For most companies, embracing diversity–in not just words but actions–is a top priority. While becoming more inclusive and equitable takes on many forms, like hiring and promotion practices, many enterprises have identified their supply chain as a facet of their business where they can make real progress toward their diversity, equity, and inclusion (DEI) goals.
While there are a large number of social and financial advantages of a diverse supply chain, actually including businesses owned by minorities, women, armed services veterans, people with disabilities, and members of the LBGTQ+ in your seller pool comes with myriad challenges.
“The biggest barrier right now is finding diverse suppliers that actually have not only the talent but also the scale and capability to deliver solutions that meet our needs of tomorrow,” said Reggie Humphrey, Assistant Director of Supplier Engagement at General Motors in an interview with the U.S. Chamber of Commerce in late 2020.
To Humphrey’s point, diverse suppliers tend to be smaller companies that are eager for new businesses, but often lack the working capital to scale. When engaging larger enterprises, they can be deterred by payment terms that typically stretch out to 90-120 days. Many, despite the cash-flow problems these terms may cause, don’t push back because of fear buyers may question their financial health and charge ahead with contracts to get the business. In the worst cases, companies have to forgo opportunities because the payment terms present too great of a working capital challenge.
In fact, a procurement manager for a large pharmaceutical company stated “that he had risk concerns with a supplier who balked at these payment terms, and that there was a possibility they might default on their obligations,” while speaking on a Diversity Alliance for Science panel.
This challenge is exponentially greater for minority-owned businesses. These companies are traditionally underbanked and face structural barriers that place them at a competitive disadvantage. The 2021 Small Business Credit Survey Report on Firms Owned by People of Color found that firms owned by members of a minority group tend to have weaker banking relationships, experience worse outcomes on credit applications, and are more reliant on personal funds.
The data is stark and proves there is an unlevel playing field for minority businesses:
- Black business owners were the most likely to tap into their personal funds in response to their firms’ financial challenges (74 percent) compared to Hispanic-owned firms (65 percent), Asian-owned firms (65 percent), and white-owned firms (61 percent).
- Seventy-nine percent of white-owned firms received all of the PPP funding they sought, while that share dropped to 43 percent for Black-owned firms.
- Black-owned firms that applied for traditional forms of financing were least likely to receive all of the financing they sought (13 percent) from any funding sources. Hispanic and Asian-owned firms (20 and 31 percent, respectively) were also less likely than white-owned firms (40 percent) to receive all of the financing for which they applied.
- Even among firms with good credit scores, Black-owned firms were half as likely as white-owned firms to receive all of the financing they sought (24 percent versus 48 percent).
Data supports similar credit challenges for women-owned businesses. A 2020 study conducted by WEConnect International showed that women-owned companies face a $1.5 trillion credit gap annually. This gap prevents them from scaling their business, leaving larger buyers out of reach, further stunting growth and causing them to lose ground with potential investors.
All of this amounts to financial constraints for diverse sellers within buyers’ supply chains. While the systemic challenges are immense–and the COVID-impacted downturns created another wrinkle to the issue–there are answers to drive DEI forward by making access to working capital easier for all suppliers.
The first step is for suppliers to be proactive with their buyers in discussing payment terms and the constraints long payment terms put on sellers’ cash flow. According to the participants in the Diversity Alliance for Science panel, more often than not, buyers are oblivious to the challenges extended payment terms cause their smaller sellers.
For buyers, it is essential that they sponsor programs to better suppliers’ working capital position outside of traditional bank financing and educate sellers on how to use those programs.
One example of a working capital program for sellers is supply chain finance (SCF). SCF lets buyers utilize a third-party funding source to fund seller early payments. SCF allows sellers, who are often underbanked and have trouble gaining access to traditional sources of credit, to get paid on demand, so they can improve their cash-flow position to maintain and expand their businesses without adding additional debt.
SCF programs rely on the credit rating of the buyer, not the seller, leveraging their standing to increase access to all suppliers and reduce the cost of capital. For buyers, there is the benefit of terms standardization with SCF to boost their working capital position also.
While there are many options for providers of SCF, there are a number of things to look for in a quality solution. As it relates to getting sellers up and running, it is important to look for a provider whose program includes outreach and education to introduce and explain how the program works to the entire pool of suppliers. In fact, supplier adoption is the most important facet of a successful SCF program.
Technology-driven programs and platforms, like LSQ FastTrack®, have helped make SCF more accessible to diverse suppliers. Typically, SCF enrollment and administration have been labor-intensive processes, making it difficult for small businesses without large finance departments to participate. Technology platforms are easing the process through intuitive interfaces and automation of invoice payments, allowing greater access. Platforms like LSQ FastTrack also have the benefit of data insights that allow for measurement of DEI initiatives; information about diverse supplier concentration and spend is available directly from the interface to inform reporting.
For DEI to go beyond saying the right things publicly to concrete initiatives, companies have to create and embrace actions that have positive, measurable results. Evaluating the diversity of your supply chain is a good starting point and taking steps to ensure a level funding playing field for all potential suppliers is a great way to turn those words into meaningful action for your company.
With more than 25 years experience in supporting the working capital needs of diverse suppliers, LSQ can help you get started today.