Banks Give Black-Owned Businesses Advantage on Supply-Chain Finance Terms

The biggest banks in the U.S. will give Black-owned businesses advantageous terms on a crucial type of financing that companies use to manage their cash flow, a novel effort to narrow the wealth gap between white and non-white communities.

Banks made multibillion-dollar commitments to expand lending to Black consumers and businesses after the wave of protests throughout the U.S sparked by the killing of George Floyd. The targeted lending is meant to correct decades of discrimination in lending whereby banks denied loans to Black borrowers or steered them toward products with high interest rates and other terms many couldn’t afford.

As part of those promises,
Citigroup Inc.,
JPMorgan Chase & Co.
Bank of America Corp.
say they will lower charges to Black- and other minority-owned companies in supply-chain finance programs. Companies use supply-chain finance to manage short-term spending needs, similar to the way a consumer might use a credit card.

In a typical supply-chain finance deal, a bank will pay a company’s supplier faster than the normal payment terms, which, depending on the industry, typically vary from 30 to 180 days. In return for getting paid early, the supplier agrees to receive slightly less than it would get by waiting, and pays the bank a fee.

The company pays back the bank the full amount down the road, improving its working capital by padding out the time it gets to hold on to its cash. The bank profits by keeping the difference between what it paid the supplier and what it received from the company.

As part of their diversity efforts, the banks will pay Black-owned suppliers earlier than other customers or charge them lower fees, the banks say.

In most types of lending, the Equal Credit Opportunity Act and the Fair Housing Act forbid lenders from making credit decisions based on race. That prevents banks from giving cheaper interest rates on mortgages, for example, to minority applicants.

In the supply-chain finance business, by contrast, the supplier isn’t receiving a traditional loan. Rather, the banks’ financing relationship is with the company that buys the goods or services from the supplier. The client tells the banks which of its suppliers are eligible for preferential treatment. The banks then run checks to confirm the pool.

John E. Harmon Sr., president of the African American Chamber of Commerce of New Jersey, said the programs would help Black businesses grow faster and level the playing field. Supplier diversity has become a frequent topic of discussion with companies and financial institutions since the racial-justice protests, he said.

Banks have made efforts over the years to lend to Black and other-minority owned businesses. But progress has been mixed, and those businesses often fail to get access to the key types of financing that grease the wheels of commerce.

A December report from the Federal Reserve Bank of Atlanta found that while nearly half of white-owned small businesses got approval for all the financing they applied for in 2018, only 31% of Black-owned firms, 35% of Hispanic-owned and 39% of Asian-owned did.

In the wake of the protests,
duplicated an existing supply-chain program that extends preferential pricing for suppliers who meet environmental, social and governance criteria like committing to upholding the Paris climate agreement. The new program will focus on Black-owned businesses, said Ebru Pakcan, global head of trade.

“You have the effect of being able to support Black-owned businesses that are already in the marketplace,” Ms. Pakcan said. “If growth opportunities have not been at par with others, if they have been disadvantaged in other ways, we are now giving them an extra advantage.”

The first client to consider it is a large U.S. telecommunications company, whose program is likely to be implemented next year. The bank is initially targeting 150 suppliers of that client for improved terms or earlier payment, Ms. Pakcan said.

Big users of supply-chain financing include blue-chip companies such as
Boeing Co.
Coca-Cola Co.,
which manage hundreds or thousands of suppliers at a time. The programs help companies conserve cash for longer. By paying suppliers earlier, it makes them more attractive to do business with.

Supply-chain finance deals are private, and public companies aren’t obliged to disclose them, so it is difficult to put a precise figure on the size of the business. But there may be more than $350 billion of invoices involved in the supply-chain finance technique known as reverse factoring, according to research firm Aite Group.

Supply-chain financing spread after the financial crisis and has remained popular through the coronavirus pandemic. It comprises a small but growing part of banks’ commercial banking operations. Banks took in $12.7 billion in revenue during the first half of the year from supply-chain finance, up 3.6% from a year earlier, according to research firm Coalition.

is crafting programs with better pricing for Black- and other minority- and female-owned suppliers, propelled in part by corporate clients reaching out to the bank on the topic, said Vasudha Saxena, head of trade in JPMorgan’s commercial bank. The bank in recent months has been working with retail and industrial clients on programs.

Technology has helped widen the pool of suppliers. Typically, onboarding supply-chain finance participants has been paper-intensive, making it difficult for small businesses without large treasury departments to enroll. New technology is easing the process and allowing more access, she said.

Bank of America
will use some of the proceeds from a $2 billion environmental, social and governance bond it issued in September to fund financing to minority-owned suppliers in the U.S. Black and Hispanic suppliers will get a discount on the rate the bank charges for supply-chain finance, said Geoff Brady, head of global trade and supply-chain finance.

The bank will target hundreds of suppliers in the next several months, he said. One goal of the program is for Bank of America to get access to new, diverse clients with the hopes of banking them beyond supply-chain finance.

Write to Julie Steinberg at [email protected]

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