A thorough analysis of all the latest instruments in SCF that are allowing more enterprises to conduct successful trade deals
Trade agreements, e-commerce, and technological advancements have allowed virtually any business to sell its products internationally. Companies can thus access several new markets and increase revenues. However, with every opportunity come challenges, and for international trade, supply chain is one of them.
Conducting cross-border trades demands a sophisticated logistics system that extends beyond the flow of goods. Buyers and suppliers must receive and deliver products and services on time and, on the other hand, receive and send payments in a timely manner.
This means that there are financial risks undertaken by companies on both ends of an international transaction that warrant the offerings of financial services companies. This is what is called Supply Chain Finance (SCF), a system used to finance enterprises’ Net Working Capital through access to alternative liquidity sources.
Advance reverse factoring
As new fintech solutions replaced traditional services, SCF has evolved.
One of these solutions comes in the form of allowing the ordering enterprise to pay their suppliers earlier through a third-party financier, a practice coined as advanced reverse factoring.
Traditionally, factoring (also known as invoice factoring) refers to suppliers selling their unpaid invoices to financiers. Instead of waiting for payment from customers, the supplier “sells” its invoice to a financier who pays a bulk of it upfront. The customers then pay the financier directly, and the financier eventually pays the remainder of the invoice back to the supplier minus a fee. Consequently, factoring is a solution for accounts receivable, while advanced reverse factoring is an accounts payable solution.
Voted as the best bank for SCF by Global Finance, Citi leads the pack with its proprietary Citi Supplier Finance platform and WorldLink cross-currency payments platform. The bank has invested in its SCF program for over 15 years and has thus developed a strong familiarity with local-markets which is valued by its clients. First launched as a 1999 co-venture between Citibank and SAP, Orbian is a fintech challenger that leads the world in supply chain finance.
Many companies engage in a trade struggle to find financiers for their transactions. The problem lies in that, although they account for a large portion of trade (nearly half of EU trade), these small businesses present a higher risk to financiers than that of large enterprises. As such, traditional financial institutions underserve SMEs.
On the contrary, some financiers seek out high-risk investments, but it is difficult to connect with these businesses. To address these issues, invoice auctions provide a platform for enterprises to display their invoices and desired payment plans on which investors bid to win the right to finance the trade transaction.
The auction system creates a marketplace for invoice financing. This fosters competition, which in theory gives both SMEs and investors access to the most desirable financial terms. There are many fintechs operating in this space.
inwise describes itself as a factoring platform that utilizes the invoice auction model for suppliers looking to sell their receivable invoices and for investors seeking low-risk investments with a sizable return.Unlike banks, inwise does not analyze the companies’ financials or restricts customers with contracts or collateral; it only charges up to 0.5 percent of an invoice with no hidden fees and has an attractive user-interface. Moreover, service is confidential — the investor who purchases an invoice is unknown to the invoice seller.
Another fintech focused on invoice auctions, Crowdz launched in 2019. This company operates an auction platform powered by blockchain. Unlike inwise, Crowdz boasts a marketplace for the products being sold between businesses in addition to its invoice selling system, and it partnered with Google X to develop a sophisticated credit score system for every buyer and seller.
The company makes money in three ways: transaction fees (when the product sells in the marketplace), finance fees (when the invoice is purchased by an investor), and data analytics.
Dynamic discounting is a FinTech solution that aims at improving efficiency and lowering costs in supply chain transactions between buyers and sellers. It is a service that uses technology to offer suppliers early payments on their invoices in exchange for a discount on the goods or services they provide to the buyer.
This discounting method is referred to as dynamic because the supplier can control and adjust the rate of the discount, the timing conditions of the early payment, and which invoices they want to be paid early. The buyer has the ability to receive a discount on those invoices by meeting the payment deadlines set by the supplier.
An effective use of dynamic discounting strengthens the relationship between the buyer and the seller, with an overall improvement in supply chain health. American company C2FO, which deals with 50 to 60 million invoices per day and handles a total of more than $3000 billion has succeded in becoming the number one Supply Chain FinTech company in the world by providing a dynamic discounting service (among all the other products) that connectes less established businesses with investors and credit institutions. C2FO operates by charging the buyer a fee for the reduced payments, while the supplier uses the service for free.
In November 2020, Italian banking group Intesa Sanpaolo partnered with supply chain FinTech Kyriba to debut a new dynamic discounting service.
This partnership is part of Intesa Sanpaolo’s efforts to strengthen its Supply Chain Finance Program. Its aim is to enhance Italian production chains, which are crucial in boosting the country’s economy through development, employment and investment.
Inventory finance is a popular FinTech solution that offers financing opportunities to small and medium-sized companies that lack an established credit history. These are companies that struggle to qualify for traditional bank loans but need capital to purchase inventory that will take time to sell. Inventory finance is filling the void left by institutions that mainly offer their financing services to multinationals and is opening new possibilities for smaller businesses to improve their cash flow and grow.
Often, all a company needs to qualify for these financing opportunities are reliable customers and inventory, which the company that issues the loan takes as collateral in the case of a default.
British FinTech Supply@ME has created a platform that connects companies looking for inventory financing with investors in search of new opportunities. Its platform uses advanced technology, such as ERP integration, to monitor a company’s inventory and present it to investors clearly and logically. It created a highly scalable global business through the development of a multi-channel funding strategy, which allows it to satisfy companies’ working capital needs in a wide range of industrial sectors. Their service is gaining traction in several domestic markets through partnerships with major arrangers and banks.
These innovative FinTech solutions are key to solve challenges that arise from supply chain transactions between buyers and sellers. New and emerging FinTech companies are acting as a stepping stone for businesses to receive and deliver payments in a timely manner, and are helping to finance their Net Working Capital through access to alternative liquidity sources. The recent expansion of international trade and e-commerce is fueled by the growing influence of these players, whose services are allowing increasingly more enterprises to conduct successful trade deals.
Bocconi Students Fintech Society