Surviving 2020 has been a battle for India’s small and medium-sized enterprises (SMEs). Having trouble meeting payroll has prevented a few SMEs from investing in necessary inventory like raw materials, and the decline in demand has only made matters worse. Since the shutdown, a large number of companies have gone bankrupt, adding to the already tense financial environment. Yet, Indian companies are warming up to a new financing mechanism called SCF (Supply Chain Finance). In believe that, by bridging the distance between invoice creation and settlement, it is possible to optimize working capital flow. This will further enable companies to concentrate on growth and strengthening supplier relationships.
Empowering Small Businesses: The Benefits of Supply Chain Finance
A few of the benefits of supply chain finance for SMEs are:
Improving Liquidity
The significant cash flow shortage caused by COVID-19 has forced businesses to request close to 120 days of credit line extensions. If the buyer is experiencing a lack of working capital, SCF can ease the strain on their monetary funds, allowing them to redirect their attention to expanding their business.
Revitalizing Stressed SMEs
The small and medium-sized enterprises (SMEs) in India have historically been looked down upon by financiers due to their bad credit history. Banks are understandably wary of taking on any more risk with such a large amount of NPA already on their books. Thanks to SCF, large companies can use their better credit scores to lend to SMEs. This newfound access to capital allows many smaller enterprises to expand.
Securing Funds Without Security
SCF doesn’t demand collateral; thus, small and medium-sized enterprises (SMEs) are no longer hindered in pursuing credit financing. This outstanding debt is being held as security for the bank to release the requested monies. Small business owners must put up their own homes and cars to secure loans from banks and other financial institutions. In the aftermath of the COVID pandemic, this will help small firms overcome a significant hurdle to resuming normal operations.
Borrowing at a Lower Cost
According to my analysis, a working capital loan in India will often incur interest rates between 12% and 16%. Although the interest rates on these loans are much lower than those of conventional moneylenders, they can still be too much for small and medium-sized enterprises (SMEs), especially during times of slow activity. If you need access to cash reserves quickly, supply chain financing is your best bet, with interest rates between two and four percent. It’s a much more reliable method of funding a company’s volatile demand and supply operations.
Providing Strategic Flexibility
SCF allows small and medium-sized enterprises to purchase products from suppliers at lower costs, expanding their profit margins. Suppliers may provide significant discounts in exchange for early payment of goods and services. Through financial aid, purchasers might encourage the growth of a network of favored suppliers, enhancing their ability to compete in a market weakened by a pandemic.
Breaking Barriers With Financial Innovations in the Supply Chain Finance
Various fintech waves shaking up supply chain financing have hit the entire procure-to-pay cycle. They are:
- Wave 1: E-invoicing platforms
- Wave 2: Procure-to-pay systems
- Wave 3: Trade finance platforms
Wave 1: E-invoicing platforms
SCF’s wave 1, like that of many B2B sectors, involved digitizing paper trials to increase efficiency. Cloud-based electronic invoicing solutions for businesses include Tradeshift and NvoicePay, which have progressively expanded their value proposition to include invoice financing and approval, with the NovicePay being acquired by FleetCor Technologies. These electronic invoicing options focus on one step in the whole purchase-to-payment process.
Wave 2: Procure-to-pay systems
To expand beyond traditional financial services, several fintech companies have capitalized on their standing as payment aggregators to offer assistance along the supply chain, such as purchasing, supplier management, and stock management. Taulia is one of the top fintech all-in-one solutions, combining AP and procurement operations. It’s a one-stop shop for the entire procurement cycle, from the initial request for quotes through the final settlement with the vendor. By bridging the gap between procuring and providing a framework that streamlines these operations, integrated solutions allow purchasing businesses to drastically minimize the strain of running these functions. Adding a new app to a phone can be more complex than joining a platform, but it can be simple for vendors.
Wave 3: Trade finance platforms
When I researched, trade finance platforms, sometimes known as “pure SCF,” may comprise fintech firms that handle buyer discounting and invoice validation. When a supplier chooses to be paid in 15 days for an invoice of $10,000 through a fintech, but the buyer pays the fintech ninety days after the supplier’s invoice has been approved, and the buyer’s capital cost is 2%, the supplier discounts the invoice by only $41 (so the supplier receives $9,959 instead of the entire $10,000). Due to the prolonged payables, there will be a favorable effect on the buyer company’s working capital.
Companies like Kellogg’s and Procter & Gamble have prolonged their accounts payable to 120 days through supply-chain finance partnerships. Fintech companies function as intermediaries. Through their established connections with a wide range of banking and financial organizations, they can source competitive finance options for their clients. This is analogous to the services provided by third-party logistics providers (3PLs) in the logistics industry. Once upon a time, businesses only worked with a single trucking provider for all their transportation needs. Nonetheless, a 3PL can select a carrier in the same way that a brokerage would.
Global Fintech Trends Shaping the Future of Supply Chain Management
Overall Transaction Volume recorded by Triterras for the 6 months ending August 31, 2022, was 989.6 million dollars, up from 4,003.9 million dollars for the corresponding period in 2021. Users’ estimated rate of seeking finance through the Trade Finance sub-module rose to 39.9% from 36.4%, as measured by the Financing Ratio. Compared to the same time period in 2021, the number of users on the Kratos platform’s Trade Finance modules and Trade Discovery increased to 249. According to Triterras’s last financial report, the company has lent out $45.6 million at an annualized interest rate of 16% through the Kratos platform’s Trade Finance module. The Trade Marketplace module of the Kratos platform processed $20.7 million in gross transaction volume.
Nevertheless, the pandemic and its consequences have had unprecedented effects on the operations of certain Triterras’ customers, resulting in a continuously shifting structure of its customer base. Reduced presence and increased rates for trade credit instruments, reduced cash flow and financial struggles in the trade finance global market, reduced trading volumes, and business expulsions and liquidations, especially in South East Asia where strict restrictions hit customers during and after COVID-19 era, continue to impact revenues negatively and are hurting MSME traders. Additionally, Triterras has seen headwinds in recruiting new lenders or partners on the KratosTM platform and has seen a decrease in referrals from other customers due to the publication of the short seller report, including confidential customer information.
Closure
I have observed that the COVID-19 pandemic has posed significant challenges to India’s small and medium-sized enterprises (SMEs), including a severe cash flow shortage, difficulty securing loans, and high-interest rates. However, supply chain finance (SCF) has emerged as a promising solution to these challenges by providing liquidity, revitalizing stressed SMEs, securing funds without security, borrowing at lower costs, and providing strategic flexibility.
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