Tradeshift is working with EKF, the Danish Export Credit Agency to open up liquidity to businesses in Denmark through a technology-driven supply chain financing model. Denmark’s supply chain finance programme targets business bounceback with a US$55B working capital injection. Tradeshift is a European fintech specialising in supply chain payments which exploits blockchain technology.
“We want to do our bit to motivate companies to pay immediately, so we’ve made our full arsenal of solutions available to export companies that choose to show their support for suppliers. Under our model companies can pay suppliers ahead of time without compromising their own liquidity ”said EKF Director Kirstine Damkjær.
The liquidity issue
The dramatic slowdown in trade over the past two months – attributable primarily to COVID-19 ‘side-effects’ – has seen many organisations involuntarily extend their payment terms to suppliers. For example, in another country, late payments to UK suppliers may have shot up by 23% since mid-March, 2020. In a different estimate, some US$9T is currently trapped in supply chains globally, due to lack of suitable supply chain financing options.
This clogging up of cash flow is putting major pressure on otherwise healthy businesses, and risks slowing down dramatically any potential bounce-back after the current conditions lift. The problem has been made more serious as traditional trade finance insurers threaten to pull out of the market and government-issued ‘helicopter relief’ money struggles to flow to businesses that would most benefit.
The Tradeshift – EKF approach
The model developed by Tradeshift, in collaboration with EKF, encourages banks to offer favourable credit lines to those large organisations with export turnover. The objective is to enable those organisations to pay suppliers earlier. The key point: EKF will underwrite these lines of credit.
The Danish initiative, which has the endorsement of several leading academics including Professor of Economics at Aarhus University Philipp Schröder, should offer a cost-efficient alternative designed to help ease liquidity pressures placed on businesses as a result of COVID-19. It is preferable to:
- government-backed loans
- stimulus packages.
The Danish initiative relies on accessing invoicing data exchanged between buyers and sellers. This builds a picture of existing invoice liquidity – which is then eligible for finance. Tradeshift, with its knowledge of supply chain invoicing, will help businesses deliver the necessary visibility into their transactions.
Each business must be able to document that they have suffered or expect to suffer, a decline in revenue of at least 30% as a result of the COVID-19 pandemic/crisis for the entire or part of the period (with a minimum of 14 days) from 1 March 2020 until 30 September 2020. By accessing the Tradeshift data, businesses will be able to access financing. At the same time, the program is enabled to roll out rapidly and at massive scale. In contrast, businesses which rely on paper-based invoices will not be able to access this specific program.
“The immediate payment scheme has the potential to become a vital support package for companies during the corona crisis. Not only is the economic potential inherent in itself, it also avoids the behavioral death spiral, where all companies in a value chain withdraw their payments simultaneously” according to Tradeshift’s co-founder and SVP, APAC, Mikkel Hippe Brun.
Enterprise Times: what does this mean
By largely removing the risk while reducing cost elements around access to supply chain finance, it becomes a virtual ‘no-brainer’ for large organisations and their suppliers to use the system. By targeting the top 250 large buyers in Denmark, Tradeshift claims that up to $55B in working capital can become available to suppliers in Denmark between June 2020 and to June 2021.
An additional attraction is that Tradeshift has made the financing model open source. This means that other fintech companies and organisations can provide solutions to help facilitate the digital requirements of the overall system.
While the EKF financing model is available only in Denmark, there is no logical reason why it could not become available in other countries. To this end, Tradeshift says it is in discussions with a number of governments which are considering as a mechanism to release working capital to businesses.