As organizations look for ways to strengthen supplier relationships and improve liquidity, supply chain finance has become an increasingly important tool for optimizing working capital. By enabling suppliers to receive early payment while allowing buyers to extend payment terms, these programs can create benefits across the entire supply chain. However, the success of a supply chain finance program often depends on its funding structure. While some organizations favor a single-funder model for simplicity, many are turning to a multi-funder strategy to reduce concentration risk, improve global coverage, and ensure long-term program stability. As supply chains become more complex and interconnected, diversification is emerging as a critical component of effective working capital management.
If you’re familiar with supply chain finance, you know that proponents fall into one of two categories – those that choose a single, large financial institution to fund their program, and those that deem that path far too risky. But, before we get into the reasons of why a single-funder approach is ill advised, it’s important to acknowledge why companies are drawn to it a tall.
Despite the billions of dollars spent on supply chain management and logistics innovation, today’s global supply chains are plagued by inefficiencies that erode profits. This is due in part to the sheer complexity of managing hundreds (or thousands) of suppliers across multiple geographies, and all of the process, financial and regulatory nuances that entails.
Also weighing heavily in this complicated mix of dynamics is the need to improve cash flow and optimize working capital. Regardless of the challenges facing the supply chain, companies still need to innovate, compete and invest in the long and short-term success of their business. Supply chain finance gives them an opportunity to do just that. By extending supplier payment terms, companies can optimize cash outflow – while enabling suppliers to trade their invoices with a financial institution that can provide near-immediate payment.
It’s a win-win for companies and suppliers, but establishing a supply chain finance program is also a significant undertaking just like any other highly strategic business initiative. It requires a complex orchestration of procurement, IT, finance and funder stakeholders – all of which have their own business and departmental objectives and requirements. On the surface, askinga single, large financial institution to fund an entire program seems like a good way to simplify the process and reduce the program management burden.
Except that it’s not. Not by a long shot.
A single source of funding, no matter how large, cannot meet the financial requirements of a global supply chain. There is no one institution that can fund all currencies and jurisdictions. And, above all else, there is no single funder that can accomplish the aforementioned requirements without introducing considerable and untenable risk.
Many of the very financial institutions that claim to be able to fund supply chain finance programs have had struggles in the post-financial crisis market landscape. Examples: Citigroup, Royal Bank of Scotland and Deutsche Bank.
Amid a soft global economy in 2014, Citigroup began exiting 11 countries (many concentrated in a single geography). RBS made a similar move in 2015 as it wound down cash management and trade services in 25 of the 38countries it serves. Very recently , Deutsche Bank’s share price plummeted following reports that several key hedge funds had started withdrawing funds to reduce their exposure. This event was precipitated by the Department of Justice’s recent $14 billion fine for the bank’s activities leading up to the financial crisis.
In regards to Deutsche Bank, the real concern isn’t the corrections to Deutsche Bank’s position; it’s the aftershocks that could be felt by dozens of other large, multi-national banks across the globe. Earlier this summer, the IMF remarked that Deutsche Bank “appears to be the most important net contributor to systemic risks” in the global banking system.
These events in the context of global supply chain finance could have serious implications for companies that elect to employ a single-funder approach. What happens when your funder can no longer serve suppliers within a certain market or entire geographical area? Cutting off funding for any swath of suppliers – broad or narrow – not only weakens program performance, it can have a lasting impact on the suppliers’ health as they acclimate to a new standard of cash flow (which, in turn, can increase risk in the company’s supply chain). And bringing in new funding sources on a one-off basis is no less risky.
This is the single most important reason why companies should take a multi-funder approach to supply chain finance. Not only is it virtually impossible for one bank to fund all jurisdictions, it’s dangerous at best and disastrous at worst. Multiple funders prevent a company’s supply chain finance program from being held hostage to the health and strategic imperatives of one single financial institution. It ensures that all currency and jurisdictions are well funded and also increases price competition so that companies and suppliers can optimize working capital to full potential.
Supply chain finance helps companies unlock millions (in some cases, billions) of dollars of working capital trapped in their supply chains. A multi-funder strategy ensures and sustains this impact while eliminating many of the single-funder strategy risks that could destabilize program success.
The evolution of global commerce has made supply chain finance a strategic necessity for many organizations seeking to improve working capital management and support supplier health. While a single-funder approach may appear convenient, the risks associated with concentration risk, geographic limitations, and changing institutional priorities can undermine long-term program success. A multi-funder strategy provides greater flexibility, broader coverage of supplier payment terms across jurisdictions, and increased resilience in the face of market disruptions. For companies seeking to maximize the value of their supply chain finance initiatives, diversification may prove to be the most sustainable path forward.
