Supply chain financing can help early-stage startups optimise working capital
Supply chain financing (SCF) can help startups boost their working capital as it helps early-age companies use the value of their supply chain to secure capital in the short term without having to offer security.
Chirag Ranka April 10, 2022
Head - Corporate Sales, Supply Chain Finance, CredAvenue
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For all new businesses or early age startups, it is vital to maintain a strong balance between the current liabilities and current assets and ensure no working capital deficit. Maintaining good working capital is also essential to maintaining an early-age startup’s financial health and long-term growth.
Supply chain financing (SCF) can help startups boost their working capital as it helps early-age companies use the value of their supply chain to secure capital in the short term without having to offer security. SCF requires both buyers and suppliers to have access to a cloud platform – where the supplier uploads their invoices and thus be in a position to receive early payment on them.
Right time & applicability
The Right Time and the applicability for supply chain financing can be said to be a function of three key parameters – namely, the sector that an early-age startup operates in, what are the various revenue streams and what are the expenses for the startup in question.
An early-age startup needs to ask the question – if you combine all cash flows together, what is the net capital that would be required to grow your business?
When we talk of the right time for a startup to apply for SCF, there is no right or wrong time – it is relatively independent of the startup’s stage. It is rather more essential to understand the working capital requirement of the business in question, such that it can sustain and grow almost two times from the current levels.
SCF to fuel growth
One of the steps through which startups can solve the working capital problem is by not inheriting all the working capital on the balance sheet – as this can become a scale limiter. Startups or early-stage companies can start with using their equity and build a transaction record to build comfort among the lending partners. Once this comfort and confidence is established, such companies can then go on to leverage their lending ecosystem. This is also where the partnerships with banks, fintechs and NBFCs come into play.
This method – of financing through the supply chain – is also scalable and would aid during the growth phase of the startup. The supplier financing program is an excellent tool for business growth.
Can enable smooth movement of goods
For businesses for whom a frictionless movement of goods and capital is important, SCF can play a vital role. While banks are carrying out post-shipment finance, mostly balance-sheet lending takes place. Pre-shipment finance is a challenge, and this is where SCF comes in – with innovative invoice counting and platforms that enable SCF.
Steps startups can take to enable an alternate model of lending
Startups looking at availing SCF towards enhancing their working capital needs to also ensure they are taking the adequate steps to enable this alternate mode of lending.
First, the startups need to understand and be compliant with the risk underwriting process that a lender may undertake. It will also be helpful if the lenders can be helped with the credit profiling of a new-age or an early-stage company.
Second, the startup must assess what kind of pool of capital they can access from among the various lending solutions and which ones fit best with their actual working capital needs.
Third, a startup needs to also look into how would they facilitate the transaction, such that the transaction is automated to scale up along with the startup.
Regulations around SCF
The country’s regulatory bodies have started recognising the significance of alternate modes of financing for startups and have started taking action towards enabling them. The launch of trade platforms for the financing of SMEs/ MSMEs is a step in that direction. Another one is the introduction of the bill that allows NBFCs to do invoicing, invoice discounting, and then bringing in such vehicles that can bridge the larger gap between supply-chain and financing. Suppose regulatory bodies enable easier access to transaction history, credit history etc., through APIs and other digital interventions. In that case, it will make the whole ecosystem capable of lending – and we can see that we are moving in the right direction.
Role of fintech companies
Today, fintech companies play a crucial role in building and enabling the ecosystem around alternate modes of lending for startups through innovative products. They are creating SCF solutions for the new, emerging B2B marketplaces – mostly through collaboration with other lenders such as NBFCs.
Today, as many as 63 million MSMEs in the country are suppliers, contributing almost 60% to the country’s GDP. Supply chain finance or vendor finance can utilise the idle revenue stuck in the supply chain, hence is a great tool to aid the growth of the economy as well as its many SMEs & MSMEs.
Today, the proliferation of fintech is giving a push in the right direction for SCF, in turn helping early-age startups get easy access to financing in order to boost their working capital. While SCF helps unlock idle capital and aid economic growth, it offers a win-win scenario for all – buyers, suppliers and intermediaries.
SCF can be a boon for early-age startups looking to optimise their working capital, especially at a time when traditional forms of funding – such as bank loans are hard to come by in times of a challenging business environment.