Historically, supply chain finance (SCF) has often been limited to larger suppliers. That is starting to change. Technological and marketplace developments mean financing is reaching a greater number of smaller suppliers than ever before, bringing lower cost working capital tools to firms previously struggling with access to finance. This trend increases the level of funding required to support a programme, but for investors seeking an asset class that promotes financial inclusion and social good, SCF has emerged as a unique opportunity.


The global trade finance gap is large and growing. Defined as the total demand for trade finance facilities not being met by the market, the gap increased from US$1.5tn to US$1.7tn between 2018 and 2021, according to research by the Asian Development Bank.

It is typically smaller companies, often in developing markets, that have the most difficulty accessing trade and supply chain finance. Rejection rates rose to record highs during the Covid-19 pandemic. Even where facilities are available, they are often not cost-effective for small and medium-sized enterprises.

Historically, that was mostly true of SCF, with programmes being made available to suppliers if they were within the top 5% by spend for a given buyer. However, that is rapidly changing, with SCF increasingly being expanded to smaller suppliers that would otherwise struggle to access facilities. For that reason, the product is emerging as a powerful tool for financial inclusion.

“It is a product that really lends itself well to supporting financial inclusion, because it gives suppliers access to finance based on the credit risk and pricing of a strongly rated large corporate or mid-cap firm,” says Duncan Lodge, managing director, global head of traditional trade, EMEA head of trade and SCF product at Bank of America.

“That means smaller companies are accessing financing at pricing that is typically much lower than they would be able to achieve themselves under their own facilities. Not only that, it doesn’t normally create any debt on their balance sheet.”


The rise of technology

One of the reasons SCF providers traditionally limited their SCF programmes to larger suppliers was the time and cost associated with onboarding participants. It may have proven more cost-efficient for a multinational buyer to target a few hundred key suppliers even if that meant leaving out thousands more.

Funders may also face tough regulatory requirements around customer due diligence, which means they will typically need to demand evidence from all suppliers that their business is legitimate. This can prevent a substantial barrier to streamlining, regardless of how slick or technology-driven the platform on-boarding process may be. If suppliers are located in numerous different markets around the world, that becomes even more of a challenge.

Against that backdrop, however, digitalisation of previously manual processes has accelerated in the trade finance industry. Although a growing trend for several years, adoption of digital technology has ramped up, driven by the change in working practices brought about in response to the pandemic. As a result, banks and corporates are able to bring greater speed and efficiency to the supplier onboarding process, introducing automation around document handling and compliance checks.

Technology is also changing the shape of the market, as platforms can also integrate solutions from other third-party providers, from data analytics to funding, creating an ecosystem around their SCF offering. If companies have all suppliers on platform, they can start to look at new opportunities to unlock additional value, through new products and processes. These ecosystems connect multiple data sources, which can be used to bring new insights. “We’re now at the point where this is becoming reality,” Lodge says. “It is now becoming possible to take that ecosystem approach, using data from multiple sources to enrich the onboarding process and automate the risk management process in a scalable way.”

Looking ahead, the platform model could also unlock new ways of financing suppliers, Lodge adds. “If you’ve onboarded the suppliers and have access to all the data coming through the platform, you could be able to start financing earlier in the procure-to-pay cycle. You’ve seen how suppliers interact with the buyer, and you’ve seen the likelihood that a purchase order turns into a pro forma invoice, and then to an approved invoice that is paid at maturity. How do you use this information to provide finance at the purchase order stage?”


Investing in SCF

Though hugely beneficial in terms of financial inclusion, the expansion of SCF programmes to large numbers of smaller suppliers brings challenges of its own. As more financing is made available to participants, the funding requirements for the programme increase, potentially to a point where no single bank or funder can fully meet demand on its own.
Lodge suggests that an “ecosystem made up of banks and non-banks” is likely required to ensure funding remains robust while SCF programmes grow and scale. “Particularly if you start to look at products like purchase order financing, you end up with a large volume of financing required,” he points out.

“This is where non-bank investors can really play an important role.”
Some investors have been buying into SCF programmes for many years, but in other cases, familiarity with SCF as an asset class is still growing. There are several reasons why investors are increasingly drawn to the product: it presents an opportunity to contribute to financial inclusion while buying into investment-grade programmes, typically carries a low risk of default, and can generate an attractive return versus comparable investments. The range of interested parties is broad, spanning from institutional investors to funds to insurance companies.

In practice, there are numerous ways investors can participate in funding a programme. In some cases, they could join SCF platforms directly as funders, while others may prefer to manage their investment through master risk participation agreements used to buy and sell trade-related assets in the secondary market, or by purchasing notes containing securitised receivables. As Lodge explains: “Having that flexibility is important to ensure that you can maximise your investor reach and maximise the funding availability under a programme.”

Ultimately, attracting greater investment in SCF programmes generates a virtuous circle. Programmes are able to extend financing to more suppliers, which in turn makes a programme more appealing in terms of financial inclusion and so more attractive as an investment.


Driving ESG improvements

Companies are well positioned to drive environmental, social and governance (ESG) improvements across supply chains. Campaigning from non-government organisations, changes in consumer spending and regulatory reforms mean ignoring ESG is not an option for banks and corporates. Multinational companies are expected to carry out ongoing due diligence on their suppliers in order to reduce carbon emissions and drive positive social change.

Among trade finance products, SCF is uniquely placed to address these challenges. “Alongside using SCF as a tool for supporting smaller suppliers that haven’t previously had access to finance, you can also specifically target minority-owned enterprises and women-owned businesses, for example,” Lodge says. “You can have specific tranches of suppliers that are prioritised based on their ESG credentials, and these credentials can include the ‘S’ and ‘G’, alongside the ‘E’.”

Some buyers are introducing incentives to SCF programmes, meaning suppliers that meet certain targets can access preferential rates. As a result, these programmes are driving improvements and, by virtue of their financial and social inclusion, generating ESG-linked receivables that may be attractive to investors.

At the same time, a technology-driven ecosystem approach means external providers focused on ESG can be integrated into programmes to gather and analyse information generated from transactions. This can be fed back to a buyer, helping it understand the carbon impact of its supply chain, decide where to target improvements, and ultimately improve its overall ESG standing.