Tradeshift, a European fintech specialising in supply chain payments and a leading supplier of Denmark’s supply chain finance is working alongside the Danish Export Credit Agency (EKF) to create a technology-driven supply chain financing model that will open up much-needed liquidity to businesses in Denmark.
Tradeshift, in collaboration with EKF, has developed a model that encourages banks to extend favourable credit lines to large organisations with export turnover in order to pay their suppliers earlier. EKF will underwrite these lines of credit.
The Danish initiative is being touted as a cost-efficient alternative to government-backed loans and stimulus packages designed to help ease liquidity pressures placed on businesses as a result of COVID. It has also been endorsed by leading academics including Professor of Economics at Aarhus University Philipp Schröder,
The dramatic slowdown in trade over the past two months has seen many larger organisations extend payment terms to suppliers. According to a recent study by B2B Artificial Intelligence platform Sidetrade, late payments to UK suppliers have soared by 23% since 11th March. This clogging up of cash flow is putting significant pressure on otherwise healthy businesses, and risks slowing down dramatically any potential bounce-back after the current conditions lift. The problem of Denmark’s supply chain finance has been made more severe by traditional trade finance insurers threatening to pull out of the market, and government-issued ‘helicopter relief’ money struggles to flow to businesses that would most benefit.
By effectively removing the risk and 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 $55bn in working capital can be made available to suppliers between in Denmark from June 2020, to June 2021.
EKF Director Kirstine Damkjæ has stated: “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”.
The Danish initiative is dependant on access to invoicing data exchanged between buyers and sellers to build up an accurate picture of existing invoice liquidity that is eligible for finance. As the technology partner in Denmark, Tradeshift will help businesses deliver the necessary visibility into these transactions to enable the system to roll out rapidly and at massive scale. Companies that rely on paper-based invoices will not be able to access the program.
Co-founder and SVP, APAC, for Tradeshift, Mikkel Hippe Brun, says: “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, but it also avoids the behavioural death spiral, where all companies in a value chain withdraw their payments simultaneously,”
Tradeshift has kept the IP open on this model, allowing other fintech companies or organisations to provide solutions and help facilitate the digital requirements for the system. While the financing model is currently available only in Denmark, there is no reason why it could not be introduced in other countries.
Tradeshift is currently in talks with several governments across the world who are considering the model as a way to make working capital available to businesses. An estimated nine trillion dollars of working capital is currently trapped in supply chains globally, due to lack of suitable supply chain financing options.
We spoke to Mikkel Hippe Brun, Co-founder of Tradeshift to gain insight into the financing model.
Why was it important for Tradeshift to keep the IP open on this model?
We have a global pandemic and economic crisis. We have come up with what we believe is a great and very scalable idea. This is not the time to protect ideas that could possibly save the livelihood of millions of people. We just wanted to encourage others to do what we have done in Denmark without fearing that we would chase them down afterwards for IP infringements. That’s it.
What’s your prediction for the future of supply chain financing?
The model we have just proposed is supply chain financing in its most crude form. It is equivalent to financing supply chains with a shovel. It is highly effective, but it is also a one-size-fits-all model. With nine trillion USD tied up in global supply chains, it has clearly been demonstrated that current practices do not scale. The next generation of supply chain financing can be targeted needs of each individual company. They will have options to choose from, and they will not be at the mercy of their customers’ payment terms and their banking partners’ tight credit facilities. Optionability with regards to supply chain financing is the future, and we are already pretty far.