We have commented on this topic of supply chain financing (SCF) a few times, including recently, but it certainly bears reminding readers of the importance that liquidity plays in the lifeblood of any organization, particularly in the case of small businesses. In this posting at Dala Street Investment Journal, a COO of a furniture company in India provides perspective on this topic. The author claimed that MSME (Micro, Small and Medium Enterprises), employs 111 million in India. We also recently released some member research on the U.S. middle market alone (which has many definitions across the globe) and it represents about one third of GDP, so 111 million employed by MSMEs in India might even sound a bit light. The author’s point is the importance of access to SCF for these businesses.
‘However, banks limit their exposure to MSMEs due to the high cost of service and the risk of lending without adequate collateral. Credit risk assessment is complex for lenders due to a lack of structured financial information, historical cash flow position, repayment trends data, etc. For MSMEs, the direct result of this credit gap is a vicious cycle of high costs, low profitability, stunted growth, and an inability to withstand even minor economic shocks. An economic disruption caused by the COVID pandemic results in an almost immediate tightening of credit terms from lenders for the fortunate few, who have access to the banking system….Considering the significance of MSMEs to economic growth, it is crucial to assist them by removing working capital-related barriers to growth. Supply chain finance (SCF) is critical to accelerating MSME growth. SCF refers to technology-based solutions to lower financing costs and increase business efficiency for buyers & sellers in a sales transaction. It helps them by bridging financial gaps and providing desperately needed liquidity.
Again, the author works for an MSME and the perspective is one we have shared in the past vis-à-vis the accrued benefits associated with supply chain finance; that is, greater working capital efficiency, lower cost of borrowing (short term loans backed by receivables, inventory, or payables, depending upon the type of agreement and parties involved), and a more robust series of relationships across the supply chain. Modern digital tech is making all this more accessible. The article is worth a quick browse.
‘Since SCF transactions are structured, lenders can onboard more partners because the documentation & underwriting process are simplified and less time-consuming. With the advancement of technology, everything from onboarding to disbursement and settlement can be streamlined, making it easier to advance funds to small businesses without being resource-intensive or negatively impacting the bottom line. Trade Receivable Discounting System (TReDS) platforms enable MSMEs to instantly secure highly subsidised credit from a variety of banks and NBFCs. SCF is a solution that would provide numerous benefits to MSMEs. It is pertinent to educate MSMEs and their anchors about such options for improving cash flow.’
Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group