Turning The Liquidity Tap Back On

Banks are stepping up to provide loans and capital to beleaguered businesses. The challenge is making sure SMEs get more than just a trickle.

With the spread of the novel coronavirus forcing businesses and whole countries into lockdown, global trade faces even greater uncertainty than during the 2008 economic collapse, as global supply chains experience a severe demand/supply shock. The World Trade Organization predicts that merchandise trade could fall by as much as 32% this year, with the biggest drops likely in the services sector due to travel restrictions.

Governments have announced unprecedented financial support for businesses and international trade, and development banks have moved swiftly to minimize the economic fallout from the pandemic. On March 13, the Asian Development Bank made $200 million available via its Supply Chain Finance Program to companies that manufacture and distribute medicines, test kits, protective masks and ventilators needed to combat the infection. Financial support could rise to $800 million, the ADB said, if the risk is shared 50/50 with commercial banks.

“We’re looking to support companies that want to ramp up production, and therefore need to engage suppliers,” says Steven Beck, the ADB’s head of Trade and Supply Chain Finance. “We want to make sure this is contained, so we’re bringing all the [financial] firepower we have.” He says he is in daily contact with clients and partner banks in Asia. “The sense of communication and coordination is much tighter than it was during the 2008 financial crisis. We’re much better equipped to respond more quickly.”

Lessons learned from the 2008 crash are the silver lining in the current heavily clouded environment. Big commercial banks are in a much better position to lend to businesses than they were then, when their balance sheets were loaded with risky loans and dubious financial structures. Today, they are better capitalized and better able to be part of the solution, rather than the problem.

Beck, Asian Development Bank: We’re looking to support companies that want to ramp up production.

“We’ve heard from many government agencies around the world,” says Geoff Brady, head of Global Trade and Supply Chain Finance at Bank of America. “They’re asking what they can do and how they can help. Banks could play a significant role in this environment, guaranteeing loans and providing capital to help stabilize supply chains for buyers and suppliers.”

The Hardest Hit

The liquidity taps have been turned on, but will it reach the businesses that need it the most in time? For some, it may already be too late. “In the UK, we’ve already seen the collapses of Laura Ashley and Flybe, driven in part by the virus,” says Kerstin Braun, president of Stenn Group, an international provider of trade finance. “In China, we know only 10% of businesses feel they can hold out six months or longer.”

Small and medium-size enterprises will be the hardest hit by the pandemic. Unlike larger, cash-rich companies that can draw down preapproved bank credit lines or tap into rainy-day cash war chests, smaller companies typically have only enough cash to see them through a month or two. SMEs also find it difficult to access trade finance, which has led to a persistently high global trade financing gap, estimated at some $1.5 trillion.

“This crisis is only going to exacerbate that gap,” says Beck. “At times like this, you have companies hoarding liquidity. And in this environment, SMEs, who are the most underserved segment, know that financial institutions will be looking to service top-tier clients.”

For businesses to survive months of interruption under lockdown, fast and flexible financing is vital. Business loans offered by governments and well-intentioned banks may have more attractive repayment terms or even be collateral-free, but now is the time when many companies, particularly SMEs, are looking to expand their sources of off-balance sheet financing, which isn’t counted as debt.

One product that fits the bill is supply chain finance, sometimes referred to as working capital finance. “Supply chain finance is an excellent product right now as it enables suppliers to get paid earlier,” before the invoice due date, says Patrik Zekkar, global head of Trade Finance & Working Capital at Nordea Bank. “Multinationals don’t want their suppliers to go out of business.”

Jose Maleh, CEO at S&J Distribution, a consumer electronics company, says working capital finance provides quicker approvals and more flexibility than bank loans. It also keeps a company from having to exhaust its existing credit line with banks. The current challenge, says Maleh, is that suppliers globally are not extending payment terms, which kills cash flow.

Using financing from Stenn Group, S&J can pay suppliers at shipment for goods imported from overseas. Suppliers usually receive payment within 24 to 48 hours of receipt of all documentation, Maleh says. S&J is still able to purchase goods on extended payment terms, but without putting unnecessary strain on its suppliers’ cash flow.

During periods of financial stress, when many companies struggle to borrow or use their own cash, supply chain finance is a particularly good solution for suppliers, says Brady: “Banks have maintained their appetite for this type of financing throughout the different market cycles. Short-term, self-liquidating financing may become even more attractive to banks in the future, when decisions around deploying capital could take on greater significance.”

But supply chain finance isn’t always a good deal for smaller SMEs in the lower tiers of corporate supply chains, argues Roger Vincent, CIO at Trade Ledger, a lending-as-a-service platform. “SCF, in a global context, is heavily biased toward the top tier of the supply chain,” he says. “It is the players in the mid-market that tend to lose out.”

Prior to the pandemic, most buyers may have had their top 10% to 20% of suppliers participate in bank-led SCF programs, says Nathan Feather, CFO of PrimeRevenue, a multibank supply chain finance provider. But now, he says, they want SMEs and smaller independent contractors on board. “Buyers may not have focused on SMEs in the past, but they are trying to provide a liquidity lifeline with no strings attached to keep them going.”

The Case for Digitization

As buyers look to onboard more suppliers to SCF programs, Feather says it’s important for providers to be able to do so at speed and scale. That requires purchase orders and invoices to be received and approved electronically.

And that means supplier onboarding is one area where fintechs have the upper hand. “The technology the banks operate is old and they have difficulties supporting programs with thousands of suppliers,” says Stenn Group’s Braun. “We do everything using APIs.”                                                                                                                                           

As the coronavirus shines a spotlight on the fragilities of global supply chains, some banks have seized the opportunity to roll out new solutions that leverage the latest digital technologies to speed up how quickly companies can access financing. In early April, for example, DBS Bank launched a new digital platform using APIs and integrated online account opening and onboarding. This gives the distributors for Haier Group, a Chinese consumer electronics company, many of them SMEs, access within 24 hours to lower-cost financing for their purchase orders.

The current crisis in global supply chains underscores the need for banks to promote higher levels of digitization and to provide financing that reaches all segments of global supply chains, Brady argues. “SCF has validated itself as a useful tool, and seen us through different financial crises,” he says. “Our clients, as well as governments, agencies and the broader market, are all seeking to increase this type of financing, not decrease it. We need to figure out how SCF can be more ubiquitous.”