J.P. Morgan: Why Working-Capital Trade Finance Is On The Rise

Although the 2008 financial crisis jolted the world economy, the financial conditions leading up to the disruption had been a long time coming.

It’s perhaps the biggest economic difference between then and the current climate, in which a global pandemic thrust millions of workers in the U.S. into unemployment and fractured supply chains across the globe — all within a matter of days.

But there is room for optimism.

In a conversation with Karen Webster, J.P. Morgan Global Head of Trade Structured Solutions James Fraser explained how some corporates’ healthier cash positions this time around have fostered an environment of cooperation and support throughout supply chains.

Whether through accelerated supplier payment terms or the deployment of less traditional trade service solutions, businesses are finding it beneficial to keep liquidity flowing for themselves and their key partners. And according to Fraser, that means banks will be poised to support that cash flow collaboration through trade finance innovation.

Lessons Learned From 2008

Although the current economic volatility is disruptive and challenging, many businesses are taking lessons learned from the past and applying them to the ways in which they navigate today’s hurdles.

One of the biggest lessons, according to Fraser, is the need to go beyond an enterprise’s own four walls when promoting financial health.

“Coming out of the 2008 financial crisis, corporates recognized that in order to preserve their own operations, they needed to maintain liquidity through their supply chain and into their supply base,” he said.

Businesses with such financing programs already in place have largely been able to support the financial health of their supply chains, while corporates without such programs are today exploring implementation “aggressively,” he added.

Unlike a decade ago, corporates today are flocking less to traditional trade services and more toward off-balance sheet financing tools like supply chain and receivables financing, offerings which Fraser said are resilient to economic downturns thanks to banks’ overhauled capital management strategies.

Many firms, particularly larger ones, find themselves in “a strong and stable position” from a cash and liquidity perspective as a result of their greater access to capital and credit markets. According to Fraser, that has a profound impact on these firms’ ability to support their partners.

Accelerated supplier payment terms and buyer-initiated supply chain finance solutions have proliferated in recent months as corporates explore how to wield their healthy cash positions and ease a liquidity crunch that many smaller players within supply chains face today.

“You’ve seen this symbiotic relationship across the supply chain, where corporates are helping each other out and managing through the crisis,” Fraser said.

An Innovation Opportunity

That’s not to discount the very real cash flow challenges businesses around the world continue to face today. Not all corporates are in a position to accelerate accounts payable (AP) or extend trade financing programs to vendors, with players in industries like travel and hospitality in a particularly precarious situation.

Yet for others, the past decade offered a profound lesson in the opportunity that off-balance sheet and working capital financing solutions could provide to help weather financial volatility — both for themselves and their essential partners.

As important as it is for corporates to wield these lessons today, Fraser emphasized the opportunity for businesses to also use those teachings for more permanent changes in how they do business and manage liquidity.

While it’s largely too early to predict long-term impacts of the pandemic, Fraser said results could include long-term accelerations of supplier payment terms or more permanent supply chain financing arrangements that were put in place because of the pandemic.

There are new lessons to be learned, too. While businesses have historically focused on margin optimization strategies like just-in-time delivery, the current climate has pulled the curtain back on the significant downsides to keeping inventory at a minimum. In the future, businesses could shift toward a different strategy to ensure they keep inventory on hand to continue production and maintain stock through volatile times.

“That needs to be financed,” Fraser said, “and it’s creating pressure on working capital that needs to be sized appropriately.”

For financial institutions, this presents an opportunity to expand off-balance sheet financing offerings into areas like inventory finance. And while supply chain finance and other similarly evolved solutions will continue to gain traction, Fraser said banks have a significant opportunity to invest in further innovation ahead.

Data analytics to support more accurate cash flow forecasting presents a significant value proposition for financiers, he explained, adding that for J.P. Morgan, exploring bespoke portfolio financing solutions to help both buy- and sell-side corporates unlock liquidity will be key. It was among the motivations behind its alliance created with working capital management platform Taulia.

“The focus has to be on the quality of the platform, the speed of execution, in order to drive increased adoption,” he said. “Whether it’s purchasing a receivable or a non-balance sheet loan, the instruments aren’t really changing. What is changing is how they’re deployed, and the platforms and technology that’s used to manage them.”