Supply chain finance

In the sixth part of our series on “How Fintech is disrupting SME and Startup Financing”, we present to you how supply chain finance enables an SME to leverage the creditworthiness of a large buyer in its fundraising process.

Supply chain finance (SCF) is a mode of raising funds for an SME’s working capital requirements. Unlike invoice financing, the buyer, of an SME’s offering, initiates SCF. SCF conventions entail considerable cooperation and integration between a smaller SME and its buyers.

In SCF, the buyer allows suppliers to raise funds against its “approved payables”. In other words, the SME can choose an early payment of the invoices raised, albeit at a discount. A third party provides the financing basis the credit rating of the buyer.

Fintech SCF clicks with an SME scale of business

Typical SCF involves complex legal frameworks and is, therefore, applicable to large scale of operations.

On the other hand, fintech SCF solution is as efficient at lower scale, rendering working capital across the supply chain.

The buyer integrates its enterprise resource planning (ERP) system with the fintech SCF platform. The buyer and supplier, who is a SME, need to be connected, as well, as per their working arrangements. The SME supplier uploads the invoices directly to the SCF platform or via its accounting software. Then the SME, at its discretion, chooses the timing of the payment. Earlier the payment, higher is the rate of discount.

The fintech SCF platform acts as a broker for a small fee. It leverages its relationship network of different financial services institutions to obtain the funding for the SME applicants.

SME reaps inexpensive financing on the back of buyer’s strong credit rating

SME can avail cheaper cost of working capital based on the large buyers’ higher creditworthiness. In turn, the buyer extends the payment terms longer than provided by the SME supplier. This augments the buyer’s working capital position, without financially impacting the SME supplier.

SCF saves the SME time and effort to seek financing from a separate receivables factoring firm. Given the platforms are integrated, they can be used for invoicing and financing.

Fintech SCF is yet to gain prominence in the overall receivables finance market.

SCF is relatively new, therefore, awareness levels within the SME community are low. However, governments and institutions are supporting efforts to increase awareness and push adoption.  The European Investment Bank has investigated a €100 million initiative to support invoice finance platforms in the Netherlands.

And the results show. In light of the high number of application cases, this product can be expected to gain traction.

SCF has been observed to be the most relevant in a B2B relationship, where there are limited number of large buyers.

Key players in the segment include Taulia, Orbian, Prime Revenue, C2FO, and Ariba.

A SME can maximise the benefits from SCF by integrating its ERP systems thoroughly with the buyer and the fintech SCF platform. This level of sophistication enables to streamline the process further.