Small and medium-sized enterprises (SMEs) deeper in the supply chain often find themselves with many financial challenges. They are several layers away from giant companies like Unilever, Siemens, and Dell that can provide supply chain financing. Until now, all support programs that larger companies have provided, such as reverse factoring and dynamic discounting, were only available to their first-tier suppliers.
Enter the next-generation financial technology companies such as Provenance, SumUp, and Zeconomy. These “fintechs” have created game-changing platforms that help SMEs navigate these challenges and tap into previously inaccessible resources. By leveraging these platforms, SMEs can better manage their cash flows and enhance their business operations. Here’s how.
SME assets can now be digitized
SMEs have three core assets that can be used to obtain financing: approved invoices, inventories, and purchase orders. Of these, organizations providing financing prefer approved invoices from larger companies; they are considered low risk because they mean the work has been completed and the shipment has been sent to the buying company.
However, when these invoices come from fellow SMEs, financial institutions might consider them much riskier and cast a wary eye. The same is true of purchase orders from other SMEs and SMEs’ inventory.
Through the fintech platforms, these SME assets can now be digitized. Once they are, they can be traded in a digital marketplace to match specific asset types to the risk and return profiles of various investors. Similar to the way people playing fantasy football choose players from various teams, investors can assemble portfolios of SME assets. Previously unbankable SME assets can be bundled into diversified investment portfolios.
Connectivity, efficiency enhanced
The underlying technology behind the fintech software platform is blockchain. It affords a way for SME assets to get digitally connected with large focal companies. This provides a number of benefits:
- Makes it possible for the focal companies to provide financing to these SMEs
- Reduces outside investors’ risks in lending to SMEs based on their assets
- Makes it easier for focal companies and first-tier suppliers to provide early payments to SMEs in return for discounts on their purchases from SMEs
- Allows SMEs to obtain better financing terms
What’s more, the blockchain technology underpinning these transactions provides an added layer of security and transparency for the financial transaction while keeping the confidential and competitive data of suppliers private.
AI provides cash-flow predictions
The way fintech platforms can help SMEs manage their cash flows is nothing short of revolutionary. These platforms can automatically compile transactional data and use artificial intelligence (AI) to analyze SMEs’ transaction histories and make accurate forecasts of SMEs’ future cash flows. This data-driven approach empowers SMEs to optimize their working capital and make more informed decisions, mitigating their risk of insolvency.
Moreover, these cash flow predictions can give investors more confidence when deciding whether to provide SMEs with financing. For instance, suppose an SME supplier applied for a short-term loan. The fintech platform analyzes the loan application, sets appropriate loan limits, and suggests optimal repayment schedules—all backed by AI-generated cash flow predictions. The end result: The platforms allow SMEs to obtain better offers from more investors than has traditionally been the case.
Fintech platforms offer new pathways for SME suppliers to access funds. By digitizing assets and leveraging technology, the platforms can increase SME suppliers’ liquidity and lower their cost of financing. And by helping strengthen SMEs, these platforms can help make the entire supply chain more resilient.
Source Thomas Y. Choi is professor of supply chain management at Arizona State University’s W. P. Carey School of Business; Sam Bizri is founder and CEO of Zeconomy, a fintech company that provides supply chain and blockchain-based solutions; Wenting Li is a PhD candidate in supply chain management at Arizona State University’s W.P. Carey School of Business.
