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Supply Chain Finance to help SMEs

May 26, 2020

Demica’s Head of Origination – North America, Andrew Holmes, writes about how Supply Chain Finance can benefit SMEs.

The measures recently taken by the Fed and the US Treasury are unprecedented in scope and in scale, and the lifelines provided will do a great deal to keep small and medium businesses trading through the crisis.  But what can Corporate America do to assist Mid-Market companies and SMBs in the coming recession?  Larger Corporates can work with their Banks to offer Approved Payables Financing (APF), thereby providing a lifeline of payment acceleration to their smaller suppliers at a time of great need.

With many banks closed for new business, and Trade volumes and collateral pools in decline, smaller companies have limited options for working capital.  According to a survey commissioned by the Secured Funding Network, only 30% of SMBs in North America have sufficient cash reserves to survive another month of lockdown.  Because of the strength of their banking relationships, large corporates are in a position to assist these suppliers by enrolling them in an APF program.  Banks will take the risk of large Corporate buyers and finance accelerated payments to their suppliers.  This injects working capital into the economy without saddling the banks (or the government) with difficult credit risk.

For large Corporates that have not implemented an APF program, setting up such a program as we enter the recession can produce advantages for the Buyers and their Suppliers.  Many large buyers are stretching terms at the moment—in some industries we are seeing an unprecedented stretch from 90 to 180 days and even beyond.  Without an APF program, this extension of payment terms hammers suppliers at the worst possible moment.  As large corporates push out their DPO, an APF program can mitigate the impact on suppliers, producing a pricing arbitrage and a win/win scenario, as APF is priced on the risk of the buyer.

There are already thousands of APF programs in place across the globe, and these should now be expanded.  Historically, many large Buyers have put APF programs in place with the top 10-20 strategic suppliers, but they did not extend these programs to the long tail of suppliers.  Now would be a good time to make such programs available.  Government institutions could even step in to add liquidity to the programs—thereby providing the same liquidity to SMBs, without having to underwrite SMB credit risk.  Fintech platforms such as Demica’s make it possible to extend the benefits of APF to hundreds or even thousands of suppliers.  Programs are automated and both buyers and suppliers have full visibility as to the status of the invoices and the accelerated payment.

Critics will point out that an APF program quickly becomes an important part of the buyer’s supply chain, and that if banks pull the APF lines at a time of crisis it can be lethal for those suppliers.  This is why Buyers should be careful with the funding partners that they choose, and should consider a multi-funder program to mitigate this risk.  While the current crisis may not be the best time to secure pricing for a new APF program, Treasurers, CFOs, and Procurement Officers should begin considering options, to deal with the coming recession and to ensure that their suppliers are better prepared for the volatility ahead.

Supply chain security is rapidly becoming an important topic for corporate Treasurers and CFOs.  Large corporates will want to assist strategic suppliers during difficult times—this is both to cement relationships and to ensure reliable availability of raw materials and services.  For buyers that have already implemented APF with strategic suppliers, Fintech platforms can help to extend those benefits to the long tail of suppliers, who have the most acute working capital needs.  By supporting struggling suppliers, large buyers are both strengthening their supply chains as well as displaying a sense of Corporate Social Responsibility.  Clearly, APF is a significant tool that large corporates can utilize to help SMBs and strategic suppliers in a time of great need.

If you are interested in learning more about APF and how it can benefit the supply chain, please contact Demica at www.demica.com.