As businesses struggle to conform their supply chains to the ever-changing the needs of the market, they’re constantly reminded of one core truth: In the end, it’s all about the money.

Each tweak to the supply base, each adjustment of inventory levels, comes down to a question of finance. And that sends suppliers and buyers scurrying for ways to ensure the economic viability of all partners in the chain, large and small.

Last year saw a growing number of companies acting to diversify sourcing, partly to reduce reliance on manufacturing in China, and partly to mitigate the overall impact of future supply chain disruptions. But every such move carries a price, often in the form of increased buffer inventories that drain cash and working capital. Add in higher prices caused by rising inflation and interest rates, and companies face a situation that’s crying out for innovative supply chain finance strategies.

Maureen Sullivan, head of supply chain finance with MUFG Americas, notes a simultaneous squeeze on working capital and contraction in bank lending to suppliers, at a time when the latter is needed more than ever. “The challenge of high interest rates and the cost of inflation have created a desire for avenues to ensure liquidity,” she says.

There’s also new red tape to untangle. The growing reliance on supply chain finance (SCF) options is accompanied by tougher reporting requirements by the Financial Accounting Standards Board, which now requires that companies with SCF programs disclose them in their quarterly financial statements, Sullivan notes.

Buyers turn to SCF providers to enable early payment to suppliers while protecting their own working capital. Suppliers, in the process, can often acquire funding under buyers’ more favorable credit terms.

SCF programs also allow suppliers to be paid more quickly in exchange for a discount off the bill, although that option can be painful for those suppliers that are already struggling to stay profitable.

The popularity of SCF is part of a larger effort by global businesses to improve the resilience of their supply chains. Recent disruptions caused by extreme weather events, labor actions and geopolitical strife have heightened awareness of the need to better manage risk. (In 2023, weather and climate disasters alone resulted in damages of at least $92.9 billion in the U.S., according to the National Centers for Environmental Information, part of the National Oceanic and Atmospheric Administration.) “It’s a lesson that many companies have learned over the past few years,” Sullivan says.

Falling interest rates, should they materialize in 2024, will alleviate some of the pain, but Sullivan believes companies will continue to be attracted to SCF programs. “It will definitely encourage suppliers to continue to enroll, or do so for the first time, depending on their credit profile and cost of capital,” she says.

Don’t count on banks to come roaring back as dependable sources of supply chain finance, Sullivan says. They’ll continue to be stressed due to uncertain conditions worldwide. “Despite the fact that the U.S. appears to be positioned for a soft economic landing, it’s unclear whether other parts of the globe will move into recession,” she adds. “There will be ongoing scrutiny around the availability of credit, which could hamper suppliers’ access to financial assistance by local banks. So they’ll be seeking alternative sources of liquidity.”

Another trend that’s likely to boost the popularity of SCF is an increased focus by global supply chains on environmental, social and governance (ESG) compliance. “ESG-branded” SCF programs can aid suppliers in meeting those requirements without undermining their financial health.

“They provide a win for the buyer in terms of meeting ESG objectives, and for suppliers to have access to attractive financing schemes,” Sullivan says.