The dramatic slowdown in trade over the past two months has seen many larger organisations extend payment terms to suppliers. According to one recent study, late payments to UK suppliers have shot up by 23% since 11th March.
In Denmark, where Tradeshift was founded, more than a quarter of businesses only have enough cash in reserve to last two months. If cash flow dries up, healthy businesses will start to come under enormous financial pressure, threatening the integrity of global trade ecosystems, and putting any hope of a strong bounceback in jeopardy.
We believe such a doomsday scenario is entirely avoidable. So we decided to do something about it.
Injecting liquidity into supply chains at scale and with speed
Together, with the Danish Export Credit Agency (EKF), we’ve launched a program to free up much-needed liquidity to businesses in Denmark through a technology-driven supply chain financing model.
Under this model—developed by the team here at Tradeshift, and endorsed by leading academics—banks in Denmark will be encouraged to offer favourable credit lines to large organisations in order to pay their suppliers earlier. EKF offers to underwrite these lines of credit to companies having at least 20% of their revenue from export, while Tradeshift will provide the technology to enable this initiative to roll out rapidly and at scale.
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.
We believe we can help to unlock up to 350 billion Kroner in working capital (equivalent to $55 billion USD) over the next 12 months, by targeting just 250 large organisations in Denmark.
We are leveraging the fact that the strongest companies in every economy typically also have access to cheaper capital. By paying their suppliers early we unlock much-needed liquidity into the supply chain with scale and speed.
Extending the model beyond Denmark
We believe our model can act as a cost-efficient alternative to government-backed loans and stimulus packages, many of which have struggled to reach businesses that would benefit most.
We encourage governments to consider offsetting the interest rate paid by the large corporates for a limited time period, twelve month, for example, under these programs. It is vital life support to SMEs during these difficult times.
The model we are using in Denmark is shared openly without IP restrictions so that other fintech companies and organisations can provide solutions to help facilitate the digital requirements of the overall system. We’re also opening discussions with a number of governments across the world who are considering the model as a way to make working capital available to businesses.