Why Technology plays a crucial role in extending supply chain finance reach to the last mile?

May 4, 2020

Why Technology plays a crucial role in extending supply chain finance reach to the last mile?

Supply chain finance has been around for decades, with a potential global revenue pool of $20 billion. However, to date, only 2 percent of the potential has been tapped into globally as supply chain finance is restricted exclusively to the first tier of suppliers and distributors of leading corporates. Despite the shortage of access to formal capital deeper down the supply chain, it still remains vastly unexplored globally and in India.

What is Last mile financing?

Last-mile supply chain financing refers to leveraging supply chain linkages to offer access to capital all the way until the last set of suppliers or retailers. Currently, well-rated corporates are offered standard financing solutions to their direct supply chain ecosystem. More often than not, these players do not need it as they already have direct access to capital from banks.

The second or third-tier suppliers and retailers deeper down the supply chain are enterprises that are in dire need of liquidity to keep their businesses afloat. Most of them do not receive access to formal banking, and even if they do so, it is available at highly uncompetitive terms - high rates of interest or higher loan-to-value ratios.

A study by the Asian Development Bank revealed a global trade financing gap of 1.5 trillion dollars. But addressing this market has its own set of challenges.

Challenges of financing players deeper down the supply chain

  1. Lack of trade visibility of smaller businesses: –There is a shortage of organized data as we go down the supply chain, especially in India. Proper books of accounts such as balance sheets or profit and loss statements are not maintained thoroughly. Lack of visibility is a significant roadblock as banks do not have audited data to back their underwriting process to offer loans.
  2. High volume and Low-value transactions: – Manual onboarding requires a large workforce and paperwork to on-board suppliers or dealers to access supply chain finance. The cost of the acquisition of a new customer is substantial. When it comes to smaller businesses deeper in the supply chain, the volumes do not prove to be economical to justify costs for financiers.

However, with technology, the challenges of financing stakeholders deeper down the supply chain using an ecosystem approach is closer to becoming a reality.

Technology as an enabler for last-mile financing

Significant progress in technological innovation has changed various aspects of SCF that empower, extending its reach deeper down the supply chain:

1.    Digital onboarding: Onboarding has become seamless with the advent of technology. Right from loan applications, appraisal, to loan documentation execution, all aspects can be executed across remote locations with a negligible incremental cost for every new customer.

2.    E-Invoicing through GSTN: A Government-led initiative, e-invoicing ensures authentication of transactions between businesses electronically using the GSTN. This data can be leveraged by banks to make reliable credit assessments as it offers details of legitimate business transactions executed by the firm.

3.    Digital Scorecard: Scorecard-driven credit underwriting helps evaluate new-age businesses that assess the creditworthiness of a loan applicant by estimating her probability of default based on publicly available historical data.

4.    Early Warning Signals (EWS): EWS solutions help mitigate credit risk by monitoring various business health parameters of small businesses. Financiers can prevent the occurrence of non-performing assets by periodically observing the quality of their asset book.

By relying more on the inter-party transaction and leveraging technology to standardize operations seamlessly, companies such as Cashinvoice are making last-mile coverage a real possibility.

For supply chain finance to truly deliver value to corporates, supply chain partners, and financiers, it is essential to extend its reach till the last mile.

Reach out to us to know more about how Cashinvoice can empower corporates with the right technology to unlock maximum value within the supply chain.