Insights for Procure-to-Pay and Finance Leaders

The 9-trillion dollar question: why is so much liquidity locked up in the supply chain?

A little over three years ago, Forbes described Christian Lanng, co-founder and CEO of Tradeshift, as “the man fixing the late payments issue.” Since then, interest’s been exploding in industry platforms, technologies like AI and blockchain are taking the spotlight, and legions of fintechs are challenging the financial services industry.

Innovators continue to improve the speed and transparency of payments to suppliers. An entire ecosystem of companies (including Tradeshift and its partners) now offers small businesses a host of products to boost their working capital and gain access to alternative forms of lending.

So why are over nine trillion dollars of liquidity still locked up across supply chains? It’s simply a case of a widespread problem finally coming into contact with an emerging solution. With technology fueling nonstop innovation, the entire trade finance industry is inching toward a turning point that will unfreeze liquidity across global supply chains and strengthen trade in the process.

Rising demand for affordable credit

Globally, over $9 trillion in trade assets languishes on supplier balance sheets as receivables. A report by the World Trade Organization (WTO) states that over half of global trade finance requests by small and medium-sized enterprises are rejected.

The WTO estimates $700 billion in unmet trade financing demand in Asia and $120 billion in Africa. And an Ernst & Young study found that the leading 2,000 US and European companies have up to $1.3 trillion unnecessarily tied up. Yet, only 10 to 20 percent of outstanding receivables are intermediated by banks and other financial institutions.

This isn’t a lack of liquidity problem. It’s not because traditional avenues of commercial banking and working capital programs are inferior. The real culprit is high transaction costs combined with structural barriers like paper invoices, onboarding costs, risk management, governance, complexity, and accounting treatments. These barriers have simply fenced off the long tail of supply chains in need of financing.  

“Non‐financial” platforms: a supply chain solution

Those barriers above slow down the mainstream adoption of trade finance, including reverse factoring, supply chain finance, invoice discounting, and other forms of early payments. But the barriers virtually disappear once you integrate banks and business credit issuance providers into the marketplace of a global network of trading partners transacting on a single open platform. That’s because the transaction workflow is precisely where credit should be offered: the point where it is often most needed. Or in the words of the World Economic Forum (WEF):

“Lenders are targeting non‐financial platforms because they provide access to the exact moments when customers need credit the most, such as during supply chain management or the settlement of accounts receivable. Thus, lenders can pre‐emptively underwrite loans at ‘decision moments.’”

WEF’s report illustrates how new “non‐financial platforms are emerging as an important source of underwriting data and a point of distribution for credit.” Financial institutions are embedding lending products into third‐party online platforms as a solution to supply chain barriers.

Data is another key driver for lenders. Once again, in the words of the WEF:

“Lenders are also turning to non‐financial platforms as distribution channel partners because of the particular data sets many of these platforms hold. This data can provide valuable forward‐looking insights into a company’s performance, as well as enable detailed comparisons between similar businesses and individuals. As such, this data helps to lower both underwriting risk and the cost of underwriting.”

The road ahead

Partnerships between platform providers and financial institutions have the power to make a real impact that goes well beyond reducing costs and barriers to lending.

When joint solutions are neither strictly in the core solution set of the finance providers or the platform providers but are common to both, they can form symbiotic relationships that benefit millions of small businesses that need access to affordable credit.

To learn more about supply chain finance, download a copy of “Busting Payable Finance Myths- Key Trends and Issues in the Digital Age” by Global Business Intelligence.