Knowledge Centre

The COVID-19 pandemic brought business supply chains into the spotlight as public health restrictions, sealed borders and workplace shutdowns caused factory closures, port gridlock, and shortages of everything from assembly line parts to toilet paper in supermarkets.

When the pandemic sparked widespread supply and transport disruptions, Scotiabank’s Supply Chain Finance team helped business leaders access critical capital for themselves, their suppliers and customers, to stay afloat or accelerate towards new opportunities.

“Suddenly, clients told us they felt a lot of uncertainty about their ability to get supplies for production or whether they would receive payments for goods sold that were needed to fund their operations,” recalls Ambar Mardikar, Scotiabank’s Director of Trade and Supply Chain Finance.

“As time passed, pent-up consumer demand for goods drove international trade flows above pre-pandemic levels,” adds Echithran Fernando, Senior Manager, Trade and Supply Chain Finance Product. “Our clients began experiencing greater demand for their products, but their supply chains could not catch up, and that drove up prices and shipping costs.”

The pandemic has also been unprecedented in terms of the scale of its impact, points out Arun Vaidyanathan, Associate Director, Supply Chain Financing: “While most service companies quickly transitioned to online channels, any company that dealt in physical goods was affected – from a major retailer that could not stock shelves for the holiday season to an aviation firm whose ticket sales dropped but still had fixed operations costs to pay.”

Nirasha Guruge, Associate Director, Supply Chain Financing, adds that the duration of these supply chain difficulties has strained companies: “By last fall, many were hopeful that business was starting to normalize, but the Omicron wave and renewed shutdowns created more supply chain backlogs alongside spiking demand for goods. Now, the prospect of higher interest rates weighs on companies that need access to affordable working capital.”  

How working capital can address supply chain issues

While these supply chain disruptions are annoying for consumers, they are crippling to companies that face a liquidity crunch when they can’t buy, sell or receive payments for their goods sold. “A company’s working capital is like blood in your body – if you run out of it, you can’t keep operating, making, or selling your product,” says Mardikar.

These issues impact companies in both buying and selling transactions. “As a buyer, they may not get the raw materials they need on time and the prices they must pay have increased. This extends their cash conversion cycle and they may lack adequate working capital for that longer time span,” says Mardikar.  “For a seller of goods, their customers may require longer payment terms due to issues they face, creating a possible liquidity gap for the seller.”

“That’s where Scotiabank comes in, since we provide access to capital across the supply chain, from the moment a client’s product is conceptualized until it is delivered to the end-user,” notes Vaidyanathan.  

Benefits for buyers and suppliers

Both buyers and sellers can use supply chain finance for short-term credit to optimize working capital, lower costs and improve efficiency. By taking advantage of a buyer’s solid credit rating, a bank can help suppliers gain faster access to the money they are owed and provide a buyer with more time to pay off balances. Ultimately, these solutions provide both parties with liquidity, to keep their operations running smoothly or to fund other important business activities.

Not only do these facilities reduce working capital uncertainty for a buyer, but they can help strengthen relationships with their valued suppliers. While ‘payables financing’ was historically seen as a way to provide a buyer with liquidity by extending payment terms, since the pandemic, it is increasingly recognized as a way to also help one’s suppliers weather disruptions and make them more resilient.

Similarly, ‘receivables financing’ can create a competitive advantage for a seller. Since they can offer appealing, longer payment terms to prospective customers without affecting working capital, it can help companies attract more, loyal buyers.

Pandemic opens eyes to supply chain finance

Although supply chain finance strategies are well-known in Asian and European trading hubs, the pandemic has led many Canadian companies to discover these financing strategies.

Many large companies that typically turn to debt and equity market financing - or traditional term loans - have discovered that the bank market for supply chain credit is a helpful, alternative source of capital, to diversify their funding sources. They now see how supply chain finance enables them to monetize their current assets, inventory and receivables, by unlocking that ‘stuck capital’ without impacting their balance sheet.

In addition, since supply chain finance depends on a bank’s in-depth understanding of its client’s business, their up-to-the-minute transactions and shifting market conditions, these companies benefit from critical hands-on counsel from Scotiabank’s Supply Chain Finance team.

“We need to understand our client’s business flows, well beyond a simple snapshot of their balance sheet and credit-worthiness,” explains Mardikar. “This means that every supply chain solution we offer is bespoke for the client. There are intricate details to consider, to accurately assess risk and structure the optimal solution.  That’s why we have specialists like Arun and Nirasha, who, alongside Scotiabank relationship managers, meet with clients regularly, and advise them when they face a complex, unique or urgent supply chain or trade finance challenge.”

Custom solutions delivered at pandemic pace

The team describes how they differentiate themselves by offering high-touch, client-centric solutions. “One of our principal advantages is our expertise and customer-first culture. We have a team with the knowledge and experience that is prepared to listen to our clients’ supply chain challenges, educate them on relevant solutions, and execute on plans,” says Echithran.

“Scotiabank’s international network is also a tremendous advantage to our clients. We have a strong footprint in North America, as well as teams in Asia and Europe, which are some of Canada’s major trading partners,” notes Guruge. “We can thoroughly service our clients, including managing cross-border counterparty risk, in locations that matter to them.”

The Scotiabank team has supported all types of clients through the pandemic, including an original equipment manufacturer, with operations across North and Latin America. When the manufacturer’s suppliers sought better credit terms, the Scotiabank team leveraged its unique Americas footprint to support the company’s suppliers, with minimal impact to the company’s own working capital.

Advice for the ‘new normal’

After months of supply chain tumult, many businesses want to know when will things return to normal. There’s no simple answer, opines Guruge: “Many businesses have learned from the challenges of the past two years, and put plans in place to minimize further disruption. However, it will take some time to clear up the backlog and reach more normalized conditions.”

At the same time, the team suggests that a ‘new normal’ may unfold. As some companies shift away from ‘just-in-time’ supply and production mindsets, they are trying to secure their supply chains by buying as much stock as possible in advance to get ahead of customer demand. For some, that means embracing local or regional supply chains to reduce offshore dependencies. However, such strategic supply chain decisions take time to implement.

“I think in the ‘new normal,’ companies are getting more innovative in the way they do things, to make both their goods and payments supply chains faster and more flexible, including less paper and more electronic tools to minimize future disruptions,” says Echithran.

In light of the supply chain issues crisis, he urges companies to put a greater emphasis on risk management by asking themselves questions like, “If this happens, would there be a direct or indirect impact on us?” and “What contingency plans can we make before it happens?”

Mardikar also recommends that companies take a proactive approach: “If you’re a company that deals internationally, you are exposed to geopolitical risk, and that’s something you should not ignore. At least once per quarter, you should discuss with your banker, ‘Is there any way I can optimize how I run my business right now?’ Don’t wait for your banker to sell you something. Instead, ask them ‘Is there something else I should be considering; is there a better product, rate, or solution to protect my supply chain, for the challenges I face, or the new market I want to enter?’”

Concludes Vaidyanathan: “We are impressed by the resiliency our clients have shown and their openness to new ways of doing things, including supply chain finance solutions. We’re proud to deliver ways to strengthen their supply chain relationships, diversify their working capital funding, and create liquidity, so they can become more efficient and invest in other parts of their business for the future.”