Supply chain finance was a lifeline for many in 2020
B2B transaction data from the Infor Nexus network shows a major shift in supplier payment terms following the onset of COVID-19 in March of 2020. In the first three months of last year, the majority of payment terms were 30-45 days. In March, 66% of all orders were on terms less than 60 days.
By July, the buyer-supplier payment dynamic had completely flipped, with 65% of orders on terms greater than 60 days. This trend continued throughout the year with 60 day, 90 day, or even longer payment terms in place as buyers moved to preserve their own capital. As a result, many suppliers found themselves in need of a lifeline. For many buyers and suppliers, supply chain finance programs became that solution, removing risk and stress from supply chains by ensuring suppliers access to early payment.
A Look at supply chain finance volumes globally
According to the World Trade Organization, global trade is expected to contract by 9.2% in 2020. Supply chain finance volumes delivered through the Infor network actually grew by 10% in 2020 versus 2019, despite the impact upon overall commerce brought on by the pandemic. New financing streams appeared out of several countries where none existed the prior year, including UK, Netherlands, Portugal, Canada and Honduras.
Major increases in supply chain finance (SCF) volumes on the Infor network were most prevalent in Ireland, British Virgin Islands, Singapore, Jordan, San Salvador, Taiwan, Macao, Cambodia, Turkey, Malaysia, Vietnam, and Hong Kong. Meanwhile, notable decreases in SCF were also present in Korea, India, Sri Lanka, Egypt, UAE, Indonesia, Mexico and Philippines.
Without reading into the complexities brought on by global trade shifts, tariffs, geopolitical policies and the global health crisis, a general statement can be made that supply chains continue to operate as fluid and agile networks built to adapt to change. And supply chain financing is playing an increasingly vital role in the delivery of capital to the point of greatest need in the supply chain.
Lessons Learned from 2020
Supply chain financing is projected to have reached record levels in 2020, according to Reuters. Major banks are estimated to earn $27 billion financing supply chains this year, a 5.5% increase from last year. The programs continue to provide an impactful cash cushion where capital is most needed. As retailers and manufacturers plan throughout 2021, there are a few best practices to note from 2020:
- Hybrid models that encompass self-funded and finance-provider-funded early payments for domestic and import goods. Retailers and manufacturers with excess cash are often willing to pay suppliers early in exchange for an invoice discount. But when the crisis hit last Spring, a premium was placed on capital preservation. Buyers needed to hold their cash longer. Several companies on the Infor Nexus platform were able to quickly pivot, within days, and switch from self-funded early payments to a finance-provider-funded program. The moves prevented suppliers from being squeezed and in some instances, enabled suppliers to strike terms that were even more beneficial from the network of finance providers on the Infor network.
- Rapid deployment of payables financing from a pool of finance providers. Suppliers tapped into our multi-bank network for early payments based on approved invoices that are electronically delivered to a host of finance providers. This type of program, deployable within just weeks, had an immediate impact and kept the capital wheels of the supply chain moving during some of the darkest days of uncertainty.
- Pay now, ship later. An initial reaction was to cancel orders when the crisis came to a head. But for retailers and manufacturers that had an SCF program in place, they had greater options. One of these was the strategy of, “We’ll pay you now, but don’t ship until later.” The cash cushion of SCF removed the urgency to cancel orders and granted buyers the flexibility to fulfill their financial obligations with suppliers, while requesting in return that suppliers hold onto inventory until a later date when there was a better handle on demand signals.
Now that January has rolled around, we’re having increased volumes of conversations with buyers globally, as well as suppliers in pockets of the globe seeking assistance in getting more programs up and running to offer access to capital at speeds and costs that fortify their businesses and supply chains.
Not to be tone-deaf to the rumbling counter-argument that SCF programs bring risk in the forms of un-reported debt. The underlying issue there is about disclosure laws and debt reporting policy, which we’re not debating here. We are confident, however, that SCF programs are an important and valuable way to deliver capital where it is most needed in today’s supply chains, to alleviate strains brought on by the current environment and ongoing uncertainty.
Those who began 2021 with this tool in their war chest have a running start on the rebound that’s on the horizon.
To learn more about innovative finance opportunities through a supply chain network, check out the best practice guide.