Supply Chain Finance to help avoid crisis for smaller suppliers

supply chain finance

Experts from the Supply Chain Finance Observatory at the School of Management of Politecnico di Milano, Federico Caniato and Antonella Moretto, and a director of the MIT Center for Transportation & Logistics, James B. Rice, Jr. have pooled their knowledge to explain in the Harvard Business Review why they feel a financial crisis is looming for smaller suppliers.

They say a crisis, “less visible than the financial distress wrought by the Covid-19 pandemic,” is sitting  deep within supply chains and is destabilising small and medium-sized enterprises (SMEs). It could, they say, add to the woes of the global economy.

“… their current plight is exacerbated by punitive payment terms that large companies began introducing in the aftermath of the 2008 financial meltdown. These practices, in combination with the pandemic crisis, have starved countless SME suppliers of working capital and threaten to trigger a tidal wave of failures.”

They describe the practices during the financial crisis as, “banks attempting to reduce their exposure to credit risk either wouldn’t lend to SMEs or did so at usurious rates, further undermining the financial viability of SMEs.”

What can be done?

The article suggests a few things that can be done, and which suppliers can do for themselves, to help avert a crisis. These include:

Governments should provide financial support and do more to inject cash into the financial system with safeguards to ensure that the liquidity goes beyond large firms and reaches SMEs.

Large companies can assist by identifying and supporting suppliers at risk, paying them earlier or paying for future orders.

Using supply-chain-finance solutions to improve the access to credit for the supply chain’s weaker players, especially SMEs.

Suppliers can help themselves through a more rigorous approach to managing their working capital, and using innovative SCF solutions, including a new generation of digital solutions, to provide sources of credit.

The article explores each in more depth and looks at why smaller suppliers have become the more vulnerable parts of the supply chain.

Coronavirus Response

In a Coronavirus Response series of articles, Spend Matters has gathered content from our analysts, our news coverage and guest contributors from providers of procurement technology to help firms learn about vendors that can help in a crisis. (It also highlights the firms that have made parts of their offering free to use during the crisis, like HBR which made its coronavirus coverage free for all readers.)

One of those articles ‘what should the business focus on in times of crisis?’ centres on the subject of keeping liquidity going as a priority, because “it means we can protect as much of the infrastructure of companies as possible so that businesses will be able to pick up again and return to profitability.”

“As the 2008 global financial crisis taught us, the massive pull back on global liquidity strategies likely did more damage than the global crisis itself, because hundreds of thousands of suppliers banked on it. So during this crisis the message is to honour that liquidity flowing through the supply chains, which is crucial for payment flow which can significantly improve the working capital base,” said Christian Lanng of Tradeshift.

And, as the HBR article states, we should also look to novel solutions such as dynamic discounting (buyers offering early payment in exchange for discounts), inventory finance (loans with inventory as a collateral), purchase order finance (loans backed by purchase orders), and invoice trading (platforms for selling receivables).

Look to innovation

One innovative solution highlighted in our Response series was a fintech initiative to finance payroll, pay employees, avoid bankruptcy, keep economy going. A very interesting idea about how we can finance suppliers more efficiently, and allow the banks to raise money on the London capital markets to pay the wages of the threatened companies, to keep the wheels of the economy turning.

We also shared how B2B payment companies can expand supply chain finance solutions and play more actively in the early pay finance space, on the premise that those who are involved in receiving payable files, can certainly add early pay finance. Related to this 4 Techniques to Manage the Risk When Advancing Payments to Suppliers should also be of interest.

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