Published: January 01, 2000
Throughout the ages, wherever there has been trade, there has been some form of trade financing. Historians and academics have suggested that mechanisms for the financing of accounts receivable were in place in England before the 15th century.
Germany has been a leading global trade hub for decades, and the treasury departments of corporates based or operating there are familiar with a variety of financing instruments. More recently though, the increasing globalisation of economies has brought a greater degree of internationalisation to the supply chain. This development, coupled with the financial crisis, is encouraging many companies to think differently about their supply chain financing requirements. In this article, we’ll examine what supply chain financing offers, and how it is evolving to serve the new trading environment.
Over the past 40 years, the composition of the global trade market has evolved. The IMF notes that in the early 1970s, trade was largely confined to a handful of advanced economies and that together, the US, Germany and Japan accounted for more than a third of global trade. By 2010 however, China had become the second largest trading partner after the US, and today, other emerging market economies account for a far greater share of global trade.
Germany’s place in this mix remains significant. As a top five producer of automobiles and a key player in many other industries, the country is one of the world’s largest exporters. It therefore plays a significant role in Europe, with the majority of trade conducted within the region.
However the supply chain in Germany, as in many countries, is increasingly global. As the market develops and becomes more complex, effective financing solutions are increasingly being seen as vital, not only to individual businesses but to the economy as a whole. The World Trade Organisation (WTO) estimates that 80-90% of world trade relies on some form of trade finance. Furthermore, as part of its overall objective to help producers, exporters and importers of goods and services conducting business, the WTO has explicitly stated that one of its aims is to “encourage the revival of the complex links and networks involved in the trade finance market.”
Supply chain financing was first conceived by banks and providers around 10 years ago as a potentially innovative funding option for corporates and their suppliers. At the time, it met with mixed reactions, as there were alternative and more direct funding options available at relatively attractive rates.
In the last five years however, both awareness and demand for supply chain financing instruments have increased. The global financial crisis constrained the availability of credit, particularly for small- and medium-sized businesses, which meant that liquidity became even more important to treasury departments and board members. As direct lending facilities became less readily available, this led many businesses in Germany and throughout Europe to consider other effective financing vehicles, either to replace credit lines that were no longer there, or to serve as an additional source of support.
Both corporates and their suppliers have begun to discover the wider benefits that supply chain financing can offer. For the buyer it helps to free up working capital as they can readily extend their payment terms. The supplier benefits from reliability and visibility on payment streams, and often achieves financing at better rates as the finance charges are based on the buyer’s credit rating rather than on the supplier’s own position and rating.
It also provides a form of risk mitigation. By more actively supporting their suppliers, corporates can increase the resiliency and reliability of the supply chain, helping to avoid the impact of any disruption to supplies. For example, the German automotive association, VDA estimated that in 2008, the auto sector imported parts and components to the value of €52 billion, which gives a sense of how vital supplies and supplier relationships are to the industry. Suppliers are crucial to the production process, and there are examples in every business sector that have incurred tangible loss of value where crucial suppliers or supplies have been interrupted.
More broadly, mutually beneficial financing arrangements can also improve working relationships, fostering partner loyalty which can only be good for business and could ultimately result in reduced procurement costs.[[[PAGE]]]
It is clear that supply chain financing can create many valuable benefits for buyers and suppliers in today’s market. However there have been obstacles to optimising the financial supply chain in this way, chiefly the imperfect integration of the physical and financial supply chain.
Many treasury departments readily understand supply chain financing. They perceive how well the approach aligns with their key objectives, including the improvement of cash flow efficiency, visibility of payments and the optimisation of working capital. However, the physical supply chain is often the remit of procurement departments, and links between treasury and procurement vary from business to business.
The most common obstacle to implementing or extending a successful supply chain finance programme is gaining buy-in from procurement executives on the physical side of the supply chain. One of the reasons for this is that the benefits have not always been made in terms of a procurement team’s own objectives.
When discussing programmes with buyers, providers should ask how integrated the financial and purchasing teams are and how clear the division of responsibilities is. They should then establish how the performance of the procurement team is measured. If it is according to the price of the services secured, it is vital to demonstrate how supply chain financing gives buyers a greater ability to negotiate on price, when a supplier is being offered effective financing at the same time. If securing competitive payment terms is key, one can demonstrate the flexibility the team could leverage. This helps to devise a programme which is beneficial for all stakeholders and contributes to the success of the wider business.
Whilst the core benefits of supply chain financing have not changed in the past 10 years, the market is developing and evolving in response to how trade is being conducted. Many companies that have supply chain financing programmes in place are now interested in expanding them. Buyers that initiated programmes in Europe as a first step are looking to extend them globally. This is stimulating demand for multi-currency and multi-language support services, and providers are responding in kind to cater for new needs as suppliers from around the world are brought onboard.
Another significant development in this space is the increasing use of multi-bank arrangements. Traditionally, supply chain financing programmes have been bilateral, arranged between one buyer and one bank to service a range of suppliers. However there is now a clear tendency towards club or syndicated deals. These arrangements have their advantages: they give buyers flexibility, ensure they are not dependent on any single provider and enable them to manage any concentration limits they may have to individual counterparties.
Multi-bank arrangements are also a sign of the increasing complexity of the supply chain. Trade volumes may be too high to be handled by one provider alone, or supply chains may reach into a vast number of markets. Some providers will naturally be stronger in certain regions, and buyers creating a global programme may put together a roster of banks which can best service their needs. Putting a multi-bank arrangement in place ahead of time can enable German buyers to position themselves for future growth, knowing that they have an infrastructure that will support them to source suppliers in new markets.[[[PAGE]]]
Against this backdrop, buyers who are initiating or expanding their programmes need to consider a number of factors when evaluating providers. Given the evolution of the market towards a multi-bank approach, it is important that providers have agnostic, interoperable solutions that can integrate with whatever financial and procurement systems are already in place. They should also be able to explain the tangible benefits of the programme to various parties, how long it will take to establish and its pricing structure. It is also worthwhile understanding the depth of their market commitment and international coverage, in order to build long-term relationships that will evolve with their business and trade needs.
Changing economic conditions and the continued globalisation of trade have driven many corporates in Europe and around the world, to reappraise the benefits of supply chain financing. When a programme is implemented well, and when there is a degree of collaboration between the physical and financial supply chain, it can create a win-win situation for German buyers and their global suppliers alike.
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