Key takeaways:

• Inflation, rising interest rates and geopolitical instability are putting increasing pressure on supply chains

• Innovative working capital solutions are more efficient, more transparent and more available, thanks to digitisation

• Tailored Supply Chain Finance products mean even complex supply chains can find funding solutions

While the world economy just narrowly skirted a recession (for now), the World Bank announced that global growth over a five-year period is at its weakest in three decades. Companies are feeling the squeeze. Inflation, interest rates and geopolitical instability are placing enormous pressures on businesses, and they’re particularly acute for global, complex and increasingly fragile supply chains. 

Within this context, innovative working capital solutions have never been more critical, and we’ve seen Supply Chain Finance (SCF) products emerge as one of the most effective strategies for optimising cash flow and working capital in a testing period. 

That said, there are some important ways in which existing solutions are falling short. So before you choose a working capital solution, be aware of the following limitations – and more importantly, the solutions…

What do we mean by Supply Chain Finance?

Supply Chain Finance (SCF) is not one solution but a suite of solutions. It is not, as some suggest, simply Payables Financing – or Reverse Factoring. 

According to the International Chamber of Commerce, SCF is the use of financing and risk mitigation techniques to optimise working capital management and liquidity invested in the supply chain. It’s an ecosystem of products, mostly for open account trade and triggered by supply chain events.

Challenge #1: Funding cross-border trade

Existing supply chain finance (SCF) solutions – and especially Receivables Finance – often struggle to adequately support cross-border trade, creating barriers for growing companies looking to expand overseas. 

For traditional SCF solutions, credit assessment processes are often limited in scope, and fail to capture the full spectrum of risks associated with international trade. They typically focus on the financial health and creditworthiness of the primary borrower or domestic buyer, without adequately considering the broader context of cross-border transactions. As a result, many funders are reluctant to extend credit for overseas operations due to a range of perceived higher risks.

But this conservative approach to risk assessment means that most 'non-vanilla' markets – those that do not fit into the typical risk profiles favored by traditional SCF solutions – are excluded altogether. Many businesses operating in or with these markets find themselves unable to access the necessary financing to support their international operations. This exclusion not only limits their growth potential, it stifles opportunities for diversification and market expansion.

Traditional SCF programmes are typically designed with domestic operations in mind. They rarely accommodate for the nuances of multiple currencies – and the associated foreign exchange risks – or provide the flexibility needed for varying payment behaviour norms in certain markets. 

Compliance requirements for cross-border transactions are also more complex and time-consuming than domestic transactions. Some markets, and especially developing markets, are flagged as higher risk from a KYC standpoint and require “enhanced due diligence”. The inflexibility of many funders means that they’re either unwilling to take the risk or lack the expertise to carry it out. 

The solution to funding cross-border trade

To overcome these challenges, there is a pressing need for innovative, flexible SCF solutions built for cross-border trade. Key elements of such solutions should include:

• Holistic cross-border funding, connecting businesses with a global network of funders and enabling them to access financing across multiple markets from a single, unified platform.

• Tailored risk assessment and compliance management to address the specific political, legal, and economic risks of different markets.

Challenge #2: Funding operational complexity

Businesses aiming to unlock the most working capital from their supply chain often struggle to access supply chain finance (SCF) solutions that can handle the operational intensity of managing and processing large variability across diverse value chains. 

Traditional working capital solutions do not normally meet the specific needs of different industries, which is a problem when each industry has its own challenges. Take prepayment requirements for international manufacturing, for example, seasonal peaks for commodities, intra-group trading for distribution, or technology’s rapid inventory cycles. 

Despite these differences, working capital solutions are mostly rigid and not easily adapted to meet the varied and dynamic requirements of these sectors, or indeed any operationally complex supply chain.

Many banks and even non-bank lenders lack the capability or the desire to deeply understand more complex business. 

As a result, businesses often can only access a fraction of the working capital that they need from the most straightforward parts of their supply chain, leaving everything else on the table.

The solution to funding operational complexity

To address the shortcomings of traditional working capital solutions, businesses need partners who can truly understand their operational complexities and have the capacity to offer flexible and tailored financing solutions. This requires:

• Deep understanding and custom funding structures with funders who have the capability and willingness to delve into the specific needs of a business and its industry. This allows for the creation of bespoke funding solutions that reflect the unique requirements of each sector.

• Flexible digital platforms that incorporate the nuances of different industries and automate the funding process. These platforms provide real-time transparency, risk management, and adaptability to every stage of the supply chain to enhance operational efficiency and funding flexibility.

• Comprehensive lifecycle financing with dynamic financing options to cover the entire supply chain, from PO Finance to Inventory Finance and Receivables Finance. This ensures that businesses can unlock working capital at every stage of their operation to improve their cash flow and overall financial health.

Challenge #3: Funding more trading partners

Many existing SCF and working capital solutions are falling short because they support only a limited number of top-tier trading partners. 

This selective approach means the vast majority of suppliers or buyers – those smaller than the top-tier and often referred to as ‘tail of the supply chain’ – are left without the financial coverage they need. The inability to include all trading partners not only leads to missed opportunities for cost savings and improved liquidity, but also undermines the overall resilience of a supply chain.

This focus on top-tier counterparties is often due to perceived lower credit risks and the administrative ease of dealing with fewer, larger companies. However, this focus neglects many smaller trading partners, crucial for the diversified and healthy functioning of the supply chain. 

Smaller suppliers face the highest funding costs and have limited financing options, which can significantly strain their cash flow. Excluding them from a Payables programme, for instance, means missing out on the opportunity to offer a lower-cost funding solution that could also reduce the buyer's cost of goods sold (COGS). On the Receivables side, this exclusion restricts the scope and size of the programme, limiting it to selective accounts receivable (AR) rather than a full portfolio, and reduces the amount of receivables that qualify for funding.

To build more resilient and inclusive supply chain ecosystems, SCF and working capital solutions need to be redesigned so they can cater to the entire range of a company’s trading partners, not just a few large ones. 

The solution to funding more trading partners

To address the limitations of traditional working capital solutions, it's crucial to develop more inclusive and resilient SCF strategies. This requires: 

• Deep understanding of smaller counterparties from both a credit and KYC standpoint. This means being willing to assess and manage the risks associated with these smaller entities, which are often overlooked by traditional SCF programmes.

• Advanced digital platforms that can automate the onboarding process for a large number of entities and handle a high volume of invoices. These platforms should be capable of managing diverse payment and funding terms, making it feasible to include a wider range of trading partners in the SCF program.

By incorporating these elements, SCF and working capital solutions can be redesigned to support the entire spectrum of a company’s trading partners, enhancing overall supply chain resilience and maximising financial inclusivity.

Get a working capital solution that works for you

If one or more of these challenges are familiar to you, the good news is there is a better way. 

Finverity stands out in a crowded SCF market by offering tailored working capital solutions that meet the specific needs of growing, international businesses like yours. 

Unlike traditional working capital solutions that are inflexible and limited to local funding opportunities, Finverity provides funding solutions that support both local and cross-border trade, address the full complexity of your global supply chain, and include more trading partners.

So if your business is facing any of these challenges, Finverity can help you:

• Find your optimal working capital solution by structuring & securing funding tailored to your business & supply chain.

• Unlock additional working capital with working capital solutions that support more trading partners, more complexity and more geographies.

• Diversify your lending pool with access to over 50 funding partners, specifically selected to support your long-term goals.

• Seamlessly manage your working capital facilities from a single digital system designed to eliminate manual processes and streamline operations.

What does your optimal working capital solution look like?

Get in touch to explore solutions that support more markets, more trading partners and more operational complexity than your existing funders.

Book a call > Capital@finverity.com