Small businesses (SMBs) are always in need of financing to support cash flow which is often hard to come by. The credit gap is huge, and lenders need to play a substantial role to make a dent, especially banks with large balance sheets. But large lenders’ hands are often tied due to concerns around risk. Given there is a concerted push from Governments to lend more to SMBs, there is a need for a solution that can bridge this demand and supply gap. Supply Chain Finance could be the solution.
Supply chain finance (SCF) is financing a supplier / dealer of a corporation against their invoices. Essentially a buyer-based financing approach. This is to facilitate quicker access to working capital for suppliers for their approved invoices or getting dealers access to capital to buy inventory from their corporate seller. SCF is currently focused on large buyers and their suppliers, and the financing is done on the strength of this so-called ‘anchor’ corporation instead of the supplier.
This is opposed to the seller-side financing which is based on the financial strength of the seller for accessing credit through products like invoice financing or factoring.
Supply Chain Finance: a much-needed enabler for SMB financing
Per a recent McKinsey report, there is an addressable market of $17 trillion that can be supported through a buyer-led SCF. Potentially, every relationship is a supply chain relationship – someone selling and someone buying especially in the B2B space. Lately, there has been a lot of activity in this space, and it is experiencing robust growth globally.
There has been a proliferation of platforms that facilitate financing on the basis of buyer-approved invoices. These platforms are third party companies like Fintechs or could be a bank-owned consortia. These platforms connect buyers (corporates) and suppliers/dealers (SMBs) with lenders to increase cash flow often at a much lower risk and cost.
Lenders are happy as there are many benefits to them, such as:
- The short-term financing nature of SCF, thereby reducing time period risk
- Well documented end use of funds as compared to an unsecured line of credit
- Built-in warning systems that could limit access to funds, depending on milestones and trigger events
- A profitable long-term relationship from a customer lifetime value and cost of acquisition perspective as the buyer / supplier will continue to leverage the platform
Imagine suppliers with not much prior trading history or creditworthiness being able to access bank financing based on the financial strength of buyers. They can deploy these funds for further growth and expansion. These suppliers often operate in communities that are underserved, thereby creating a transformational economic opportunity for all the players in the ecosystem.
Canadian Supply Chain Finance Market
The Canadian supply chain finance market is projected to grow at a CAGR of 8.7% over the next decade as per Expert Market Research. The growth is driven by demand for working capital and operational efficiency. However, a small proportion of Canadian businesses view their supply chains strategically and therefore are not equipped to manage the flow of supply chain data and information needed for financing.
On the supply side, the product offering is not well developed. There may be receivables programs for large corporate clients but the supplier payment programs for others are limited. A lot more needs to be done from enabling regulations to risk management for market innovation and maturity.
Risk assessment is a stumbling block
One of the biggest constraints in SCF is the lack of support to suppliers that sell into smaller corporations. This is due to a lack of methodologies to assess the risk of these smaller corporations. AI/ML based tools that can analyze business environment, leveraging thousands and millions of data points, to provide a deeper view of a corporate buyer and their associated SMB’s financial health at the time of adjudication will offer lenders, big and small, a way to put skin in the game and take appropriate risks. Furthermore, continuous monitoring of financial behavior for real time risk identification will ensure repeat business, better customer experience for SMBs and higher profitability for lenders and platform providers.
In conclusion, there is a need for enhanced collaboration between Canadian banks, lenders, technology providers, insurers and other stakeholders to make it easier for bank and non-bank lenders to offer SCF solutions to suppliers of all anchor corporations, irrespective of whether they are investment grade or not. This would open the flood gates of working capital flow into the hands of SMBs in a timely, affordable and inclusive manner.
Abhishek Bhasin is the Head of Product at Uplinq Financial Technologies with over 15 years of experience in financial services, including product management, lending, strategy, and impact investing. He spent eight years as a business lender at RBC and Oikocredit, which supports microfinance institutions and MSMEs in over 70 countries. Abhishek has also worked with credit bureaus TransUnion and Equifax, gaining expertise in financial systems. He specializes in credit structuring, alternative data, AI/ML-driven lending, open banking, and financial inclusion, which he is passionate about promoting throughout his career.
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