SCF’s Role Amid Uncertainty
Supply chains are critical to the global economy and recent events have demonstrated the need to minimise disruption and keep funds – as well as goods – moving. By allowing financial institutions to step into the payment cycle, supply chain finance gives corporate treasurers a useful tool to optimise their working capital, especially when times are unpredictable.
Shortages and shocks have been a feature of the business landscape for many years, but if recent years have shown anything, it is how supply chains – and the finance that underpins them – are crucial to keeping the wheels of the global economy turning.
Now, as the world moves on from the pandemic and the disruption it caused, inflation and interest rates have been top of mind for treasurers as well as the pressing need for them to manage their liquidity effectively. The cost of borrowing looks set to fall now that central banks around the world have begun a rate-cutting cycle, and SCF is increasingly being viewed as an attractive option for improving cash flow and the use of working capital.
In recent years, a number of events have defined the operating environment for companies, including the disruption from lockdowns, increased shipping and energy costs, and shortages with critical items such as semiconductors. Added to this, major geopolitical events, such as the war in Ukraine, have added to the uncertainty and the need to expect the unexpected.
Global issues impact SCF
For those who are in the business of financing global trade, such issues have framed their priorities. Greg Hurst, Managing Director, Head of Origination, Supply Chain Finance at MUFG, comments on the current state of SCF: “The major trends that are happening right now in SCF are an extension of what is going on in the world”. He adds that geopolitical uncertainty and the knock-on effects of Covid are just some of the factors that have impacted global trade, and its financing, in recent years.
More recently, the outcome of the US election has been weighing on the minds of many business leaders - and corporate treasurers - and what the ramifications of a Trump presidency will mean in terms of trade protectionism and tariffs. In many respects, uncertainty has become the new norm for doing business, and treasurers have been mindful about how to shore up liquidity and manage it more effectively.
As a top ten global international bank, MUFG is well positioned to observe the ripple effect that major events can have on trade and supply chains. Although MUFG’s headquarters are in Japan, the bank is a significant player in the markets where it has a major presence. In the US, for example, it competes alongside other US-based banks and isn’t solely facilitating trade for companies that are either doing business out of, or into, Japan.
Given the bank’s international presence, Hurst and his colleagues are aware of how macro issues can impact the economy and disrupt supply chains. With the uncertainty in the current environment, corporates have turned their focus to working capital and the pressing need to optimise it and manage liquidity more effectively, says Hurst. This has led to an increasing interest in supply chain finance solutions. “Companies have looked to implement strategies available to them, like harmonising payment terms or reducing supplier numbers or geographies, and they are now focusing on the benefits that they can realise from their working capital,” he says.
Despite the difficulties in recent years, such as an increase in inflation and interest rates, there has still been a growing appetite for SCF. According to the World Supply Chain Finance Report 2024, which draws on figures from the full year of 2023, there was a global increase in terms of both the global volume of SCF, which is also known as reverse factoring or approved payables finance, and of the funds in use.
The global volume was estimated at US$2,347bn, which was a 7% increase on the year before. Some regions showed particularly strong growth, such as Asia where there was a 17% growth from US$415bn in 2022 to US$486bn in 2023. And in Europe there was 8% growth to US$577bn in 2023 from the year before.
In terms of the funds in use, the report also showed there was global growth in 2023, with a figure of US$916bn, which was up 7% on the year before. Again, Asia saw 15% growth in its funds in use, from US$134bn in 2022 to US$155bn in 2023. And in Europe, there was a 7% growth for funds in use between 2022 and 2023, from US$257bn to US$275bn. Despite the challenging macro environment, such figures demonstrate the continued appetite for SCF.
SCF and its ripple effects
When a financial institution steps in to provide supply chain financing, it gives both the buyers and suppliers room to breathe; suppliers get paid quicker and buyers can stretch out their payments. With the financing reaching the companies that need it, there can be a positive ripple effect for other businesses, which in turn contributes to the health of the global economy.
When the container ship Ever Given ran aground in the Suez Canal in 2021, it blocked a major shipping route and caused disruption across global supply chains. Such an event, as well as the port closures during the peak of the pandemic, showed that the movement of physical goods can easily come to a standstill if one part of a complex supply chain is impacted.
Similarly, when it comes to payment, and the financing of such transactions, businesses can be foundered if money isn’t moving throughout the economy. This is where programmes such as SCF can ensure that trading can continue without disruption.
“When a vendor joins a supply chain programme, they can get paid in a faster manner and shore up their liquidity - they are effectively using the credit rating of their buyer - and this is a powerful tool in vendor management,” says Hurst.
“Our clients view supply chain finance as a win-win”, he adds. “It provides important liquidity to vendors, and for our clients – the buyers – it enables them to extend payment terms and preserve cash flow.”
There are other solutions that can be brought into this arrangement, and Hurst explains that the bank is focused on understanding clients’ business and providing solutions that address their needs. This could be with dynamic discounting or a virtual card solution, for example. By putting such tools in place, companies will be able to provide solutions across their supplier universe.
The impact stretches further, and a broader availability of SCF can have a positive impact for smaller companies throughout emerging markets as well. This was a point emphasised by the Director-General of the World Trade Organisation (WTO) recently.
Ngozi Okonjo-Iweala commented, at a roundtable with the heads of multilateral development banks on the sidelines of the World Bank Group and International Monetary Fund annual meetings in October 2024, that SCF was critical in integrating small businesses from developing countries into global trade.
Okonjo-Iweala said: “WTO research shows that a 10% increase in the use of international factoring – the main type of supply chain finance by small businesses to secure immediate cash against unpaid invoices – can boost countries’ trade by 1%”. Also, if small and medium enterprises are able to participate in global value chains – with the help of SCF – it will increase trade and development opportunities for them and their local economies, she added.
Digitalisation and innovation
One factor that opens access to finance, and lowers the barrier to entry, is the availability of technology and the wider trend of digitalisation of trade finance. By removing the need for traditional paper-based processes, many companies will be able to leapfrog into the digital mode of financing their trading relationships. And for more established corporates, the digitalisation of trade finance, and SCF, means that massive efficiencies can be gained both in terms of resources, and of managing risk because of the improved visibility they have of their transactions.
There have been many innovations in this space, with a number of fintech companies, as well as larger financial institutions, creating more user-friendly ways of financing trade. Part of this includes the use of blockchain and distributed ledger technology (DLT), which has received plenty of attention in recent years. While the noise and hype around it may have subsided, the potential of the technology remains, comments Hurst. “There is a lot of discussion around how DLT is going to help with the visibility and understanding of where the invoices come from and the transparency with trade,” he adds.
This, combined with the developments in AI, will help with risk management. Predicting risk outcomes, says Hurst, is one area where AI can be effective and aid the decision on when and how to finance invoices or purchase orders.
Given these developments, and the other benefits that supply chain programmes can bring, SCF will continue to be an attractive option for treasurers to manage their working capital.
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