From Crisis to Opportunity: Unlocking the Power of Supply Chain Finance in a Volatile World

Physical supply chains – the confluence of procurement and logistics – have been subject to great upheavals in recent times. This has led to the re-emergence of supply chain finance (SCF) as a key instrument in helping to secure and strengthen supply chains by supporting both the buyer and the supplier in working capital optimisation.
 
SCF enables buyers to optimise their working capital through payment-term extensions, making their supply chain more resilient, without harming their supplier relationships. Meanwhile, suppliers are able to cash in earlier on their receivables at a much lower rate compared to the financing achievable under their own steam. This is the “social impact” of SCF programs: secure strategic suppliers, making them benefit from buyer’s rates.  In a world of uncertainty with new challenges to face such as counterparty risk, this is probably one of the most valuable approaches. This affords SCF the potential to be what Cordier describes as “a win-win solution”.

SCF is nothing new of course; it has been in use for many years, offering buyers and suppliers just these benefits, emerging in Spain in its current format in the 1980s as a response to high interest rates and inflation. Ever-present, SCF’s popularity has exhibited the strongest growth since the 2010s among trade and working capital products.  
In recent times, immediately post-Covid, SCF saw its popularity rise with the restart of the economy. However, a slow-down occurred one year on, with high inventory levels being reported, and suppliers suffering from interest rates re-entering positive territories after a decade of cheap financing. 

And then in May 2023, new SCF accounting disclosures were imposed, with the International Accounting Standards Board (IASB) issuing amendments to IAS 7 and International Financial Reporting Standards (IFRS) 7. This was a response to credit rating agencies calling for more clarity for investors on how SCF-type arrangements affect an entity’s liabilities, cash flows and liquidity risk.

And then the world changed again

As geopolitics intervened in markets across the world, each new crisis overlapped with the next to create global economic instability. Energy costs soared, and certain components became difficult to source. And now, without pause, we have the imposition, removal, and reimposition of huge tariffs from the US, and countermeasures from other jurisdictions, creating further unpredictability and destabilisation of global markets and trade processes.

Viry and Cordier understand from clients that it is still too early to assess the full impact of the most recent turmoil on supply chain activities. However, they report all agreeing that ongoing uncertainty is affecting both buyers and suppliers, and that SCF has come to the fore once again as “a very effective tool for combatting the turbulence”.

Calming trading nerves

Even so, the watchword for SCF adoption remains ‘uncertainty’ in some instances. Anecdotal evidence suggests that many corporates are unsettled by the tariffs, and as such are pausing their investments in the US – the world’s largest SCF market. This may see US buyers with cross-border suppliers – between the US and Mexico or the US and Canada, for example – exposed to some SCF market disruption. 

At present, Viry notes, trade flows are so unpredictable that the impact could just as likely be positive as it could be negative. Indeed, it is difficult to assess which proportion of US programs are done with domestic suppliers vs cross-border suppliers, and therefore how could volumes be strongly impacted or not under this ‘tariff-war’ conditions? Difficult at this stage, to know who will support the tariffs raise: the final consumer, the importer or the exporter or both.  However the market evolves, companies will face higher inventory level and contingency planning and probably new working capital constraints. 

Cordier adds, “whatever the situation, it’s a strength of SCF that under such conditions it can be seen as a win-win solution that could help secure a buyer’s supply chain with its key strategic suppliers by helping to optimise their working capital – and investment capacity – through early payment”.

SCF’s potential as a win-win solution today is most likely to bear fruit in an inflationary environment, Cordier believes. Price rises as markets remain in flux are a real possibility. This could slow down procurement levels, putting additional pressures on the working capital streams of non-US sellers trying to service US buyers. “Whereas before the tariffs it was less of an issue for these suppliers, especially the cash rich, suddenly liquidity and working capital optimisation becomes their hottest topic.” 

Long-tail support

Current trading conditions are clearly pushing working capital back up the agenda for many businesses. It had been unequivocally front of mind during the Covid period when supply chain disruption peaked. 

Viry notes, during that period, many businesses were thinking about reshoring or nearshoring production, but firms have learnt from past experience and are far more prepared to meet this challenge than they were five years ago.

He notes that while many industries are already engaging with SCF – such as automotive, aerospace, food and beverage retail, telecoms, and energy – there are others, notably in the newly boosted European defence industry, that could benefit from its uptake.

However, with clients in the defence sector, Viry has seen a range of viewpoints on the adoption of SCF. “We thought there would be strong interest coming from all of our European clients active in defence. But it transpires that there is no major issue because buyers either prepay on most of their purchase orders, or they are already supporting their suppliers because of the highly strategic nature of their orders.” 
But all is not entirely well, Cordier adds, explaining that the challenge for many is how supplier subcontractors, often up to four rungs below the primary supplier, are financially strengthened. “No one yet in the market has yet worked out how to support subcontracting companies, which are nearly always smaller than the primary suppliers,” he explains. 

“These subcontractors are often looking desperately for liquidity and a suitable working capital solution. But when implementing an SCF programme, the contract is always between the buyer and its primary suppliers; there is no provision for subcontracting companies. As an industry, we need ways to support the longer tail of the supply chain, not just the buyer and primary supplier.” 

Offering support is potentially complex but is nonetheless a work in progress, says Cordier. Simply expanding the scope of suppliers eligible for SCF still only provides financing once an invoice has been issued and validated by the buyer, he explains. But in some industries – especially those where the purchase of raw materials with high pricing volatility is common – there is a need to support upstream suppliers to ensure financing is available to them during the purchase order process, and not only when the goods have been manufactured and delivered to the primary supplier.

Reinvigorating a winner

With traditional SCF seemingly largely unaffected by recent events, and an appetite for it being fed by market instability, Cordier notes that its development as a solution is already underway as the needs and expectations of its users increase in sophistication.  

One of the most vocal calls from SCF clients is for multifunder programmes, he notes. During Covid, businesses faced significant supply chain disruptions. While SCF was a lifeline for many, some buyers witnessed their banks exit the market as they sought to avoid the risks. “Now those clients who see SCF as a strategic product are looking to mitigate the risk of losing vital funding through a multifunder approach.”
This can be achieved in two ways, explains Cordier. 

1.The first is through syndication, where an agent bank will market the loan to several other FIs, and thus spreading the risk for each participant. “In this model there can be a lack of transparency around, for example, the market share of each participant or the pricing structure,” he reveals. That said, he adds that Societe Generale purposefully syndicate on a pro rata share basis, “therefore we give transparency and visibility to both buyer and participant banks”. 

2.The second way is to work with an established third-party platform provider. “This is an approach frequently broached by our clients, so we are taking it seriously: if they’re looking for bank-agnostic solutions, then we need to be equipped to do so. In addition to working on new in-house SCF products, we are offering innovative solutions through these fintech platforms.” 

To this end, Cordier says that Societe Generale has partnered with PrimeRevenue for more than a decade, and in 2024 commenced an additional partnership with CRX Markets (a marketplace for working capital financing). The new arrangement gives the bank’s clients the option to access the vendor’s SCF technology with its fully automated, market-based pre-financing of invoices. He adds that investigations are ongoing to partner with other platform providers.

Another possible development of SCF that is being pursued as more buyers seek to extend Days Payable Outstanding (DPO) without involving their suppliers, is the concept of payment terms extension. Having been adopted by some corporates in Germany, it sees a supplier paid on the agreed due date by the buyer’s appointed payment service provider (this could be a fintech or a bank – both are pursuing the idea). The provider then invoices the buyer for reimbursement of the paid amount, offering the buyer settlement terms on the reimbursement amount that effectively extend the buyer’s original invoice terms, and thus DPO, without negatively impacting its supplier.

The aim of payment terms extension is to improve the buyer’s working capital without adding debt to its balance sheet (because the funds used to settle the invoices are part of its operating activities) while still paying suppliers according to agreed terms. It is feasible that buyers could even offer suppliers shorter terms while still extending their own DPO, affording both a working capital advantage. 

However, comments Cordier, execution of payment terms extension is still subject to auditor’s validation, the corporate buyer’s own interpretation of accounting standards, and the favourable opinion of credit rating agencies. However, he concludes, the idea has “very strong interest from multinationals but for smaller companies as well”, not least as another option in cushioning themselves and their supply chain partners against the working capital buffeting they are experiencing at the hands of ongoing geopolitical and economic uncertainty. More than ever, such buyers must leverage the expertise of SCF specialist such as Societe Generale Factoring.