Analyst Insight: The current and dominant state of supply-chain finance funding has proved to be unsustainable, given the increasingly global nature of today’s supply chains and economic volatility. The result has been a move away from single-funder, bank-led supply-chain finance programs to multi-funder programs that ensure all currencies and jurisdictions are covered.
The supply-chain finance industry is experiencing a shift. Historically, the industry has been dominated by single-funder, bank-led programs. But the realities of an increasingly global supply chain, amid current economic and trade volatility, have exposed serious limitations in the single-funder approach. Companies are being forced to re-examine not just the agility of their supply chains, but the agility and longevity of their supply-chain finance programs as well.
The primary challenge today is that no single bank can meet the funding requirements of a global supply-chain finance program. Even the largest global institutions lack the ability to serve all currencies and jurisdictions, which in turn limits programs’ success and reach. Moreover, just because a bank provides coverage to a specific region or currency today doesn’t guarantee coverage for tomorrow. Large international banks like Citigroup have reevaluated their global ambitions, and exited numerous jurisdictions, in the last several years. For supply-chain finance programs with suppliers in the affected geography, the implications have been serious, not the least of which has been a decrease in anticipated free cash flow to the buyer, and damage to its key supplier relationships.
To overcome this challenge, and reduce the administrative demands of managing multiple platforms, more supply-chain finance providers are adopting a multi-funder approach. We believe this trend will continue to accelerate for the foreseeable future. Through the use of bank-agnostic tools and processes to connect multiple funding sources to a supply-chain finance program, not only are companies assured that the funding requirements of their programs will be fully met regardless of currency and jurisdiction, but they can also manage all bank participants through a single portal. As such, companies are no longer held hostage to the risk tolerance of a single financial institution.
Another much needed benefit of a multi-funder approach is that it extends supply-chain finance to more companies and suppliers. Unlike most bank-led programs, it allows a supply-chain finance provider to bring in alternative sources of funding that can cover non-investment grade companies and smaller suppliers. By overcoming the investment criteria constraints of bank-led programs, companies can employ broader supply-chain finance programs that deliver more value to the business.
The shift to multi-funder global supply chain finance will allow the industry to expand its focus to a broader range of buyers and suppliers. As a result, more providers will emerge with supply-chain finance as a key part of their services, and central to their investment aims. These providers will have a strategic focus on increasing supplier participation across the globe and improving supplier relationship health, which will in turn increase program success. They’ll be well trained in helping customers to execute supplier payment term extensions, onboard suppliers, and provide support across the global supplier base.
As companies seek partners that can offer supply-chain finance deeper into the global supply chain, there will be less demand for single-funder, bank-led programs. Companies will also seek supply-chain finance for reasons beyond cash flow acceleration. They’ll use it as a way to strengthen supplier health and relationships, protect the supply chain against economic instability, and improve competitive advantage in the marketplace.
Dominic Capolongo is EVP and Global Head of Funding with PrimeRevenue.