Supply chain financing: A tech-fuelled solution for driving SME growth
The supply chain financing environment in Singapore is in dire need of an upgrade. As Singapore’s economy rebounds from Covid-19 and continues to be competitive in the world, many of its small and medium enterprises (SMEs) still struggle with the same age-old issues—particularly, supply chain financing.
According to the Singapore Business Federation National Business Survey 2019/2020, one of the key challenges faced by 35 percent of SMEs in the country is maintaining a stable, positive cash flow.
Though the Singaporean government has launched multiple support packages to assist MSMEs, challenges remain. A significant 61 percent of SMEs in Singapore do not qualify for business financing, and those who do qualify often struggle with collateral requirements, long approval times, and a lack of sound financial data.
To aggravate the issue, SMEs—not just in Singapore, but worldwide and across industries—have to deal with the persistent problem of late payments. Buyers often delay payments to suppliers to conserve cash. The delays interrupt suppliers’ cash flow, thus causing significant disruptions in the supply chain.
Alternative funding through fintech
It is with this backdrop that SME financing platform Validus Capital steps in to close the supply chain financing gap. Validus seeks to address barriers by combining deep credit expertise with technological knowhow. Their tech allows SMEs to access outstanding invoices and secure payments much more quickly.
It works like this: first, a buyer and a supplier make an agreement. The buyer then forwards the supplier’s invoice to the platform to be processed. Within a matter of days, Validus will fulfil the payment to the supplier on the agreed date or earlier.
This fast financing is delivered to vendors and partners at the stage that they need it most – the start of the payment cycle. Thanks to pre-agreements with Validus, vendors are able to enjoy a more flexible borrowing scheme, maintain liquid cash flow, prevent disruption in the acquisition and delivery of goods, and improve the efficacy of supply chain systems. Plus, this arrangement eliminates friction between buyer and supplier that often arises from late payments, thereby improving the relationship between the companies.
By combining technology and data with deep credit expertise, Validus can overcome age-old barriers in supply chain financing. Buyers can extend their payables and accelerate their payments to suppliers. In some cases, buyers can enjoy interest-free credit periods and suppliers can receive payments within 24 hours after their request.
Not only does Validus ensure there is no disruption in product delivery—it also helps to address a US$120 billion financing gap faced by Southeast Asia businesses. All of this is enabled through proprietary machine-learning algorithms capable of crunching hundreds of thousands of supply chain data points.
Welcome to the future
Validus can offer this form of alternative finance because of the network of individual and institutional investors that allows the platform to find the best funding solutions for customers. Validus act as a critical intermediary in the typical buyer-supplier dynamic by facilitating financial transactions more quickly and at a lower cost.
As an SME financing platform, Validus also leverages cloud-based software, which eliminates the need for long, printed forms that need to be filed and filled out. It also provides an integrated solution that streamlines and digitises the whole process. Vendors on the platform can create an account and register within just 48 hours.
Although commercial banks still dominate the credit scene, there’s no doubt fintech is disrupting the industry.
Since Validus started in 2015, it has aggregated over 15,000 loans totalling more than S$580 million to growing SMEs in ASEAN. All loans have so far been approved under 48 hours and have provided a highly diversified portfolio of industry classes.
Validus has also partnered with Visa to provide SMEs with virtual card solutions to help them clear out their invoices during payment cycles. This collaboration allows SMEs to expand faster and enjoy a quicker turnover of products and services. Backed by technology, it facilitates the tracking and management of invoice payments and offers a more convenient option for SMEs.
So where banks are traditional and still make use of paperwork and provide expensive credit that is not readily or easily available, fintech companies like Validus are agile and nimble, and democratise supply chain finance to SMEs.
But banks and fintech companies are not necessarily competitors—instead, they complement each other. Banks have a vast share of resources, while fintech companies have the agility to help the majority of enterprises, which are small- and medium-sized.
This is good news for countries like Singapore, where SMEs make up 99 percent of all enterprises, employ 72 percent of all workers, and contribute S$463 billion in gross added value to the economy. In a 2019 Economic Impact Study, Validus contributed over S$400 million in 2018 to help finance Singapore’s SMEs. As a critical element of the Singaporean economy, the country has much to gain from alternative financing and fintech solutions.
Opportunities for fintech
Not just limited to Singapore, the need for supply chain financing is universal. According to the Asian Development Bank’s Trade Finance Gap Survey, the global trade finance gap stood at $1.5 trillion—with 40 percent of it coming from the Asia Pacific region and 74 percent of rejected trade finance transactions attributing to SMEs.
Across the region, Validus is transforming supply chains in countries like Indonesia, Vietnam, and Thailand. As SMEs are critical contributors to these economies, providing an alternative platform for SME funding has facilitated growth for businesses and the overall economy.
BCR Publishing’s recent 2020 World Supply Chain Finance Report has highlighted the emergence of fintech and data analytics software and their capabilities in automating validation processes and reducing financial costs and risks in supply chain management.
This report suggests that the market is ripe for disruption.
Fintech companies have the potential to impact industries all over the world, and not just in terms of funding and optimising working capital. Together with logistics technology companies, fintech companies like Validus have the potential to transform the supply chain process and address the troubling and persistent supply chain financing gap.