Since the start of the pandemic, companies around the world have increasingly turned to supply chain finance to stave off liquidity issues and keep trade moving. But while governments, banks and funding platforms have all played their part in fulfilling this demand, more can be done to help businesses whose financing needs remain unmet. Felix Thompson reports.


When the pandemic struck last year, companies across the globe were forced to confront dramatic changes in consumer demand, challenges in logistical supply chains and looming financial jeopardy.

In a report released in July 2020, credit insurer Euler Hermes predicted that Covid-19 would see firms’ liquidity needs leap to a record high of US$8tn globally, up by US$140bn, due to payment delays and an inventories surge.

In some parts of the world, the damage to businesses was, to a certain extent, lessened by the swift roll-out of sizeable support packages from governments and public finance institutions.

But industry figures say that companies looking for short-term funding from the private sector also saw a rise in credit costs, as growing numbers of firms began to draw on revolving credit facilities or put in requests for loans.

Arpana Amin, Emea trade payables product head for treasury and trade solutions at Citi, tells GTR that the cost of credit reached levels not seen since the financial crisis in 2008, with the effects being felt most acutely by SMEs lacking a credit rating.

Against this backdrop, she says that “supply chain finance proved to be an extremely attractive and suitable programme for such companies to get access to liquidity”.

While supply chain finance (SCF) programmes vary in structure, they typically involve a financial third party paying a supplier’s invoices early – generally at a discount – while granting the buyer extended payment terms, maximising their working capital.

Banks such as Citi provide SCF to companies through their own programmes directly, or in other instances through multi-funder platforms such as Taulia, PrimeRevenue and many others.

Both banks and platform providers reported that demand for SCF continued on an upward trajectory last year following an initial jump in the early months of the pandemic.

Working capital technology solutions provider Taulia said in an April 2020 report that early payment volumes across its platform increased by more than 200% month-on-month in March, while new supplier adoption rose by 178% in that time.

The company said those figures reflected the fact that small businesses were looking for “ways beyond traditional bank lending to access financing to overcome cash flow gaps and obtain working capital”.

Similarly, Atlanta-based SCF provider PrimeRevenue said that the proportion of invoices traded for early payment rose from 77% in January to 93% in March last year. It also attributed the steep rise to the impacts of Covid-19, as suppliers’ demand for cash surged due to a global need for liquidity.

The company tells GTR that across the whole of last year more than 5,000 new suppliers were onboarded, while from March to December 2020, suppliers consistently received advances on 85% of available invoice dollars.

Bob Glotfelty, vice-president of growth at Taulia, tells GTR that while demand varied from sector to sector, total use of the company’s platform and net volumes remained high throughout last year – predominantly driven by consumer goods and retail businesses – following a “big spike” in March and April.

After the initial months of the crisis, some companies were “flush with cash” from cheap government loans and so less in need of SCF support, Glotfelty says.

At the same time, businesses in struggling sectors, such as the automotive industry, saw their financing volumes on the platform decrease due to declining sales volumes in the first wave of the crisis.

But in many sectors, large corporate buyers rolled out SCF programmes in new geographies in a bid to help struggling suppliers, both because they wanted to do the “right thing” and because they “knew that losing a critical supplier could shut down their whole production”, Glotfelty adds.

The picture was similar at PrimeRevenue, with the platform’s global head of sales, Brian Medley, telling GTR: “We saw record expansion in our existing client base last year, as buyers wanted to grow SCF to their suppliers already in the programme, or to a broader number of suppliers – particularly small and medium ones, who felt the effects of the pandemic acutely.

“We brought in thousands of new suppliers across 50 countries, representing billions of dollars added into the platform.”

Vilhelm Otterheim, a sourcing manager for SCF at Swedish grocery, retail and pharmaceutical company ICA Group, says the product became an increasingly important tool for businesses such as his in the throes of the crisis.

ICA Group’s core business is in food across Sweden, where – with approximately 36% of the grocery retail market share – it serves thousands of independent store owners by sourcing and buying goods both locally and globally. The company also runs a grocery subsidiary in Estonia, Lithuania and Latvia.

Otterheim says that the fresh food and confectionary suppliers the company sources from – “everything from candy to fresh fish” – were struggling in the initial months of the pandemic due to restaurants closing down, or because of restrictions hindering their ability to export.

As a result, ICA grew its participation on the PrimeRevenue platform and saw a rise in its use of SCF last year. Having made a significant effort to reach out to suppliers, he notes that several large and small companies joined the SCF programme.

“Quite a lot of our supplier base, especially in the beginning, contacted us to say they are in real stress… Apart from ICA trying to buy more goods from them, we introduced them to SCF to boost their cash flow,” Otterheim adds.


Evolving bank revenue pools

On the funding side, banks showed a willingness to roll out SCF to corporates despite reining in appetite in other areas, such as trade finance.

A report released earlier this year by management consultancy firm Oliver Wyman and development finance institution CDC, drawing on data from Coalition Greenwich, details how global revenues in trade finance fell 15% in 2020 – nearly twice the reduction in global trade flows.

“Commercial banks, understandably concerned about risk, tightened their risk appetite and found that as a result of the shifts in trade flows, many of the business opportunities they pursued before the pandemic had declined,” the report reads.

As such, analysts say that banks saw their revenue streams change last year, with major lenders profiting from a continuing shift to open account financing solutions.

One of the authors of the report, Martin Sommer, a partner at Oliver Wyman, tells GTR that in the large corporate segment, global receivables and SCF revenues saw low single-digit growth while trade finance “shrank significantly”.

He adds that the firm estimates that overall revenue from SCF – including both receivables and payables finance – grew 3% globally last year within the corporate and institutional banking sector, having risen 2% in 2019.

Echoing these findings, major banks in the space note that SCF has continued to act as a source of reliable profit in the last year and a half.

Daria Johnen, HSBC’s global product head for SCF, says that the lender had a “very successful” year in payables finance, with the product experiencing substantial growth in a few key markets in particular, such as China and India.

“Payables finance was probably one of the instruments that carried a lot of the weight as the finance vehicle for smaller suppliers, who lacked access to working capital,” she says.

Johnen adds that the bank saw an uptick in demand from suppliers that had previously onboarded but rarely used the programmes, as well as suppliers that had been invited but never joined.

At Citi, Amin similarly suggests that the burgeoning demand seen for SCF last year has continued into 2021. “We’ve seen a 25% increase year on year both for the number of invoices that have been uploaded through to our platform, as well as the actual amount of those invoices.”


DFI involvement

Development finance institutions (DFIs) have also played a critical role in providing liquidity, with their support focused on companies in emerging markets. For many of these institutions, SCF is a relatively new instrument.

The Asian Development Bank (ADB) has spent the past few years setting up its SCF programme, partnering with private sector lenders such as HSBC and Standard Chartered in emerging markets across the region.

Steven Beck, head of trade and SCF at ADB, says that it was a “bumpy road” to get the product up and running, but that the bank now has “clarity over the different SCF products, as well as our risk acceptance criteria and procedures. Off the back off that, we’ve seen real growth in our business.”

In 2020 the bank provided roughly US$250mn in SCF support to countries across Asia, with demand largely coming from the pharmaceutical sector, while requests were also made directly to the bank from garment producers in South Asian nations including Bangladesh and India.

Meanwhile, in the first five months of 2021, the bank has seen a 500% growth in SCF volumes from the same period last year, albeit from a fairly low level, with payables financing representing the dominant product.

“Over the next two or three years we expect to see strong growth in our SCF business,” says Sunil Mascarenhas, an SCF specialist at ADB.

Elsewhere, other multilateral development banks such as the European Bank for Reconstruction and Development (EBRD) and the African Export-Import Bank (Afreximbank) have also set in motion plans to ramp up their SCF offerings.

Afreximbank and tech-based working capital solutions provider Demica struck a partnership in the early months of 2021 to roll out a new SCF platform across Africa, with the fintech company agreeing to license its technology platform to the bank on a white-label basis.

While Africa’s share of global SCF transactions stands at roughly 1%, Kanayo Awani, managing director of Afreximbank’s intra-African trade initiative, says she sees a “favourable outlook” for the business as a result of ongoing economic development and the implementation of the African Continental Free Trade Area, which will increase the need for cross-border supply chain financing.

Plans are also afoot at the EBRD to drive take-up of SCF across emerging markets in Europe.

Maria Mogilnaya, a sustainable finance banker at the EBRD, said in 2019 that large buyer companies such as France’s Carrefour had started to push for buyer-led SCF solutions in Europe, but were often forced to turn to big banks at home due to a lack of SCF availability in local markets, such as Armenia.

In response, she said the EBRD would look to identify if local lenders were in need of assistance, whether through “specific know-how transfer, capacity building,” or by offering guidance on the use of technology.

In one sign of its progress in the SCF space, the EBRD said in November 2020 that it was preparing to deploy SCF to companies of all sizes in Turkey in response to the Covid-19 crisis.

The bank said at the time it would “join forces” with other financial institutions in order to provide higher amounts of financing, while offering consultancy services to Turkish companies in a bid to boost their digital capacity.

The ADB has also identified the need to expand its SCF programme network by drawing in local lenders across emerging markets in Asia that currently lack the necessary experience, expertise and systems.

After assessing which local banks across its trade finance network were “ripe” for SCF, Beck says it has now started engaging in deep-dive capacity building and training for employees at some of these local lenders.

Yet, regulatory challenges remain. “In many countries, such as Vietnam, Pakistan and Cambodia, we have been talking with officials to help enable regulation so the SCF product becomes viable. There are a set of identifiable regulations and best practices which need to be adopted by these countries, and part of our work involves technical assistance programmes where we engage central banks and regulators,” says Mascarenhas.


Going deeper

Ultimately, despite the reported growth, interest and appetite for SCF amongst banks, platform providers and DFIs, there are ongoing concerns that financing is still not reaching the smallest of companies at the very end of supply chains – where it is most needed.

Taulia notes in an April blog post that most large corporations will buy from thousands upon thousands of different suppliers, but that regardless of industry or region, it tends to see the largest 1% of suppliers typically making up about 60% of expenditure.

Given the costs and challenges of onboarding smaller suppliers, the company says that the remaining 40%, or the “long tail”, is often neglected by banks and other financiers.

Likewise, management consultancy firm McKinsey notes in a 2020 report that SCF has often focused on larger, well-financed multinational corporations and their supply chains, whereas smaller and less well-financed enterprises face barriers to access.

“Many catalysts – including digital delivery, fintech innovation, industry utilities, blockchain, and API technologies – could stimulate cheaper and more accessible SCF, but change has been slow,” it adds.

Nonetheless, growing access to data and new technology are playing a vital role in driving financing into the deeper tiers, with lenders increasingly looking to harness new solutions to make SCF more accessible and affordable.

The ADB, for one, says it is currently working alongside a fintech, a legal firm and regulator to bring out a proof of concept for a deep-tier supplier finance programme later this year.

Elsewhere, commercial banks are showing signs that they’re more willing to work with fintech companies to speed up onboarding processes and provide better access to financing for smaller suppliers.

Working capital fintech firm Demica has carved out a role as a technology provider for SCF programmes run by financial institutions including ING, Lloyds Bank and BBVA.

Meanwhile, last year was significant for Taulia, with the fintech striking partnership agreements with the likes of JP Morgan and UniCredit.

Speaking to GTR, Taulia’s Glotfelty says that financial institutions are increasingly looking to use the platform, and argues that the bank-fintech partnership model is ultimately the future of the sector.