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DIGITIZED SUPPLY CHAIN FINANCE EXTENDS LIFELINE TO SMEs

Digital supply chain finance programs are opening new pathways for lenders looking to support small- to medium-sized enterprises, which have been hit hardest by the COVID-19 pandemic. These resources will help provide liquidity now and should continue to be useful in the future. 


BY LISA ROBERTS, ABF Journal

Accounting for 44% of total U.S. GDP, small- to medium-sized enterprises (SMEs) have long served as the driving force behind the country’s economy, serving as a breeding ground for entrepreneurship and an essential source of employment. Arguably, this group has been affected the most by the COVID-19 pandemic, which has rocked the U.S. economy, with unemployment rising at a record rate and projections of a 5.2% contraction in GDP.


Many SMEs were vulnerable even before the crisis began, so it is vital that the public and private sector look for ways to support them so they can play a full role in helping to drive economic recovery. There has, of course, been unprecedented support offered by the CARES Act, but this is still not enough to keep U.S. SMEs afloat. For those businesses that do not have the track-record or credit rating to rely on traditional bank lending during this crisis, other options are sorely needed.


Previously the preserve of larger companies, digital supply chain finance (SCF) programs are emerging as a solution for SMEs. New technologies are opening this type of financing to a broader range of SMEs, including smaller businesses previously regarded as too risky by lenders and, as a result, opening a largely untapped market for lenders. So, if U.S. lenders using SCF want to help SMEs survive this crisis, embracing these digital offerings would considerably enhance the support they can provide.


SMEs Need a Lifeline

Even before the pandemic began, the median small U.S. business held just 27 days’ worth of cash in reserve.1 With the U.S. leading global charts of confirmed COVID-19 cases, and with localized second waves springing up at the time of writing, the situation has only become more precarious for U.S. SMEs as they suffer acutely from various containment measures, which are having an impact at various points on their supply chains.


Sectors such as retail and travel are suffering the most, while manufacturers are seeing significant disruption. This trend has been seen around the world, with 44% of global manufacturers invoking ‘force majeure’ clauses as they find it difficult, or impossible, to fulfill their contractual obligations.


A Potential Solution

Access to finance is therefore one of the greatest challenges facing U.S. SMEs today. Given the disruption to supply chains and cash flow problems U.S. businesses are experiencing, supply chain finance programs are emerging as a way that buyers, suppliers and lenders can work together to reduce this pressure. In a win-win scenario for all involved, SCF unlocks value within a business’s own supply chain, optimizing cash flow by allowing buyers to extend days payable outstanding and provide financial support to their suppliers by allowing earlier payments from lenders. This can provide a business with a much-needed injection of cash without the burden of potentially unsustainable debt.


Indeed, even before COVID-19, SCF was gaining traction in the U.S., with volumes increasing 23% in the first half of 2019. However, SCF programs have historically adopted a one-size fits all approach, often lacking both the flexibility that many SMEs need, as well as proper transparency into the supply chain that lenders demand. Therefore, risk-averse banks and funders have often been reluctant to fund smaller, potentially risky SMEs. Manual, time-intensive and paper-based processes have hampered efficiency and made it difficult for SMEs to access these services, while the process of onboarding buyers and suppliers has typically been cumbersome and slow. This has all resulted in SCF traditionally being viewed as a solution for larger companies with strong and lengthy credit histories.


Technology Democratizes Access

However, like so many other sectors of the U.S. economy, digital disruption has paved the way for greater access. Today it is possible to connect buyers, sellers and funders on a single digital platform that provides a simple solution for banks and other lenders looking to support U.S. SMEs, ensuring greater visibility over the entire process and more transparency for all parties involved.


New onboarding capabilities such as approval hierarchies can enable rapid and efficient KYC processes, and it is now possible to use external APIs for anti-money laundering checks or document signing, saving significant time with supplier onboarding as lenders historically carried this out manually. By streamlining these previously time-consuming and resource-intensive processes, digital SCF platforms allow lenders to provide struggling U.S. SMEs with liquidity, which is more vital than ever as the economic crisis shows no sign of ending soon.


Adapting to the Digital SCF Shift

Traditional SCF lenders that wish to serve the U.S. SME market and acquire new business along the way must be ready to adapt to this digital switch. Products must be flexible enough to meet various regulatory and tax requirements as well as to connect securely to accounting systems and data centers. Previous one-size-fits-all approaches will not allow lenders to tap into new sectors where bespoke fees or requirements may be required.


For lenders ready to further digitalize their SCF programmes, care must be taken to streamline processes for both internal teams and their customers, ensuring that previously time-consuming steps such as audit requirements, warranties and SLAs are less burdensome. But while many lenders may look to run these programs in-house, some are turning to technology providers to manage or host this process, helping lenders to avoid retraining or hiring staff.


Undergoing this shift to digital SCF could be a boon for lenders, allowing them to support more partners more quickly and cheaply, which makes lending to SMEs much more profitable. Indeed, according to the International Chamber of Commerce, SCF is a top strategic priority among global banks. Offering a solution that extends support to a wider range of U.S. SMEs also represents a way of tackling the $5 trillion U.S. SME funding gap that was present even before the COVID-19 crisis began.


Demand is also there on a global level. S&P figures showed that SCF revenues grew by 3% to 4% over the first three months of 2020, with this growth largely led by the U.S. McKinsey & Company also estimated there is $2 trillion in readily financeable payables worldwide, so there is a large volume of potential business ready to be tapped by banks and lenders.


The digitalization of outdated SCF processes is well overdue. However, new tech-driven solutions represent not only a short-term option for U.S. SMEs looking to access cash and improve balance sheets, but an opportunity to modernize lending well into the future. For SMEs, this could provide a more level playing field of funding, as buyers can boost cash flows and improve relationships with their supply chains, while lenders stand to capture a vast pool of business as they provide vital support to SMEs. •


1. “For small businesses: Cash is king,” JPMorgan Chase, institute.jpmorganchase.com.

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