The Banking Crisis and Why It’s Time to Move From Single-Bank SCF to the Safety of DSF

The previous credit crisis taught us that obtaining and relying on a single-sourced funding option can lead to counterparty risk at any time.

In his book “The Black Swan,” author Nassim Nicholas Taleb warns us to expect the unexpected, especially as globalization makes rare and unpredictable “black swan” events more frequent. His answer was to ensure flexibility so that organizations can quickly adapt — a wise piece of advice that has been proven again and again over the last three years of turmoil. 

And now we’re discovering there could be a black swan lurking in the traditional supply chain finance (SCF) model. 

With these SCF solutions typically relying on a single fronting bank or financial institution to provide funding for early payment programs, what happens when that funding collapses as a black swan event might suggest? A lack of immediate access to cash means there is a stark choice between shoring up your balance sheet and letting your suppliers struggle with limited or no access to cash flow. In either scenario, this leads to financial losses and supply chain disruptions. So how can you navigate around this black swan before it surfaces?

The current crisis serves as a wake-up call for buyers to reconsider their reliance on a single funding source for their supply chain finance program by exploring multi-funder options like C2FO’s Dynamic Supplier Financing (DSF) solution. SCF has been a very successful tool for many companies, but it rests in a sleepy corner of many companies’ financial risk assessment. The time to reassess is now. 

What are the risks of a single-bank SCF?

As demonstrated by the collapse of Silicon Valley Bank (SVB) and the Credit Suisse bailout, there are risks attached to using single-bank funding. The main risks are:

Counterparty risk: If the bank providing funding becomes insolvent, the SCF becomes disrupted, leading to financial losses for buyers and suppliers.

Concentration risk: Buyers are exposed to concentration risk if they are relying on a single bank for funding. Concentration risk also applies to the suppliers in a program — SCF typically only covers a handful of suppliers, but the current banking crisis is more likely to hit the thousands of smaller suppliers that don’t have access to a standard SCF program. An elevated bankruptcy rate of smaller suppliers has the potential to impact a business’s delivery operations to the same degree as a strategic supplier.

Pricing risk: The buyer may have limited bargaining power in negotiating pricing and terms, resulting in higher costs for the buyer and lower returns for the suppliers.

Lack of flexibility: Limited flexibility can reduce the ability of the buyer to adapt to changes in the supply chain and respond to unexpected events.Credit restriction: The bank reduces its exposure because of the crisis.

What’s the alternative to SCF?

Multi-funder options, like C2FO’s DSF solution, are the alternative to single-bank SCF programs.

How can you shift to a multi-funder option?

By assessing the concentration risk associated with your current SCF programs, you can see the potential impact of a funding source’s withdrawal. As a buyer, you can help diversify your funding sources and develop a strategy that outlines criteria for selecting the funding source, allocating the funding and monitoring the performance. Implementing a robust risk management system to consider the potential impact of funding withdrawal can help keep the supply chain running. Having a tool to allow multiple sources of funding, such as bank funds and your own cash, also helps mitigate the impact of rising interest rates on the affordability of the SCF program for suppliers.

How can C2FO help?

C2FO offers a Dynamic Supplier Financing solution that can help buyers reduce counterparty risk by offering the flexibility of alternative financing options. With the fall of SVB and Credit Suisse, you may be concerned about the stability and reliability of your traditional banking partners. Through DSF, buyers can provide early payment to their suppliers, which can help improve cash flow and reduce the risk of late or nonpayment.

How does DSF work?

C2FO’s solution provides a SaaS-based platform that connects buyers and suppliers across the entire supply chain, enabling early payment of invoices using a variety of funding sources (for example, bank credit, a buyer’s own cash or both). The platform provides buyers with visibility into their cash flow and supplier financing, allowing them to manage their supply chain financing more effectively.

DSF is a finance solution that is different from traditional bank financing. It allows suppliers of all sizes, including small and medium-sized enterprises (SMEs), to access early payment with competitive pricing and no restrictions on spending. This means that more suppliers can benefit from the program than with traditional SCF models. C2FO’s platform also eliminates the need to segment suppliers, as the system automatically determines rates based on supplier input.

The platform provides a single, cloud-based solution that allows for seamless collaboration between companies and their traditional partners. A dedicated account team ensures optimal working capital solutions and the best collaboration with trading partners. With DSF, C2FO offers the most flexible early payment program that allows for complete control in managing working capital.

Are there risks or disadvantages?

No, the only risks are those of timing. Failure to act or delays in properly assessing the risks in your current SCF could result in disaster for your business or your suppliers if that funding source collapses.

Is this a more complicated solution than traditional SCF?

C2FO’s DSF actually involves less management, because traditional SCF models still rely on individual bank-supplier relationships and fee structures. In contrast, C2FO takes management of supplier and bank communications via a fully digital platform and supportive account management, so not only are there fewer risks and more flexibility, the process is more efficient all around.

Who will the DSF solution work for?

C2FO’s Dynamic Supplier Financing gives enterprises more optionality for funding their SCF programs and ensuring those programs are consistently available to suppliers. It has helped multinational organizations transform and modernize their legacy procurement methods and enabled SMEs to thrive with increased flexibility and access to early payments on invoices.