How Innovation in Supply Chain Finance Can Bridge the Credit Gap in the Ecosystem

The circulation of money is the primary activity that characterizes any business. The capital required for day-to-day operations is termed working capital and is critical for all businesses. It is a comfortable assumption that businesses have the money ready, and this drives the business. However, external financing is often required to keep the ball rolling. It enables both buyers and sellers to improve business efficiency by filling for the temporary gaps in the availability of working capital.

Supply chain finance can be defined as a short-term loan to fulfill working capital requirements. Organizations avail this financing option to pay their suppliers on time. It offers them the flexibility to pay when they have the money from their business operations and also keeps the business running.

In simple terms, it is an understanding between three entities, i.e., the buyer, the supplier, and the lending institution.

For instance, Organization A buys goods from supplier B. When B generates the invoice, A will approve it and promise to pay in a stipulated time. However, if B needs immediate payment, A will request their financial firm to remit the invoice. Later, the financial firm will receive the amount from A once the invoice matures. This will ensure that the supply chain continues without interruption.

FinTech organizations like CredAvenue are cloud-based platforms that are making supply chain finance smooth by offering technology-driven solutions. These solutions automate the process of invoice approval, settlement, and recovery by providing access to both buyer and supplier. This improves business efficiency by allowing more time for the buyer to clear their outstanding amounts and immediate access to money to the suppliers.

According to the World Supply Chain Finance Report, the total volume of supply chain finance was estimated at $1.31 trillion in 2020, and the market is expected to grow at a CAGR of 17.1%.

Advantages of supply chain finance products:

•       Buyers can gain flexibility in payments without impacting the liquidity for suppliers
•       Suppliers have more control over how and when they want to get paid
•       Suppliers get lower interest rates than usual and are not required to use their working capital for the process
•       Supply chain finance ensures a better relationship between buyers and suppliers. This relationship would normally be strained because of delayed payments, stuck invoices, and limited working capital for suppliers.

How FinTech is disrupting supply chain finance

As the world struggles with economic turbulence because of the pandemic and now war, FinTech is enabling easier debt consolidation. As far as supply chains are concerned, FinTech is being used for the effective management of financial operations. Earlier this was done by banks and other traditional lending institutions in the form of accounts payable (A/P) and accounts receivable(A/R) financing. However, the traditional method wasn’t as streamlined, was majorly manual, and required a series of approvals. FinTech has taken most transactions into the digital realm and helped to reduce the costs involved.

Before the emergence of FinTech, there was a web of banks and difficult-to-comprehend trade agreements between buyers and suppliers. Not only was this cumbersome and time-consuming, but the working capital involved was high. Moreover, it lacked inclusion. While strong profiles and credit histories attracted finance, small-sized organizations struggled without credit. This meant that the successful few had a better chance of unlocking success as compared to the promising many.

The use of FinTech in supply chains is now bridging this gap and helping even micro and small-scale enterprises to realize their full potential.

Completely digital solutions:

FinTech platforms are cloud-based digital solutions that can be accessed by all parties involved. Businesses can manage their invoices and payments using an application or website.

FinTech is streamlining payment timelines and reducing the time it takes a supplier to receive a payment. This allows them more flexibility to invest in expensive equipment and other materials for future orders. They work with multiple banks to figure out the most financially viable solution for a company. Apart from this, the interest rates are significantly lower.

This benefits startup with weak credit profiles and suppliers with longer lead times.

According to Intellias, the global adoption rate for FinTech was 64% in 2020 and is on a further rise. CGN Global also reported that 25% of companies are using FinTech in their supply chains.

This means that either FinTech platforms will handle processes that only banks were handling previously, or banks (and other traditional lenders) will adopt technology-based solutions (mostly through partnerships in the foreseeable future) to make their platforms more versatile and robust.

The technology behind supply chain finance:

The FinTech model is a shift to “point solutions”. It integrates API into the ERP systems of clients in real-time. This can be seen as the collaboration of technical innovation, financial know-how, and relationship management.

The systems use rich data and sophisticated analytics to facilitate better transparency and insight. This helps to replace traditional financing solutions with new ones that accelerate cash flow by offering easy access to credit to a wider base of investors.

Supply chain finance is thus evolving as a service. It combines multi-product platforms with artificial intelligence and cloud-based app technologies to create a unique ecosystem for each business.

Retail MSMEs – and the evolution in financing

The evolution of retail finance is offering flexibility to customers when they shop and affordability when they pay. It helps consumers with a way to shop what they need and helps with money management. Retail finance refers to providing credit or stage payment options to customers. It ensures a better customer experience by allowing them to break the amount payable into smaller parts that they can afford easily. It allows businesses to sell more by removing the affordability barriers and helping customers to manage their finances better.

Retail finance differs from credit cards in terms of flexibility in payment terms and interest-free offers.

Advantages of retail finance for businesses:

•       Increases website traffic and visitors in offline stores by attracting customers to buy whenever they want
•       Reduces cart abandonment rates by offering attractive payment options
•       Boost revenues by increasing conversions
•       Improves customer retention by improving the quality of experience
•       Allowing customers to spread expenditure doesn’t affect cash flow for business
•       The loan relationship is directly between customer and lender and retailers have no hassle of chasing repayment
•       No risk of bad debts

How credit cards for small businesses are helping to tackle working capital issues, expense management, and payments?

A corporate/business credit card enables small businesses to take care of regular expenses, such as supplier payments, bookings, utility bills, etc. without using their personal funds. Earlier, it was difficult for MSMEs to get corporate cards. However, now FinTech companies are coming up with innovative products targeted towards MSMEs and startups. These are a great way to increase working capital. The flexibility to pay the bank later helps to make timely payments to suppliers. This may sometimes also lead to early payment discounts. Here are some other benefits apart from interest-free credit that business credit cards unlock for small businesses:

•       Easy expense management and monitoring
•       No need to go through complex workflows of letting the employees spend and then reimbursing
•       Reducing paperwork and reconciliation issues reacted to corporate expenses
•       Easy to set limits on expenses
•       Reduced risk of frauds and fund mismanagement
•       Visibility of all financial transactions in one place with a comprehensive dashboard reduces the manual workload of record-keeping and reporting
•       Consolidation of expenses and detailed reporting to aid financial planning
•       Option to pay credit card bills in easy instalments.

 How has the traditional supply chain credit model failed MSMEs?

The absence of a well-defined path has prevented MSMEs from benefitting from supply chain finance. FMCG companies have no direct interaction with end merchants and thus cannot help with finances. Banks that work with large corporations mostly do not serve MSMEs. Dedicated organizations that work with small businesses are deterred by limited collateral and non-existent or poor credit history. They also do not have supply chain data to assess the risk. While suppliers offer credit to merchants, it affects their working capital and also exposes them to risks associated with recovery. A collaborative and digital model that offers comprehensive access to data is the only way to benefit all stakeholders in the equation.

How products by FinTech companies can bridge the MSME credit gap in the supply chain finance space?

The success of small-scale businesses is crucial for economic growth and job creation. However, these entities often face a resource crunch and thus find it difficult to succeed. According to the world bank estimates, the credit gap for Indian MSMEs is $397 billion. This indicates the struggle of small business owners to stock the essentials that hinder them from growing their business. A fair opportunity for these enterprises to scale up would do wonders for the economy and job market.

Supply chain finance can thus be a ray of hope that will allow equal opportunities and ensure an inclusive ecosystem for the MSMEs to grow. FinTech organizations can use digital data and partnerships to ensure that the benefits of supply chain finance extend to smaller businesses. This will make way for low-risk financing options for businesses that are often ignored by traditional lenders. Apart from the small business, this benefits the entire supply chain by boosting sales, accelerating turnover, increasing profitability, and reducing credit costs. It also helps financial institutions to foster sustainable relationships with micro and small businesses.

How deep finance products like CredAvenue are bridging the gaps and enabling supply chain finance?

FinTech organizations like CredAvenue are adopting a holistic approach and coming up with a robust business model built on strong partnerships. They are striving to address the following gaps to ensure a seamless supply chain finance experience for small businesses.

•       Risk assessment using data: While startups and MSMEs do not have credit histories to back them, SCF platforms can analyze data that includes details of inventory purchased, sales made, and payments cleared. FSPs can use this data to assess if the business deserves the credit.
•       Money lending: Supply chain finance model offers financial institutions insights about turnovers and stocks. This way, they can help with the working capital and relieve suppliers of the responsibility of extending credit to merchants.
•       Spreading awareness among all participants involved: It is important to educate MSMEs about the value of SCF, its functioning, and reliability.
•       Acquiring and onboarding merchants and distributors: For a supply chain finance solution to be successful, a considerable number of merchants and distributors need to be on board. This will enable a collaborative ecosystem that will boost sales. CredAvenue’s SCF marketplace – a one-stop solution to all SCF needs.
•       Enabling payments: Payments are the most critical bit of SCF. FinTech solutions are making them easier by accelerating the flow of payments. Digitization is helping them access data and enabling decision-making regarding creditworthiness.
•       Accurate invoicing and orders: Digital solutions are making it possible to document all orders and invoices accurately and thus helping with the creation of helpful data.
•       Inventory and distribution tracking: This data helps to assess consumer demand and the need for finance and helps suppliers to align their operations to merchant demands.

 The bottom line:

While a lot still needs to be done in the supply chain finance space and a complete adoption will take time, these products offered by FinTech organizations are helping small businesses and those in rural areas where the reach of traditional lending institutions are limited. CredAvenue is one such FinTech company that is helping promising businesses fulfil their dreams and add to the growth of the economy by helping them with connecting to qualified lenders while also undertaking digital underwriting, KYC, etc. This digitization of the finance space is solving a part of the supply chain finance credit gap by tapping the potential of AI and data analysis.