Going beyond a marketplace model for working capital: Funding a supplier’s suppliers

Do large anchor companies in the Automotive, Technology, and Consumer Brand or other global industries want to establish their own marketplace for working capital that can extend beyond their direct supplier relationships and go deeper into the supply chain? That is a question worth asking, because certainly the technology is there to do so.

Today, early-pay solutions come in many varieties:

  • Virtual cards, or v-cards, continue to experience strong growth, given the push by payment technology companies to convert suppliers from checks to card and share rebates back to the anchor company. V-cards have been growing across industry verticals, including healthcare, government, manufacturing, media, insurance/financial, etc. These rebates can range from 100bps to 150bps given interchange fees. The v-card is considered a long tail solution.
  • Some AP automation or source-to-pay vendors offer dynamic discounting as part of their platform suite. Some vendors, such as Taulia, Coupa, Basware, etc. extend this and work with supply chain finance arrangers to structure third-party funding solutions, commonly referred to as supply chain finance (SCF).
  • Bank-driven supply chain finance programs are typically focused only on very large suppliers, given the KYC costs (know your customer) and scale requirements.
  • C2FO pitches to large enterprise customers a Treasury Cash Optimization auction tool to enable suppliers to initiate a request for early payment based on their marginal cost of borrowing.

All of the solutions above still only deal with the direct suppliers of the anchor company, not the supplier’s suppliers.

As one banker commented, “When we approach anchor companies and offer their supply chain ecosystem a standard financing solution, we often find that their largest tier 1 suppliers don’t need it. They either say they have their working capital needs sorted out or are cash-rich — it is the next-tier of suppliers that need financing, the smaller outfits embedded deeper in the supply chain.”

So back to the question. Can we develop solutions that extend beyond tier 1 suppliers and more importantly, do anchors care?

One idea is for anchors to reward tier 1 suppliers for establishing programs and meeting adoption thresholds, especially in emerging markets. The rewards come in price incentives on the funding cost for the tier 1 supplier.

For example, in the graph below, 3M has their upstream (suppliers) and downstream (customers), and it can ensure their upstream suppliers all have programs and have incentives to do so.

Source: Hofmann Wetzel (2018) WCM Study

Another idea is enabling the anchor to build a unique marketplace for their total supply chain using a smart token system, with a major emphasis creating liquidity deeper in the supply chain, especially in markets with poor liquidity. For example, many countries, such as Indonesia, Brazil, Malaysia, Vietnam, etc. have very low penetration of factoring or other asset-based lending products, and interest rates are typically very high.

There is obviously much complexity in building this type of solution. Designing the business rules, the smart contracts, the apps and functionality, API marketplace, etc. is not trivial. Bringing in the network of banks, third-party funders, anchor supplier’s suppliers, etc. is not trivial.

But with the notion of ESG (environmental, social and governance issues) gaining credence, and liquidity being a valuable commodity in an age of the Central Banker, there is potentially huge value in extending programs far deeper into supply chains. Anchors can benefit by cash flow optimization tools, better contractual supply chain pricing, and driving ESG sustainability goals.

Or that’s the vision anyway.

Happy to exchange views on the subject. I can be reached at dgustin (at) globalbanking.com

David Gustin runs Global Business Intelligence, a research and advisory practice focused on the intersection of payments, trade finance, trade credit and working capital.

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Voices (2)

  1. Tony Brown:

    The International Finance Corporation (part of the World Bank) has provided over $50B of support to SMEs in developing countries selling to anchor customers who might be suppliers of the tier 1 suppliers you refer to.

    Though their trade finance program, the IFC provides guarantees local banks in the exporter’s country to encourage the extension of longer credit terms to overseas buyers and early funding against receivables/payables. They also have programs that provide lower cost funding for transactions that meet sustainability and Climate Change criteria. https://www.ifc.org/wps/wcm/connect/industry_ext_content/ifc_external_corporate_site/financial+institutions/priorities/global+trade/gtfp

  2. Manohar G Rajput:

    We’re Indian based Trade Finance Arrangers nd serve many sector intrested in knowing, understanding more, nd associating with your prestigious organization

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