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Current Macroeconomic environment is impacting business flows  

Supply chains have become global and increasing complexities have made them brittle and dependent, rather than robust and resilient; Covid-19 is a prime example of this. One blow in the JIT inventory approach may disrupt distribution easily. 

For SME suppliers, having access to finance to prepare for the next order and maintain continuous production is crucial.

The impact of disruptions caused due to COVID, geo-political tensions, high interest and inflation rates has further exposed the resilience gaps in the already complex and global supply chains

The Supply Chain Finance (SCF) industry has evolved over the last two decades on the back of evolving global supply chains and technology improvements with fintechs disrupting the industry. 

However, the industry is currently experiencing a “first”. In a previous era, the landed cost of borrowing to suppliers under SCF programmes was less than 2%, while the current rate is at least  5%. 

Small suppliers must decide between discounting their receivables early to fund their next production cycle or slowing down sales to wait for the funds to come in.

Shifting supply chains create new challenges

Multi-shoring and near-shoring for Western corporates are done with the hope of more resilience, but ultimately will come with higher costs. 

Shifting from China to China + 1 is evident, but the transition will be gradual and slow. It took China over two decades to become the “World’s factory” and the move outward will take time too. 

The speed at which markets like India, Thailand and Vietnam develop the right skill sets to make manufacturing easier will have a key role to play as well. 

The SCF Industry will also evolve with this gradual shift. Foreign banks, local banks and fintechs will fight tooth and nail to grab this new supplier base. 

Supporting suppliers with their regulatory compliances, providing local currency funding (including pre-shipment finance) and efficient supplier onboarding would be a key aspect to consider. 

Regulators are playing a balancing act between corporate buyers, investors and suppliers 

The introduction of stricter disclosure mandates and payment regulations in certain markets will lead to higher costs of compliance and increased purchasing costs for buyers.

The discussion isn’t focused on the purpose of the regulations but rather on their potential short and medium-term effects on the SCF industry. Banks and financial institutions will have to collaborate with buyers to adjust their supply chain programmes to meet these new standards, which might necessitate additional investments from both banks and buyers.

Technology will continue to democratise the proposition 

Leveraging technology for supplier onboarding and legal documentation is essential for the industry’s expansion and plays a crucial role in offering financing to untapped suppliers in emerging markets.

Platforms and SCF fintechs will play a key role in this area, however a balance between regulatory requirements and ease of onboarding suppliers is critical. 

Any regulatory or legal arbitrage may create additional risk in the industry 

Further, while the efforts are on to bring in “digital money / tokens” to support deep tier financing, the regulatory and legal landscape need to evolve further to make this a reality on a cross-border basis. 

To conclude while the SCF industry is contributing to closing the financing gap for small and medium-sized suppliers, it is simultaneously navigating macroeconomic challenges, shifts in supply chains, the entry of new participants, and regulatory adjustments for the first time. 

How the industry responds to this needs to be seen, but all these efforts are well in the direction of achieving the objective of providing access to finance to the ones who need it the most!  

Views expressed by the author in the article are personal