The Post Covid-19 Supply Chain Finance Opportunity

Steve Taplin & Kevin Day discuss how Supply Chain Finance can drive post lockdown economy

As governments start to ease lockdown restrictions, many of us are looking to the future and a post Covid-19 economic recovery phase, be that a “bounce back” V-shaped, L-shaped, W-shaped or any other shaped recovery that economists can imagine. These have been unprecedented times with massive uncertainty for businesses, both large and small. 

"According to Chain Store Age magazine, payment delays down by 50% against the same period last year."

Some businesses have effectively hibernated by cutting costs and laying off staff or using government furlough schemes. Others have limped along, doing their best to keep active and navigate their way through the crisis. And then there are the businesses that have thrived as the general populace has adapted to new ways of working, shopping and communicating. If only we had all invested in Zoom before the crisis ensued!

One group that has been booming is grocery retailers, in particular, the big supermarket chains. In times of economic stress, cash preservation is the customary business mantra, with companies holding on to cash for as long as possible. Contrary to this standard business practice, many major retailers, such as Morrisons, Sainsbury’s, Aldi, Walmart and Tesco have pledged to pay suppliers faster; this is to improve production volumes and help with their suppliers’ cashflow.

A recent article in on-line magazine Chain Store Age, reported that grocery chains are paying suppliers faster, with payment delays down by 50% against the same time last year. Recent analysis from Creditsafe shows that DBT (Days Beyond Terms) is falling in the grocery sector. This is the number of days that companies are paying beyond the agreed terms, which shows a reduction from five days to three days.

A positive story for SMEs selling to these large customers. But what will happen when we move out of these COVID-19 times? Will these supportive measures expire, leaving businesses with a gap in their working capital needs and a dependence on short payment terms to compensate?

These suppliers may well have a number of opportunities to optimise their working capital and manage their emergence from business lockdown to business growth.  But only if they are aware of those opportunities.

How to pivot from invoice finance to supply chain finance?

One answer is Supply Chain Finance (SCF). Suppliers join their buyer’s Supply Chain Finance programme and can obtain immediate payment of invoices to that buyer for a small discount charge against the value of the invoice. The cost of financing is leveraged off the credit worthiness of their customer, which generally means a cheaper proposition compared to other forms of finance. The supplier can decide when invoices are paid, depending upon their cash needs.

Supply Chain Finance is becoming established around the globe, and is perfect for emerging markets where credit information is scarce, but where financing risk can be centred on the larger corporates that often sit at the heart of supply chain ecosystems.

Traditional invoice finance providers are in a unique position to utilise their receivables management and finance skills to address this need. In many cases, these lenders already have the technology at their fingertips and pivoting from general invoice finance to supply chain finance is easily achievable. Certainly, for users of our own LendScape software platform, we have remarked on a growing number of providers offering both Supply Chain Finance alongside other forms of receivables finance. These lenders are perfectly placed to seize upon emerging opportunities as economies begin to recover.

Providers of buyer-centric Supply Chain Finance programmes should also view the suppliers as potential users of invoice finance for invoices that fall outside of the buyer’s SCF programme. Ultimately, any financial solution that can convert unpaid invoices into cash, would be invaluable to any business.

Open accounting - the new way to unlock funding? 

With the increasing use of cloud-based accounting software, a lender’s ability to connect digitally with buyers and suppliers to obtain collateral data has never been easier. Post Covid-19, will there be a general acceptance that sharing sensitive data with your bank is a necessary step to unlocking funding? Are we entering a new “open accounting” world, for the benefit of lenders and businesses alike?

Liquidity for small and medium size businesses will be a key part of the global recovery story. Supply Chain Finance can be an important financing tool as countries rebuild their economies. Greater transparency and digitalisation can unlock the potential to provide more finance to support businesses and to drive economic growth.

Written by:

Kevin Day,CEO, HPD LendScape

Dr Steve Taplin Managing Director, HPD LendScape