Supply Chain Resilience and Renewal: Part II
We are pleased to share this piece as part of a series exploring resilient supply chains for a post-COVID-19 world, and welcome readers’ insights and perspective as they conduct business across regions and industries. Mikkel Hippe Brun, a 2019 New Economy Forum delegate, is Co-Founder and Senior Vice President of Greater China at Tradeshift.
Free Money v. Working Capital
Exploring a Low-Risk, High-Return Path to Free Up Supply Chain Liquidity, And Accelerate Economic Recovery
Governments around the world are injecting billions of dollars into economic relief to stimulate COVID-19 recovery, protect businesses large and small, and save jobs. No question that such emergency measures are needed. But the supply of government-backed ‘free money’ is by no means limitless. The sheer volume in loan application has also led to bottlenecks and delays in making these funds available to those most in need. Getting liquidity flowing into the right places requires a broader toolkit.
What if we could take a fraction of that “free money” and use it to unlock some of the $9 trillion in liquidity and working capital locked up between companies worldwide, in the process saving otherwise healthy companies and allowing government support to be directed to where the need is most acute?
We can, and there is already evidence that this approach can deliver impact at scale. In Denmark, the Danish Export Credit Agency (EKF) and Tradeshift are piloting a program designed to unlock $55 billion in supplier payments in just 12 months. A similar program is being rolled out in South Africa, where, in partnership with Raindew Trade, Tradeshift is implementing a $1.5 billion instant supplier payment scheme for local businesses as well as companies in select African markets.
“The immediate payment scheme has the potential to become a very strong aid package for companies in the corona crisis,” said Professor Philipp Schröder, a member of the government’s economic expert group for reopening Denmark after the corona crisis. “The model is particularly interesting because it is oriented towards business-to-business trade. All other things being equal, it will take longer for a company in a complex industrial supply chain to restart than, for example, a restaurant. If a component supplier fails, it takes a long time before a new one appears, so liquidity is absolutely crucial.”
Injecting oxygen into the arteries of business
The difference between investing in programs which unlock trapped working capital and pouring money into government grant programs is rooted in sound economics. In a human body, the arteries provide an efficient and effective means of delivering oxygen to vital organs. Supply chains are the arteries of the business world. The most effective means of delivering life-giving liquidity to the vital organs of business is through these arteries. Artificial stimulus packages can easily disrupt the delicate equilibrium in the business environment. A little like trying to inject oxygen. Bypassing these arteries and attempting to inject liquidity directly into each organ is risky, as it becomes very difficult to administer the correct dosage.
We have all witnessed the disastrous effects of planned economies in the former Eastern bloc of countries. The long-term risk and unintended consequences of government-backed ‘free money’ programs are also well documented. In a recent Financial Times report, UK lenders say they fear as many as 50% of the more than 600,000 “bounce back” loans will go into default, leaving as much as $23 billion in potentially dead money. And then there’s the Washington Post report of “zombie companies” that can’t make enough profit to cover debt payments and are using these credit programs as an artificial lifeline.
Under the supply chain financing model adopted in Denmark and South Africa, large established organizations act as a trustworthy conduit to get working capital flowing freely through supply chains. These programs function as a symmetrical credit line where the buyer must agree to pay their suppliers early to get access to a credit facility. Suppliers can request early or upfront payment within 48 hours of invoice approval, while corporate buyers can benefit from extended payment terms of between 30 and 360 days.
Plugging the liquidity gap
Why are the Denmark and South African supply chain credit programs so important today? In a newly published study of global transactions running through the Tradeshift platform, we’ve documented a significant increase in orders that by mid-June have neared the level of transactions we saw before the global lockdown. The problem is that invoice processing and payments simply aren’t keeping pace with ordering. Suppliers still aren’t getting paid. Programs like the ones in Denmark and South Africa bridge that gap by ensuring that suppliers get paid as soon as they’ve submitted their invoice.
Digital transparency minimizes risk
The mechanics of these programs are simple and easy to replicate. Banks are encouraged to provide low-interest credit lines to large buyers on the understanding that these funds will be used to pay supplier invoices quickly. Those credit arrangements are guaranteed by governments, Export Credit Agencies, or private companies like Raindew Trading. Digitized invoice data exchanged between buyers and sellers provides an accurate picture of existing invoice liquidity that is eligible for finance. This information is made available to both the bank and the insurer so that they can see very easily when a supplier invoice is eligible for funding.
Few would argue with the wisdom of directing stimulus into industries left teetering on the brink as a result of the coronavirus. But broader liquidity challenges require more nuanced solutions. Government grants are essentially a lifebuoy. If you’re drowning at sea, it can definitely be a lifesaver. But for how long? Unlocking supply chain liquidity is more akin to a life raft that not only protects you in the short term, but also helps deliver you safely to shore.
We’re grateful to our collaborators for this perspective, and welcome readers to learn more about unlocking inclusive trade.