Global supply chain financing after the COVID-19 pandemic

Key takeaways

  • Supply chain financing – sometimes referred to as “reverse factoring” has been around for decades.
  • The global pandemic caused broad supply chain disruptions that could not have been anticipated, nor avoided using alternative financing tools.

  • Despite the recent spike in geopolitical risk, global goods trade is gradually adapting to the new normal, while consumer demand subsides.

Modern supply chain financing (SCF) is designed to provide advance cash flow for both buyers and sellers. It is also known as “reverse factoring” or “payables financing,” and has been around since the 1980s, but has been underutilized until very recently. 

SCF is a welcome tool for both buyers seeking – to delay their cash outflows – and for sellers –  who are seeking to monetize as early as possible.

The SCF process works best among financially strong buyers seeking to build relationships and suppliers looking to increase supply chain reliability and enhance cash flows. In an ideal world, SCF works as a transparent process with financially sound buyers, experienced funding parties, and competent suppliers.

The COVID-19 pandemic’s impact on global supply chains and SCF 

The COVID-19 pandemic had a profoundly disruptive impact on global supply chains, as it limited the number of available manufacturing and transportation workers, and restricted movement, causing a shift in consumer preferences. 

In different ways, local shortages and surpluses of goods and inputs increased price volatility and impacted availability across marketplaces. Supply chain financing – which has the potential to smoothen payments in a functioning system – was not equipped to provide a solution to these black swan disruptions, which were of a magnitude that is unlikely to manifest often in human history 

Several issues with the existing SCF structure have also been laid bare during the past two years – among them, the lack of digitized supply chain data, from start to finish, which did not help when physical exchanges became problematic at the peak of the pandemic. 

Fast forward to 2022, and the business community appears to have become more resilient, while the negative economic effects of the pandemic seem to be waning. In this context, funding parties are attempting to improve  SCF,  by, among other things, working with partner firms to digitize trade records in order to provide additional flexibility to suppliers globally. Funding parties are also engaged in developing more robust systems to ensure the security of data in motion and preserve the integrity of SCF systems. In addition, various trade, governmental, and regulatory bodies are creating rules, guidelines, and incentives that encourage transparency and promote ESG goals within the supply chain. These changes, some of which are already being implemented, are likely to help mitigate future supply shocks and contribute in discouraging bad actors attempting to take advantage of SCF’s loopholes.

Supply chain finance improvements in 2022 and beyond.

There were two key reasons why container ships were backed up at ports in 2021 – labor shortages and an inflated consumer demand of goods during the pandemic, especially after stimulus checks were issued. Both issues have been largely sorted out. Marketplace incentives, along with widespread vaccination, have increased the available labor force, while consumers have mostly run through their additional pandemic savings. 

As these adjustments happen, pressure on global supply chains is receding despite the recent spike in geopolitical risk that followed Russia’s invasion of Ukraine, which triggered heavy sanctions from the West affecting the aggressor – one of the world’s largest commodity exporter – while crippling the economy of the invaded country – a key part of the European manufacturing supply chain. 

There are currently investment opportunities in accounting data automation, verification, and reconciliation, as well as in tools to improve data access. Buyers, sellers, and funders are also exploring how blockchain technology and artificial intelligence can bolster SCF. Digitization and automation have already proven to make SCF systems more efficient.  

As the world normalizes after a global pandemic, funding parties, buyers, and sellers are all attempting to transform SCF into a true global financial ecosystem that is easier to use and that can contribute to modernizing the global supply chain.

Learn more about the ways Yieldstreet can help diversify and grow your portfolio

Resources:

Learn to Lower Your Supply Chain Costs In A Shifting Market
https://www.morningstar.com/articles/1070843/when-will-supply-chains-recover
https://www.reuters.com/markets/europe/worlds-damaged-supply-chains-brace-painful-recovery-2022-02-11/
Fact Sheet: Biden-Harris Administration Announces New Initiative to Improve Supply Chain Data Flow | The White House
Digital Transformation in Supply Chain Planning 2021
Gartner Announces the 2022 Power of the Profession Supply Chain Award Winners
4 – The future of global trade and supply chain finance – Technology and trade digitisation – YouTube
Welcome To Sibos | Sibos
Supply Chain Finance: You Can Bank On It – Inbound Logistics
ICC Academy – Learn online with the International Chamber of Commerce
Supply chain finance – a good thing gone wrong? – YouTube

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