A new supply chain finance collaboration between the Danish Export Credit Agency, EKF and a Danish fintech aims to ease liquidity pressure placed on businesses as a result of COVID-19, releasing up to US$55bn in working capital.

The programme, launched at the start of May, will see banks in Denmark being encouraged to offer favourable credit lines to large organisations with export turnover, helping them to pay their suppliers earlier. EKF will underwrite these lines of credit.

Help needed now

The dramatic slowdown seen in trade over the past two months, as the COVID-19 pandemic continues, has seen some larger organisations extending their payment terms to suppliers. The effect of such action is being felt in trading relationships in many countries. One recent study shows that late payments to UK suppliers have shot up by 23% since 11th March.

This is placing huge pressure on otherwise healthy businesses, risking a slowing down of any potential bounce-back after the current conditions lift. The problem has been exacerbated 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 benefit most.

The new initiative, which has been endorsed by leading academics including Professor of Economics at Aarhus University, Philipp Schröder, 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-19.

Removing the risk and reducing cost elements around access to supply chain finance is seen by EKF as one solution. It calculates that by targeting the 250 largest buyers in Denmark, up to US$55bn in working capital can be made available to suppliers in Denmark between June 2020 and June 2021.

“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,” says EKF Director, Kirstine Damkjæ.

Industry support

The system relies on accessing 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.

“We will make the invoice data available to both the bank and the trade insurer, directly interfaced into their backend systems using our very flexible integration tools,” explains Tradeshift’s co-founder and SVP, APAC, Mikkel Hippe Brun. Businesses that rely on paper-based invoices will not be able to access the programme.

The model relies on getting industry support to pay suppliers immediately upon invoice receipt and acceptance. This will require a buyer to use money from its balance sheet now as opposed to in 30, 60 or 90 days, when the invoice payment dates were due.

“The buyer will need to take extra debt on their books, but it should be government-backed and the government should assist with handling covenant issues,” notes Hippe Brun. “We believe that the Danish government should pick up the bill for this programme since it will release so much liquidity into the economy at a very low cost. You could probably not find a better ROI in terms of jobs saved per dollar, than this model.”

Wider appeal

The programme is expected to enable EKF, and other ECAs, to begin rolling out their offering to smaller SMEs too. “ECAs are limited by very manual and paper-driven processes,” says Hippe Brun. “Digitalisation is key for scaling trade finance.”

The financing model adopted in this programme has been made open-source by Tradeshift, allowing other fintechs and organisations to use it. Whilst it is currently available only in Denmark, discussions are ongoing with a number of governments across the world who are considering the model as a way of making working capital available to businesses. “These are still early days, but we and our partners are in talks with government institutions in Spain, South Africa and the Middle East,” confirms Hippe Brun.

An estimated US$9trn dollars of working capital is currently trapped in supply chains globally, due to lack of suitable supply chain financing options.