Bracing for 3rd COVID wave: How alternate financing verticals are solving the creditworthiness and financing issues for MSMEs

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Wtitten by: Arun Poojari, Co-founder, Cashinvoice

Covid through its varying intensities really puts our systems to a test. With even big businesses struggling with the supply shock, MSMEs were the most affected. The shutdowns, the logistical challenges, and the resultant cash flow issues forced many to shut shop. The ones that survived did so because they were dealing with larger manufacturers who could take on a considerable part of the risk.

Alternate financing verticals like Supply chain financing have been instrumental in helping SMEs weather the storm. SCF cohas made it possible for suppliers and merchants to access working capital more efficiently while the organizations are only taking negligible additional risks. AI has been one of the revelations in this area. 

What’s different

Traditional supply chain financing solutions relied heavily on financial institutions and their risk tolerances. This meant that a lot of it was dependent on the credit risk assessments by these institutions. But AI-backed supply chain financing platforms have more to work with. They do not just consider the traditional parameters that the banks and financial institutions consider. They also access the historical information for each vendor, and many additional parameters to come up with a more comprehensive risk profile.

One of the biggest realizations was that the one size fits all approach doesn’t really work. Banks are also not as tolerant to risk beyond strict boundaries. This means that a lot of deserving SMEs who are integral parts of the supply chain network get left out. 

What has AI done?

If we analyse the risk involved in SCF transactions, you can clearly see that there is of course credit risk but most of it is about contractual risk. SCF deals heavily with invoice financing and reconciliation, which are bound by contracts. So, the risk profile is never complete without having an accurate assessment of both sides. 

A lot of the traditional SCF systems plug into the ERP systems but do not really do much in terms of working with the data they are sitting on. AI has changed that. To understand the risk in financing an invoice or advancing credit to a vendor, you should not just be looking at how their credit profile has been. Given how every business has struggled this last year, it is very likely that not many vendors would clear the credit score requirements.

AI can go deeper, and understand patterns from the previous transactions. The most critical parameters are already factored into the equation, and now with data to work on, the Machine Learning algorithms can take over. Over time, the systems help organizations accurately understand risk profiles that are not just superficial. 

How is it helping businesses and SMEs?

SCF backed with AI makes sure that every stakeholder in the supply chain manages their working capital efficiently, enabling them to work together and win in the longer run. SMEs have easier access to capital and can pay their invoices early and earn discounts or can advance the invoice payments to ensure that they have enough capital to procure the materials. This helps them realize financial gains and a stronger foundation.

For the manufacturers, AI helps them accurately understand and price their credit according to the risk, and also hedge their risks that may arise due to supply chain inefficiencies. Having the ability to influence the working capital availability for all stakeholders means that there is a lower risk of delays and quality issues.

Conclusion

Supply chains are dynamic beings held together by bonds that grow fragile with stress, but SCF helps bind these relationships. SCF, until recently had remained on the fringes because of how it was structured. But advancements in technology have created more opportunities in terms of financing solutions and technology to automate and manage the process end to end.

As we brace for the third wave, SCF is going to play a more prominent role in how manufacturers approach their vendor relationship. For a lot of SMEs, being part of such strong ecosystems will be the determinant in their survival. 

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