Earlier this month we looked at how trade tensions are making supply chain flexibility mission critical for businesses. Here we continue the discussion, looking at why financing should be part of the conversation.
Tensions between the US and China pose a big risk to global supply chains. Companies caught in the crossfire face squeezed profit margins and supply chain disruption.
To mitigate these risks, companies are taking action and looking to shift a portion of their supply chain out of China and into other low-cost emerging markets. But as we found out recently, this isn’t an easy task, due to the inflexibility of many corporate supply chains.
Inflexibility isn’t the only issue companies must deal with, however. Shifting parts of the supply chain to countries such as Vietnam, Cambodia, and Bangladesh is fraught with risk.
There’s risk around the quality of product, fraud, logistics, and so forth. There’s also a real risk that your new supplier doesn’t have the financial resources to support your business in the long run.
Here we take a look at why this is such an issue and what your business can do to mitigate the risk.
Around the world, micro, small, and medium-sized enterprises (MSMEs) face working capital challenges. They struggle to access bank funding, with less than half having access to formal credit. In fact, banks reject over 70% of trade finance requests from MSMEs, according to the Asian Development Bank. This creates an estimated $1.5 trillion trade finance gap worldwide.
The issue is very clear in developing Asia. According to the Asian Development Bank, 40% of the trade finance gap exists in the region. This is part of the reason over a third of MSMEs in Asia suffer from finance-related issues, according to recent research.
These challenges are holding back the growth of the MSMEs in the region. They’re also holding back trade, with over 50% of companies saying they fail to execute trade transaction when they don’t have access to trade finance. That could be your supplier, unable to fulfill your order.
Step in and step up
Given the regulatory environment banks are operating in, it’s unlikely they’ll close this gap — at least through traditional financing channels. So MSMEs require an alternative source of financing. And that’s where you step in.
Supplier financing tools like Supply Chain Finance and Dynamic Discounting allow you to offer readily available and low-cost funding to your suppliers. These tools help your suppliers with their working capital challenges.
As a buyer, you’ll enjoy more than a healthy supply chain; you’ll also improve your own working capital metrics or receive discounts on goods purchased from your suppliers.
Finance professionals have a crucial role to play in ensuring the company’s evolving supply chain strategy is a success. When your company starts working with new suppliers, make sure supplier financing is part of the conversation.