Global ecommerce platform Tradeshift is working with Eksport Kredit Fonden (EKF), the Danish export credit agency, to ease liquidity pressures on businesses triggered by the Covid-19 pandemic through a technology-driven supply chain finance model.
Under the programme, banks will be encouraged to offer “favourable” credit lines to large organisations in Denmark, with the finance earmarked to pay their suppliers. EKF will underwrite lines of credit to companies that generate at least 20% of their revenue from export activities.
“One of the biggest challenges with the current situation is liquidity in the SME sector, I don’t think it has come as a surprise to anyone. It’s a real problem,” Mikkel Hippe Brun, co-founder and senior vice-president for Asia Pacific at Tradeshift, tells GTR. “We also have a capacity problem in our banking system to process all of these credit and loan applications from businesses.”
By targeting the 250 largest buyers in Denmark, Tradeshift, which was founded in the Scandinavian country in 2010, claims that up to US$55bn in working capital can be made available to these companies’ suppliers from June this year to June 2021.
The programme relies on accessing invoice data exchanged between buyers and sellers to build up an accurate picture of existing invoice liquidity that is eligible for finance. Tradeshift will help businesses deliver visibility into these transactions to enable the system to launch and scale. Firms that rely on paper-based invoices are not able to access the solution.
The model has taken six weeks to develop, having been based on a previous solution that saw Tradeshift work with EKF on a cross-border programme, says Brun.
Tradeshift estimates that the cost of releasing this capital in interest rates is around US$200mn. “Essentially, the idea is to work with the biggest companies, the largest buyers in Denmark, give them government-guaranteed loans and have the government pick up the interest rate that would be needed to pay for these loans to release the liquidity into the economy.”
However, who foots the interest bill is still being discussed by authorities. “Right now, there is a political debate about whether government will pick up the entire bill for this. We’re hopeful that will happen. These are discussions that are underway right now in the Danish government.”
The alternative is that suppliers give a “very small” discount to offset the financing costs, which Brun adds “is definitely not the preferred model”.
Amid the Covid-19 pandemic, Brun says that one of the pressing challenges trade businesses face is capital not being deployed fast enough, and, even when it does flow quickly, it is being designated to keep companies afloat and not necessarily pay their suppliers. “Everyone is sort of hoarding liquidity. They’re delaying payments to their own suppliers and companies will even be asking for immediate payments on their own deliveries. It’s a very toxic environment.
“It’s instinctive behavior in a situation of crisis. Firms are stepping on the brakes, reducing costs and delaying payments, but in doing so, it creates a tidal wave down the supply chain, where suppliers need to step even harder on their brakes. We need companies to accelerate payments to their suppliers,” he says.
While the programme is currently only available in Denmark, Tradeshift says it is in discussions with a number of governments across the world that are considering it as a way to make capital available to smaller businesses. “We are in talks, through our partners, with institutions in Spain, South Africa and the Middle East.”
May 11, 2020