supplier finance can help make the world a better place by directing finance towards ESG objectives.

Supply chain finance has come of age.


Five SCF trends to watch

  • Moving to the mainstream: SCF has faced a global pandemic and the failure of a high-profile provider – and emerged stronger than ever. Expect to see SCF become a standard tool for treasury and procurement teams.
  • Multi-financed programmes: Relying on one finance provider may not be a popular choice in the future. Instead, expect to see programmes using a range of finance options.
  • Banks and fintechs in partnership: Banks have the scale to back large programmes but not the technology to make them run smoothly. Expect banks to partner with fintechs to deliver the complete package.
  • More ESG use cases: SCF won’t just be about working capital. Expect to see supplier finance tools used to advance an ESG agenda throughout the supply chain.
  • Technology wins through: APIs can bring data directly into AP systems, while technology can use that data to make SCF decision-making faster and safer.