Article written by Mike Brandon (Head: Customised Trade Solutions; Nedbank CIB)
The business disruptions in South Africa brought about by COVID-19 and the national lockdown response have resulted in many companies finding that their working capital is now tied up in stock that they are unable to sell. This is having the knock-on effect of highly congested supply chains with large organisations, including some of the country’s leading corporates, finding it increasingly difficult to support their suppliers – many of which are small and medium enterprises that are already experiencing difficulties simply to keep their operations going until lockdown is lifted.
Under these conditions, corporates are often required to impose extended payment terms on their suppliers as a means of managing their own cash flows. This, understandably, can have devastating consequences for the suppliers, and the distress inevitably filters down through the entire supply chain ecosystem. That’s because, the majority of such supply chain participants are highly, or even entirely, dependent on their large clients for their survival.
And the effects of supply chain instability are certainly not only felt by the SMMEs in that chain. For most large companies, these all-important supply chains feed into their primary production, manufacturing, wholesale or retail business models. So, it is essential for their future competitiveness that they find ways of keeping their supply chains as intact as possible over these challenging times, especially if they hope to quickly restore their market positions and return to profitability when they are able to operate again.
In addition, many corporates have historically made significant enterprise development investments of financial and other resources over the years, to help build up the businesses making up their supply chains. The last thing they want to see is all that time, effort and money going to waste as the businesses in their supply chain are forced to close their doors.
But, while the current COVID-19 crisis presents huge challenges for corporates and their supply chains, these are by no means insurmountable. And with a little innovative thinking, and effective partnerships with their banks, corporates have the ability to help their suppliers survive the crisis.
One of the most effective ways of achieving such essential supply chain viability is through innovative short-term supply chain bridging finance. In Nedbank’s case, the capability it presented to corporates through Nedbank CIB’s market-leading Supply Chain Finance (SCF) offering.
The value of this type of finance is perhaps best illustrated using the Nedbank SCF example. Through the SCF platform, Nedbank CIB acquires the right to repayment of the receivable from a corporate client’s supplier in return for early settlement. This settlement is paid to the supplier at a discount to the face value of the invoice, based on the corporate client’s risk rating which is typically stronger than that of the supplier. On maturity, the corporate client settles the full value of the invoice to Nedbank. The model essentially gives the supplier quick and easy access to well-priced liquidity, which means it is able to sustain its operations. At the same time, the corporate entity is able to maintain its Days Payable Outstanding at an optimal level, which enables it to effectively manage its own cash flow requirements.
It’s a fully digitised model that has proven very successful with Nedbank CIB corporate clients across all industries, with more than R4bn in supply chain finance approved to date, mainly for clients in the ICT, retail and diversified industrial sectors.
Ultimately, an effective SCF solution is one that goes beyond merely providing funding for supplier payments. It needs to be backed by a financial institution that fully understands the dynamics of effective supply chain management and is able to partner with the organisation to help it analyse, understand and optimise its cash conversion cycle to achieve its key working capital objectives.
In return, the organisation can expect to enjoy the loyal support of well-funded suppliers who have not only been enabled to continue trading, but have had access to the financial resources to strengthen their business, retain jobs, and position themselves for optimal service to their corporate clients when the operational limitations associated with COVID-19 are lifted.