Clearer regulatory guidance, customer demand for sustainability and global economic uncertainty are the trends that will lead to both strengthening the supply chain and rapid growth in the supply chain finance market in 2020, according to PrimeRevenue.
Sustainability across the supply chain
Facing growing consumer and regulatory scrutiny, companies are under pressure to foster stronger, more sustainable supply chains that deliver a positive impact in three areas: economic (long-term profitability), social (how a company supports its employees, stakeholders, suppliers and community), and environmental. This is reframing the way companies think about supply chain finance.
Program objectives are becoming more ambitious than simply extending days payable outstanding (DPO). Increasingly, these objectives include funding strategic initiatives that meet their sustainability goals as well as empowering suppliers to do the same.
PJ Bain, CEO, PrimeRevenue adds: “We’re seeing demand shift towards supplier-focused supply chain finance. It’s not just about achieving one company’s cash flow objectives. It’s about de-risking and strengthening the entire supply chain so that each player can operate more sustainably and strategically.”
Clearer regulatory guidance
Neither the U.S. Securities and Exchange Commission (SEC) nor the Financial Accounting Standards Board (FASB) has provided clear guidance on how supply chain finance programs should be structured and how to account for them. In 2019, the world’s largest accounting firms penned a rare joint letter to the FASB requesting clearer guidance on what companies should disclose about supply chain finance programs in their financial statements. This was due in part to the SEC expressing greater interest in how some companies operate their supply chain finance programs and the financial benefits provided to participants.
The industry can expect more defined, clear guidance from the SEC and FASB in the next 12 to 18 months. However, there is no reason for companies to stall their supply chain finance initiatives if they are working with a supply chain finance partner experienced in navigating the current regulatory environment.
PrimeRevenue has worked with the SEC to align on protocols and best practices that make sure the right supply chain finance program information is disclosed properly and trade payables are not reclassified as debt. “We believe the SEC’s interest in supply chain finance is exactly what the market needs right now,” said David Quillian, PrimeRevenue’s chief legal officer. “More companies are using supply chain finance to optimize cash flow. Better operational understanding from the SEC and clarification from the FASB is a good thing.”
Economic ambiguity will continue to dominate the business climate going into 2020. In a recent survey by the National Association for Business Economics, 74% of U.S. business economists think the economy will slip into recession by the end of 2021. Meanwhile, according to the Duke University/CFO Global Business Outlook, over half (53%) of U.S. CFOs believe the U.S. will be in an economic recession by the third quarter of 2020, and 67% predict a recession by the end of 2020. Similarly, 72% of CFOs in Asia believe their countries will be in recession by third quarter of 2020, as do the majority of CFOs in Europe (69%), Canada (68%), Latin America (65%) and Africa (81%).
In the face of continued uncertainty, companies will seek new ways to shore up liquidity, pay down debt and fund strategic growth and transformation initiatives—all while simultaneously strengthening suppliers’ businesses. This will be a driving force behind greater adoption of supply chain finance. “Companies know they need to insulate themselves (and their suppliers) from the risk of a serious economic downturn—but not at the expense of strategic initiatives that will grow their business in the long term. Supply chain finance allows them to do both,” said Bain.
Source: PrimeRevenue, Inc.