FREE MEMBERSHIP Includes » ABL Advisor eNews + iData Blasts | JOIN NOW ABLAdvisor Gray ABLAdvisor Blue
Skip Navigation LinksHome / Blogs / Read Blog


The Lifeline of Supply Chain Finance for Lenders

July 27, 2020, 07:00 AM

There are few sectors of the U.S. economy that have escaped unharmed due to the severe economic strain brought about by COVID-19. America’s small and medium sized enterprises, long-underfunded and typically surviving off operational cash flow, have faced an especially perilous situation – a perfect storm of an historic economic downturn, weak consumer confidence and severely disrupted supply chains.

The nation’s 30 million SMEs account for 44 percent of GDP and nearly two-thirds of net new private sector jobs in recent decades, so their contribution to the wider economy cannot be downplayed. While the CARES Act was a much-needed step to help businesses during the pandemic, targeted assistance will be vital to SMEs surviving this crisis.

One way in which this can be achieved is through supply chain finance (SCF). In the past accessible only to larger businesses, the digitalization of SCF has lowered the barrier of entry for SMEs. In turn, the lenders who facilitate this now have access to a wider, untapped market of enterprises who would previously have been considered too risky to finance. Innovation in SCF will be vital in the long run as the economy begins to open more broadly, but it is crucial right now, as SMEs continue to require financing solutions to help ease cash flow concerns.

New Solutions to a Worsening Problem

The U.S. remains in the eye of the COVID-19 storm and the economic shock is threatening many SMEs already in a precarious position. On average, they hold just 27 days’ cash in reserve, leaving them much more exposed to disruption than larger firms that often have cash reserves to last at least six months.

As the crisis wears on, more will likely struggle, especially those in industries that have been hit the hardest such as retail and travel. Even further up the supply chain, manufacturers have not been sheltered from the fallout as they face a deluge of cancelled orders from buyers, even those that had contracts in place. “Force majeure” announcements have become common as a result of the intensity of the crisis.

With existing, albeit unparalleled, business support measures failing to provide a lifeline to many small businesses, it is vital that other avenues of support are embraced by lenders and SMEs alike. SCF can offer such a remedy, optimizing cash flow by allowing buyers to extend days payable outstanding and provide financial support to their suppliers by giving the option of earlier payments from lenders. By tapping into existing value in their own supply chains, SCF can inject cash into an SME, without burdening them with unsustainable debt.

Once only accessible to much larger businesses, new, digital SCF programs have the capacity to connect buyers, suppliers and lenders on a single platform, dramatically increasing efficiency and boosting the ability to service an even wider segment of SMEs. New tech is automating once cumbersome, manual procedures, such as Know Your Customer and Anti Money Laundering checks, which had previously made it harder to verify, process and onboard smaller SMEs. Put simply, digitalization of SCF offerings is democratizing access to this valuable source of funding.

An Opportunity for Lenders

Not simply a lifeline to SMEs, SCF programs represent a huge opportunity for the lenders who facilitate them. The (pre COVID-19) $5 trillion U.S. SME funding gap highlights the scale of the opportunity, and there was a pre-pandemic 23 percent rise in SCF volumes (in the first half of 2019), showing growing demand for the service.

Further evidence of the opportunity for lenders is in the fact that SCF growth is one of the few areas of economic output that is still growing against the backdrop of a shrinking economy. S&P data reveals that SCF revenues grew by 3–4 percent over the first three months of 2020, with much of that growth originating in the U.S.

For lenders willing to digitize the SCF process, SMEs will be able to onboard as clients much more quickly, with far greater visibility over the entire process. A digitized SCF solution furthermore enables more flexibility around meeting tax requirements, SLAs, audit compliance, or connecting accounting systems and data centres, meaning that SCF is not just becoming more swift and accessible, but that it is also eliminating many of the perceived risks that so often are associated with smaller SMEs.

A shift to digital SCF for lenders will not only both help SMEs in their hour of need and tap into a high growth sector, but it will also update an industry that has up to now lagged behind its many other financial services counterparts in how it utilises technology. In a rapidly changing world with SMEs facing their biggest crisis in a generation, the shift to digital SCF could not come at a more vital time.

Lisa Roberts
North America Head | HPD LendScape
“Lisa Roberts is the North American Regional Sales Director for HPD Software having joined the company in January 2018 and is responsible for representing HPD in the North American working capital and secured finance markets. More recently, she has been working with finance providers in South America, as well, to expand HPD’s footprint in Latin America.

Based outside of Chicago, Lisa’s goal is to increase the adoption of HPD’s flagship LendScape product throughout North America, helping local and national financial institutions increase the efficiency of working capital and commercial lending. Prior to joining HPD, Lisa worked as a Regional or National Sales Representative for financial technology providers of commercial lending, credit risk management, and loan portfolio solutions, including fifteen years with Moody’s Analytics.

Contact Lisa Roberts at:
Comments From Our Members

You must be an ABL Advisor member to post comments. Login or Join Now.