Connecting the supply chain financing ecosystem
Manish Balani is the VP of the supply chain services business at Vayana Network. Vayana is India’s largest third-party supply chain financing network. We are also India’s largest GSTN and authorized GSP. And when I say GSP, I mean a GST Suvidha provider, an API gateway for applications to connect to the nodal agency called the GST network.
Supply chain means the series of processes in producing and distributing goods from where they are first made, grown, etc., until they are bought or used by the end user. All vendors, sub-vendors, micro and small vendors, retailers, and OEM distributors form part of your supply chain.
Supply chain financing is a term used to describe a set of technology-based solutions that aim to lower the financing costs and improve the business efficiency for buyers and sellers, which are linked in a sales transaction. Supply chain finance consists of vendor financing, domestic or cross-border financing, pre shipment and post shipment financing, channel financing, factoring, and reverse factoring.
Physical supply chain consists of your suppliers, manufacturers, retailers, and finally, your customer. The logistic organizations sort the physical supply chain.
Financial supply chain is monies paid by the customer to the retailer; the retailer pays the manufacturer, and the manufacturer then pays the supplier. Everyone has not been able to manage the financial supply chain effectively. Our aim should be to accelerate the GDP growth of supply chains by unlocking affordable and easily accessible trade credit for every member of the supply chain, whether it is the stockist, buyer, or manufacturer. By making trade credit available smoothly, we must also ensure that all the different threads of a supply chain are harmoniously woven together. There should be no cross-communication. It should be a simple chain that should not be broken and should be accessible to everyone in the credit line. The problem is that supply chains underperform because affordable or timely financing is unavailable. Financing should be available to small and medium enterprises. Today the traditional lenders find it very expensive to service these small and medium enterprises, and low-cost financing is very difficult. Therefore, there is a need for cutting-edge digital technology with a deep human insight that could make lending very affordable, swift, and conveniently available to all the entities of the supply chain.
Supply chain service
From an Indian perspective, supply chain service consists of E waybill, invoice, GST compliance, business health monitoring through a score, and invoicing accounts. Supply chain service is important because unless there is a service unit servicing that supply chain, there are a fair amount of chances that the supply chain financing would not work in the manner it should.
Customer Acquisition at Scale
Today every SCF platform needs to acquire customers, and that customer acquisition should be at scale.
- VIBE – The SCF platform can use the VIBE model (Vintage, Inter Dependency, Brand Pull, Existing Biz, and Credit) for acquiring customers. It should flow from the top right. The larger organization should supply the smaller organization. There should be interdependency between two suppliers or two retailers. Brand pull happens when a large organization does supply chain financing.
- Reference-based sourcing could be the other model. If there is a large OEM, the entire supply chain for this OEM will be managed till the last minute. There will be tier-one and tier-two dealers and last-mile suppliers. Customer acquisition can happen at a scale if you use referral-based sourcing from OEM to tier one to the last mile.
- One to Many Relationships – There are also one-to-many relationships in a supply chain. One brand could be a distributor, while the other could be a retailer. Two other distributors may buy from the retailer brand. A complex buying and selling system between different brands in a supply chain could exist. We have to understand this relationship and service it based on our understanding.
Vayana provides end-to-end service, a good business score for underwriting and monitoring, digital onboarding, and a transactional platform wherein all transactions happen on one platform. A financial institution then finances these transactions. Settlements can happen through a nodal account.
MSME financing is an iceberg that needs a very different approach. In the iceberg, there could be a large Corporate, Tier 1 partners, Tier 2 partners, and Micro Enterprises.
Formal financing in India is around $43 billion per month. The unmet financing is more than 100% of what is being financed. So the unmet financing is $57 billion, and many micro-enterprises cannot get the financing. To service these micro-enterprises, we need to take a top-down approach. It has to start from the corporates and come down to the micro-enterprises. This is a huge opportunity for a supply chain financing organization. On the flip side, the financers are not confident about getting their investment back, so the servicing costs are high. Also, the utilization of credit is not as expected. The other challenge is poor digitization.
The entire spectrum, from corporates to micro-enterprises, needs to get digitized for supply chain financing to be successful.
To solve these issues, we need to ensure that we get good quality and quantity of trade data. For example, how many invoices are generated, what is the transportation like, etc.
Secondly, if servicing costs are reduced and digitization is improved, the entire supply chain financing problem can be mitigated, at least in India.
Journey on SCF and Analytics
Analytics and trade relationship is very important in supply chain financing (SCF). We understand SCF as a supplier providing to the manufacturer, the manufacturer providing it to the distributor, the distributor providing it to a retailer, and a retailer providing to an end customer. There could also be an intermingling of relationships. Once we understand the entire trade relationship, financing for this becomes very easy. The most important thing today is that trade information is required and is very important for mitigating any credit risk that is involved. If we understand this relationship, we can start creating analytics around these relationships.
Managing receivables and payables is a struggle for any business.
- Payment delays lead to stretched working capital cycle.
- High processing costs due to non-electronic methods
- There are manual and broken processes, due to which there is a lack of automated solutions.
- Cumbersome reconciliation process due to disconnected ERP and banking – ERP that has been used by the buyer is very different from the seller
- Restricted payment options to fast-track collections
- Limited transaction visibility leads to a lack of 360-degree view of the business.
- Lack of control over Account Payable management
- Lack of relevant working capital products for different segments and sectors.
Most of the time and effort are spent on transactional follow-ups and reminders. Their processes for collections, reporting, and reconciliation are manual. It is not automated. A real-time, automated business dashboard can create the most value. This will also lead to working capital efficiency.
Every supply chain financing provider, bank or neobank, needs to understand the complete ecosystem of SMEs. They have to understand and mitigate those problems through digital features that they can provide. For example, we can provide a pre-integrated payment processor for the digital collection of receivables. There could be an automated reconciliation through a virtual account. There could be automatic reminders through SMS, WhatsApp email, or through payment links.
There could be invoice and field collections tracking that could create an end-to-end audit trail.
On the payable side, bulk payouts can be done through two-factor authentication, so it is very safe to do payouts. If somebody solves these problems through automated reminders, etc., all your working capital issues, new customer acquisition, connected banking problems, insurance saving, and investment offerings can be solved. Tracking and analytics are very important. Real-time insight into the best suppliers, timely payments, delayed payments, etc., can help you.