Fintech Trends: Supply Chain Financing

By Aleksandra Kireeva | June 15th, 2016
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  • In managing their supply chains nowadays, companies have to consider diverse geographies, various currencies and languages in addition to getting used to different ways of doing business. Financials within the supply chain are a story of their own, with challenging processes of invoicing and approval as well as tricky solutions to the working capital problem. Billing transforms into a painful procedure of generating invoices, sending them out, and reconciling via accounting software without any contribution to the optimisation of revenue recognition. Simultaneously, a working capital gap exists, arising from delayed payments from the debtors and a necessity to pay suppliers faster. Therefore, for a smoother running of goods and services flows, Fintech companies are tapping into this new trend of Supply Chain Financing.

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    Automatization of the document flow

    Companies that still exchange hard copies with their counterparts still exist. And even for those, who do not follow the hard copies procedure, the process is not much more advanced, being just the same exchange but in a digital format and still requiring manual signing and approval. The bills receivable and payable, then, need to be fed into the accounting system for the revenue streams to be booked. But the final point is the end-of-the-period verification of the payments with the counterparties, who often have their own calculations different from the firm’s.

    Automated supply chain management and invoicing where the payments are initially agreed upon and later approved via a special system will spare both business partners the reconciliation hassle. By using these special platforms, companies can keep track of their supplier and buyer pools, operate in different jurisdictions and currencies, receive and send invoices, see the current changes in their working capital and forecast revenue streams according to the contracts’ terms. Such solutions from Fintech firms come in the form of online or integrated platforms.

    Receivables and payables financing

    Supply chain financing is one of the main challenges for almost every intermediary company included into such a chain. Partners on both ends of the line are usually big companies with significant market power, and thus are able to dictate their own payment terms, which in turn are not so favourable to their counterparts. The classic issue of the so-called “working capital gap” happens when the firm in-between is forced to pay the suppliers within 30 days, while buyers may take up to 60 or even 90 days. Consequently, the company has to spread its finances thinly in order to navigate the gap.

    To resolve the issue, Fintech platforms are spreading their offers wider than mere digitalisation. The working capital, as the name implies, is what keeps the day-to-day operations running, including cash flows to suppliers and from buyers. To close the disruptive gap of 30 days for example, Fintechs can provide short-term loans secured by the invoices, payments from which are expected to arrive within the same period. On the other side of the offer lies payables financing, when the payments to the clients are extended based on the immediate need to pay the outstanding bill. In each scenario, the loan provider gets paid back from the actual payments from the client’s buyers. And with the flexible Fintech solutions, the process is moved entirely online and allows borrowers to quickly acquire financing for the outstanding invoices, which were approved by the lender upfront.

    FinLeap’s venture BillFront provides working capital solutions in a niche market of digital advertising agencies and platforms. In a digital marketing field, which accommodates constantly changing business models and contains several layers between brands as advertisers and end publishers, it is extremely difficult for the players to obtain working capital solutions from the traditional financial institutions. BillFront combines the industry knowledge with the means of analysis for providing timely financing when the clients need it the most.

    Valendo offers financing solutions to bypass liquidity shortages using valuable assets. The company uses a customer’s assets to provide a quick loan which as a result increases the flexibility and liquidity of the business. By targeting a wide range of customers, Valendo combines the modern concept of digitalization with one of the oldest financial instruments-asset based loans.

    Risks and mitigation

    Although fintech companies provide supply chain financing faster and easier than banks do, all the risks are still there. Fintech clients are sometimes too small or unattractive for established financial institutions, who also lack specific tools for analysing such firms and are reluctant to take over higher risks. Being under the radar of banks means that supply chain financing providers need to be cautious while assessing the clients.

    First, extra attention should be placed to perform a ‘Know Your Client’ (KYC) check, as the clients are usually internationally distributed and loan providers need to address local databases to evaluate the counterparty. Second, the credit risk, which arises at default of the client or its debtors, should be carefully assessed through the models and rating systems which are not less complicated than the ones banks have in place for the corporates. The risk mitigation framework is thoroughly developed by supply chain financing firms to evaluate the invoices, which support the financing requests of the client, as well as the payment discipline of debtors and creditors which defines the credit worthiness of the client itself.

    With more mobile devices being used for doing business and closing deals immediately, automatization of supply chain financing is certainly the right direction. Business owners would be able to receive instant snapshot of the current state of their receivables and payables and be enabled to request additional financing at the same time, which would contribute to the faster delivery of goods and services supply. Thus, the demand of the end consumer will be satisfied in a timely manner.



    [1] A study of the business case for supply chain finance

    [2] Managing risk: Supply chain finance

    [3] Why is Supply Chain Finance so Slow to Grow?

    [4] Supply Chain Financing: An Alternative to Bank Lending and Supplier Risk Management

    [5] Digital supply network—The new standard for modern supply chain management

    [6] Supply-chain finance: The emergence of a new competitive landscape

    [7] Investopedia: Supply Chain Finance

    [8] The Financial Risk Lurking in Your Supply Chain

    [9] Supply Chain Finance: Risk and Evaluation

    [10] Supply chain finance – what’s it worth?

    Aleksandra Kireeva