The global pandemic and subsequent economic crisis created a liquidity shock for corporates as shipping and air freight supply chains around the world ground to a halt. Stringent lockdown measures aimed at curbing the spread of the virus compounded the issue by causing a slump in consumer demand.
Consequently, suppliers and buyers across industry verticals have faced numerous challenges in getting their products to their respective markets amid this unprecedented global disruption. The prolonged nature of lockdown restrictions has stretched working capital. In response, demand for supply chain finance - also known as reverse factoring - has soared as corporates look for ways to sustain their business.
As the world emerges from the pandemic, supply chains are coming under further strain with demand outstripping supply across key commodities and products. From a shortage of ginger at the start of the year (which saw the price of ginger more than quadruple in supermarkets) to the more recent scarcity of microchips (which has disrupted the global new car market, for example), buyers and suppliers are facing the challenge of ensuring the smooth exchange of products along the value chain.
High profile corporates are therefore turning to supply chain finance as a way of supporting suppliers by optimising their working capital. For example, energy giant Saudi Aramco, the third most profitable company in the world, recently called for tenders from financial institutions and technology companies for a supply chain finance solution. According to the Wall Street Journal, Aramco pays between US$500m and US$2bn in supplier invoices a month.
What is supply chain finance?
Even before the pandemic, corporates around the world were embracing reverse factoring as an alternative source of capital to free up cashflow without impacting current lending facilities.
Supply chain financing enables a third-party finance provider to pay debts owed by a buyer to its suppliers at a slight discount. However, these payments happen sooner than the buyer would normally facilitate.
This speed and efficiency supports positive cashflow throughout the working capital cycle. It also unlocks business value and operational efficiencies for both buyers and suppliers by providing access to inexpensive working capital finance and greater certainty. The buyer then pays the third-party finance provider at a later date, when it has the cash flow to do so.
Businesses worldwide began leveraging this alternative finance solution to build and strengthen favourable relationships with suppliers by providing them with a mechanism for early settlement, which also created opportunities to take advantage of early settlement discounts.
While South African corporates lagged the global adoption trend, the challenges posed by the pandemic’s economic impact has strengthened the case for supply chain finance and driven demand.
The leading supply chain finance platforms are able to process and analyse large amounts of data according to criteria such as payment history, relationships with other businesses, and balance sheet strength.”
Supply chain finance uses AI to analyse supply chain and credit data
Technological advances have helped to facilitate this demand by providing a streamlined process to apply, access and manage supply chain finance. Financial services providers have invested significant time and resources to develop or procure secure, intuitive, simple-to-use supply chain finance platforms that offer a high level of configurability and flexibility.
“Businesses with large numbers of suppliers and working capital challenges are acknowledging the need to tackle the issue in a different way,” explains Peter Rattey, Head of Treasury Sales at Investec Bank. “They can do so because the technology now allows it. The leading supply chain finance platforms are able to process and analyse large amounts of data according to criteria such as payment history, relationships with other businesses, and balance sheet strength.”
Supply chain finance solutions give businesses the ability to collect and analyse this supply chain and credit data quickly and intelligently, which creates numerous possibilities to better manage working capital and support the vendors they rely on, especially in light of tight supply lines.
“Using built in AI, these solutions are also able to provide real time monitoring and analysis of client behaviour, any deviation from this is flagged and therefore this offers a safe and dynamic way of managing working capital,” adds Rattey.
These solutions easily integrate with existing financial systems and provide full multi-party transactional visibility and accurate reporting. The intuitive interface and usability require minimal training, and ultimately empowers businesses to take charge of their supply chains.
In addition, by having these solutions backed by a reputable, well-capitalised financial institution provides comfort for both suppliers and buyers alike.
“The dynamic and complex nature of global and local supply chains today means that traditional tools are less useful for managing the value chain. As such, the case for supply chain finance is as strong as ever and, thanks to the technology now available, all businesses can benefit,” Rattey concludes.
About the author
Patrick writes and edits content for Investec Wealth & Investment, and Corporate and Institutional Banking, including editing the Daily View, Monthly View and One Magazine - an online publication for Investec's Wealth clients. Patrick was a financial journalist for many years for publications such as Financial Mail, Finweek and Business Report. He holds a BA and a PDM (Bus.Admin.) both from Wits University.