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16. June 2020Digital payment processing and dynamic credit management can financially stabilize SME suppliers and subcontractors through faster invoice payments during the Cov-19 crisis. Logistics service providers are among the hardest hit. Lars Krüger describes the situation.
By Lars Krüger
The coronavirus still has the global economy firmly in its grip, sending shockwaves through supply chain systems. Many large corporations are now focusing on their cash flow management and delaying payments wherever possible to remain liquid. Their service providers, suppliers, and subcontractors are left to bear the brunt.
In politics and business, there is growing concern that many SMEs will collapse as a result of this liquidity crisis. Government support funds and cheap loans only provide limited relief. There is a call for solidarity that is only sporadically present. Industry and trade groups must respond if they want to maintain their sources of supply and bring more stability to their supply chain systems in the medium term. It is a delicate balancing act.
While large companies have access to various trade financing instruments to weather economic turbulence, these are often unavailable to SMEs. According to the Asian Development Bank (ADB), the traditionally risk-averse banking sector rejects 45% of all SME applications for trade financing, compared to only 17.5% of applications from multinational corporations. And among SMEs, it is the larger ones that benefit. As a result, there is a real risk that even more smaller companies will have to file for bankruptcy if they are paid late by their customers or cannot access favorable financing to close their cash flow gaps.
Cash is king
In this tense situation and in light of low interest rates on bank deposits, one would like to believe that early payment models (Dynamic Discounting) are on the rise. About 80% of all suppliers are willing to offer discounts for early payments. However, many large companies are either uninterested or not technically capable of providing their suppliers and subcontractors with their excess capital in the form of early payments.
From the suppliers’ perspective, such financing solutions need to be bureaucratic and transparent, and not just beneficial for the large buyer – creating a true win-win situation. However, they often do not meet these expectations. Most of the payment platforms and dynamic discounting models used by large companies (in industry, trade, and logistics) are not very attractive to SMEs – too bureaucratic, especially when companies have to register on different platforms for different customers.
Faster Digitalization
It is therefore urgently necessary to seek a new approach to provide financing to all levels of the supply chain – from source to sink – especially to subordinate parts and components suppliers. A first step would be the digitalization of trade relationships and invoice processing (e-Invoicing). This would make all transactions between buyer and seller completely transparent. This reduces financing risk for buyers and banks.
Operators of open business commerce platforms are currently testing new incentive models to massively increase the acceptance of electronic invoices and digital discount procedures among suppliers and subcontractors. Financing for long-standing suppliers should in the future be automated within a few days, regardless of a verified invoice.
In more and more countries, e-invoices are being sent or at least electronic invoice data is being exchanged and processed as copies of paper trade invoices between companies. However, in many countries in Asia, Africa, and Latin America, electronic B2B invoices are still not permitted or only with explicit approval from tax authorities. In some Asian countries, however, e-invoicing is already highly developed, such as in Singapore, Taiwan, Hong Kong, and South Korea. The financial pressure of the Cov-19 crisis will hopefully accelerate automated invoice creation and processing worldwide and give a boost to supply chain finance solutions.
Difficult Supplier Changes
Large companies are usually neither able nor willing to switch to new suppliers in the short term. Suppliers must be carefully selected to meet product standards and compliance guidelines. Time-consuming and detailed tenders, competitions, and submissions precede any new cooperation contract. It is therefore in the clients’ own interest that their suppliers do not go bankrupt due to the Corona crisis.
B2B procurement platforms are indeed on the rise, but they are more often used for spot purchases, regional or industry-specific (chemical platform) purchases, rather than as a foundation for long-term intercontinental supplier relationships. Worldwide, Alibaba is the largest B2B procurement platform. But even here, suppliers are financially at risk, so the corporation is currently offering them bridging loans.
Déjà vu
No one could predict the extent, speed, severity, or timing of the coronavirus outbreak. But shouldn’t companies be better prepared for the consequences of supply chain disruptions – also in financial terms? Every year, there are numerous triggers for disruptions: storms, floods, wars, trade wars, strikes (think of Hong Kong and France), diseases (mad cow disease, Ebola, SARS…), etc. Now there is also a massive drop in demand in almost all economic sectors. And it is always the SME suppliers and subcontractors that stumble.
The Author
Lars Krüger has been with Tradeshift since 2016 and is responsible for Alliance Management in the DACH region as Director. He works closely with leading consulting firms. Lars Krüger has over 20 years of experience in e-invoicing, business collaboration, procure-to-pay, and order-to-cash.
