Trade and Supply Chain Finance: Rising Above Uncertainty
By Eleanor Hill, Editor
Covid-19 has changed so many aspects of life and business – global trade is no exception. With trade flows declining, and commercial payments following suit, Aoife Wallace, Head of Trade & Working Capital Europe, Barclays, and Daniela Eder, Head of Payments & Cash Management Europe, Barclays, examine how treasurers can play their part in supporting the recovery – from financing their supply chain partners to digitising trade and cash management workflows.
Even before the term ‘Covid-19’ was on the lips of treasurers across the world, challenges to the future of global trade and supply chains were looming. International trade tensions, coupled with ongoing Brexit negotiations, not to mention the upcoming US Presidential election, were all causing ripples. In turn, this uncertainty was impacting corporates’ requirements for trade- and supply chain finance (see fig. 1)
Fig 1: Need for increased trade and working capital facilities in 2020
Source: TMI and Barclays research report: ‘New Europe: Is Your Treasury Fit for the Challenge?’
The pandemic has only intensified matters, with global trade declining in March 2020, and – at the time of writing (September 2020) – remaining lower than previous years. According to the World Trade Organisation, trade in goods is estimated to have fallen 18.5% year-on-year in the second quarter of 2020 . Wallace elaborates: “The reasons were multi-faceted, but included supply side shutdowns in Asia, unprecedented drops in commodity prices, and Covid-19 restrictions coming into place. No economy has been immune to the impact of lockdown measures, causing large-scale logistical disruptions and reduced demand.”
Inevitably, this is impacting other areas too: Eurozone GDP for Q2 2020 shrunk by 15% year-on-year , for example. Commercial payments have also been significantly stunted due to the drop in trade. Eder comments: “Although e-commerce has risen enormously during lockdown as businesses have embraced new business models, Eurozone commercial payments for Q2 2020 were down 11% – according to data issued by SWIFT in August 2020 – and this is closely linked to the drop in trade. Likewise global commercial payments flows dropped by 10% during that same window.”
Smart financing solutions
While small green shoots of recovery are starting to emerge, the overall decrease in trade flows – combined with pre-existing geopolitical tensions – is a significant challenge for businesses, not to mention the global economy. Eder comments: “Companies have found that, even if they are surviving the crisis, their suppliers may be at risk. We have heard anecdotal evidence of large corporates offering financing to their suppliers during the Covid-19 crisis, simply to help those suppliers keep their heads above water, and to maintain the security of the overall supply chain.”
Wallace echoes this, adding that: “Supplier finance used to be primarily about looking at your own balance sheet as a buyer, and extending out payment terms as far as possible to reduce the cash conversion cycle. Now it’s being used as a tool by corporate buyers to help their suppliers survive the crisis, maintain the integrity of their supply chain, and drive long-term sustainable relationships.”
Today’s treasurers need to look holistically at their underlying supply chain and ensure the correct level of funding is in place throughout, in order to ensure resilience, believes Wallace. “Corporate buyers can no longer concentrate only on their top ten suppliers to the detriment of smaller suppliers. In these difficult times, there is an opportunity for large corporates to step-in and support their smaller suppliers, with their financial strength and higher credit rating. This will be especially pertinent when government support schemes come to an end across the globe, as many suppliers could find that their financial crutch has been removed.” she says.
Another financing tool to consider alongside bank-driven supply chain finance (SCF) is dynamic discounting. Offered by fintech-led third party platforms, dynamic discounting can enable a large buyer to better support its tail end suppliers. This approach has several benefits, says Wallace. “Buyers can use up their excess cash to help their supplier get early payment, and in return, receive a discounted price for the goods/services that they are procuring. This could be particularly attractive in the current negative interest rate environment, given the limited returns available on short-term investments.”
Offering these kinds of financing options could also assist corporate buyers to diversify their supply chains in response to Covid-19, says Eder. “A number of corporates have become aware of the high concentration risk in their supply chains, with over-reliance on a few key suppliers. This has led to delays and holes in supply chains as the crisis has taken its toll. In addition, buyers sourcing from far away locations pre-lockdown are starting to consider regionalising their supply chains, as a way of mitigating the types of supply chain breakages and blockages that we saw at the start of the pandemic. We therefore expect to see large buyers looking to work with a broader base of suppliers going forward, to help ensure resilience,” she explains.