In July 2016, the World Trade Organisation launched its quarterly goods trade barometer with the aim of assessing the trajectory of global trade relative to recent trends. The barometer spans from 90 (well below the trend) to 110 (well above). In its latest release, at the end of May, the barometer was not only in the red at 87.6, it was off the These are unprecedented times for global trade.
Very rarely do we see instances where both global supply and demand disappear – and while the full impact of COVID-19 remains hard to define, we can expect months, if not years, of supply chain disruption, as well as some inevitable dislocation.
To survive the current global health crisis, cash management is clearly the number one priority. Yet the tried-and-tested techniques of working capital optimisation – collect as soon as possible and pay as late as possible, while keeping inventory to a minimum – no longer works when protecting supply chain viability trumps profitability as a priority. We can also, for the meantime, say goodbye to just-in-time production methods. If you want to hit the ground running as lockdowns begin to ease all over the world, the availability of stock will be critical.
Of course, it is a delicate balancing act. With demand evaporating, some smaller companies with weaker finances and less clout with counterparties will inevitably be sitting on significant stockpiles with no cash and no sales.
Financial support to companies across the supply chain will therefore be crucial to ensuring their survival. However, we also need to address structural issues beyond just the financing, which means more visibility in supply chains, and accelerating the digitalisation charge.
Tapping pools of liquidity
Liquidity has not completely dried up. In fact, it is readily available and at a low cost. The difficulty is the risk associated with lending it. Disciplined bank teams are trained only to lend to viable businesses, but the pandemic has tipped the playing field, making huge numbers of businesses unviable from a traditional credit perspective. As a result, securing liquidity has become a matter of bank and good credit relationships. Banks want to be there for their customers and their supply chains. Businesses must lean on these relationships to find a solution.
That solution, in many cases, has been payables finance. Even before the pandemic, Deutsche Bank wrote in a September 2019 paper, Payables Finance: A guide to working capital optimisation, that:
“As the market has grown, so has the size of payables finance deals demanded by corporates. Some programmes – particularly those of the largest multinational corporation – have become so enormous that they now outstrip the funding capacity of a single bank.”
We are now seeing the demand for bank or multi-bank led payables finance burgeon even more, while fintechs in the space have also been quick to report significant spikes in demand as a result of COVID-19.
Payables finance sees large buyers extend financing support to their supply chain by offering early payments on invoices approved by the buyer, which are fulfilled by a third-party finance provider. This offers easy access to liquidity when it is needed and at a favourable price point, since the buyer’s guarantee means the risk is tied to the credit profile of the larger buyer, rather than the supplier.
The COVID-19 pandemic is likely to help overcome some of the historical barriers to onboarding and supplier reluctance. Communicating the benefits, simplicity and security of joining a payables programme is far simpler at a time when not only do suppliers need the liquidity more than ever, but also, they can in many cases effectively benefit from a free cash-flow forecasting and cash position application through the supply chain finance platform. There are risks, however. Chief among them is the possibility that programmes will experience a surge in demand and onboarding, but will not have the equivalent flow of financing from providers with the necessary financial strength or risk appetite. It is one reason why large bank-led programmes are increasing in popularity.
As the economic impact takes its toll, suppliers have been drawing down on their facilities as much as possible – and it is imperative we keep these credit lines open if we are to help support business continuity.
Digitalisation needs to accelerate
Continuity of financing will be underpinned by digital solutions. Trade finance remains an extremely paper-reliant business and with lockdowns preventing the physical exchange of documents, alternative processes have been required to ensure the ongoing flow of global trade and supply chain continuity. In turn, the push for electronic trade finance documents and the removal of physical documentation – which has already been a priority for some time – is now at the centre of attention.
The benefits of digitalisation have been lauded for many years, notably from a cost and time-efficiency perspective, along with the streamlining of processes across the lifecycle of a trade. However, with a lack of cases, it has been difficult to prove these efficiencies, resulting in slower adoption. By helping mitigate the impact of COVID-19, digitalisation has shot up the list of priorities to enable continued access to finance for existing clients, as well as increase market capacity – particularly useful for small and medium-sized enterprises.
However, a major challenge for digitalisation is the scalability of solutions. With so many parties involved in any single trade transaction, working from around world according to different legal systems, the complexities in terms of regulation and compliance are countless. What’s more, in many jurisdictions, it remains the case that electronic trade finance documents are either illegal, or their legal status is unclear. In turn, governments around the world need to take some relatively simple yet urgent steps to make it possible in law to recognise things digitally that historically have only been possible on paper.
Industry-wide calls for action have been supported by organisations such as ICC, which has also released a series of guidance documents to support business continuity, along with advice on the modification of ICC rules.
Transforming the trade finance industry for the benefit of stronger, more-efficient supply chains will require a concerted industry-wide effort, and continued exchange and dialogue with regulators and governments. Once achieved, however, the industry is likely to be more robust, inclusive and effective than ever before.
Disclaimer: The content of this interview does not reflect the official views of ICC. The opinions expressed are solely those of the authors and other contributors.