The pandemic and subsequent economic disruptions are prompting major growth in a product banks have long offered: supply chain finance.
It helps suppliers stay on better financial footing, allowing them to get paid earlier for the goods they have provided. It's appealing for companies buying the supplies, too, because it helps ensure suppliers remain healthy and keep providing goods at a time of persistent shortages and rising costs.
Though supply chain finance has a long history — with roots
"It clicked, and it clicked fast," said John McQuiston, head of structuring and program management at Wells Fargo's global supply chain group, adding that light bulbs turned on "over the heads of the treasurers and [chief financial officers] of big and small and midsized companies alike."
Supply chain finance is different than factoring, where suppliers use invoices due them to get money upfront from a lender, which profits by taking a sizable chunk of the accounts receivable.
For many suppliers, supply chain finance can be cheaper than factoring because they are bringing that invoice to the buyer's lender, rather than their own, to get paid earlier. By doing so, they are able to use the buyer's credit standing — which is often better because they are larger — to determine the haircut their invoice gets. The haircut is often smaller thanks to the buyer's lower credit costs, letting the supplier keep more of the money.
Buyers also benefit, since it lowers their suppliers' cost of operating and helps the suppliers stay afloat during times of stress.
That is critical for companies that depend on a key supplier to make their products, as it helps improve the supplier's cash flow and "maintain that flow of supply," said Bryan Ford, head of treasury management at Regions Bank in Birmingham, Alabama.
A decade ago, bankers needed to take more time to explain the mechanics of supply chain finance when they called on their commercial clients' suppliers, according to Geoff Brady, head of global trade and supply chain finance at Bank of America. But now, suppliers are more familiar with the benefits to both parties.
"That's what is generating the growth, when you see this benefit on both sides," Brady said.
Supply chain finance volumes in the Americas grew to an estimated $995 billion in 2021, up from $726 billion in 2020 and $530 billion in 2019, according to the latest World Supply Chain Finance report from BCR Publishing.
Volumes were on an upward trend in the years before the pandemic, as buyers realized that the belt-tightening following the 2007-08 financial crisis was hurting their suppliers.
For years after the crisis, large corporations looked to boost their cash flow by
Supply chain finance lets companies keep those extended payment terms — and reap the benefits of hanging onto their cash longer — all while giving their suppliers a cheap option to get paid earlier.
But its growth is not without risks. Banks are opening themselves up to risk by assuming that their clients will pay the bank back for paying invoices from suppliers early, a prospect that may become tougher if economic turbulence hits, Ellram said.
The sector is getting more scrutiny after the collapse of the nonbank company Greensill Capital, a British and Australian firm that provided supply chain financing and went bankrupt after
The Securities and Exchange Commission is also taking a closer look at supply chain finance, since the transactions aren't classified as debt under companies' financial statements and could therefore mask a company's indebtedness. Companies that have had to respond to SEC letters asking for more details on their programs include
In July, the Financial Accounting Standards Board, which sets accounting rules in the United States,
Other companies that use supply chain finance include the consumer goods company Procter & Gamble, which said in its annual report that it "generally provides the suppliers with more favorable terms" for discounting their invoices since they are using P&G's creditworthiness.
Supply chain finance is no longer mostly a product for multinational firms. Bankers say increased digitization of invoices and other paperwork has made the process more efficient, helping banks offer the product to more middle-market firms rather than large corporations.
The Minneapolis company believes a new partnership with LiquidX will grow its niche supply-chain financing business by 'multiples.' The goal is to help more suppliers get paid early in a system that's been pinched throughout the pandemic.
But the middle-market sector and sub-investment-grade firms remain an "underserved market" that relatively few banks have been willing to serve, said Joerg Obermueller, managing director of CIT Group's supply chain finance business. CIT is now part of Raleigh, North Carolina-based First Citizens BancShares after
"I think many of the players understand that now. How they're responding to that, I don't know," Obermueller said. "We're actively involved, and we like this market."
Banks such as Citigroup are also increasingly focused on "deep tier" financing, which essentially offers the same type of supply chain finance program to a supplier's suppliers — or in some cases, the next tier down.
Citi is
"In an increased interest rate environment these types of services are even more critical as suppliers need more resilient sources of funding" since their costs will go up, Adoniro Cestari, Citi's global head of working capital solutions & structured trade, said in an email.