Banks are Moving Away from Supplier Finance and SMEs are Scrambling; Is Blockchain the Solution?

The world is becoming increasingly globalized, and despite the benefits of a better connected global economy and supply chain for businesses both small and large, banks seem to be pulling away from what was once a mainstay of their regular operations: supplier finance. As someone with their ear to the ground in the supply finance space, this has been verified by a number of small to medium enterprises (SMEs), who have stated they are scrambling to find alternatives, especially as economic conditions worsen in light of COVID-19.

To understand why this is happening we first need to understand what supplier finance is. In a nutshell, supplier financing is a component of supply chain financing, which plays an important role in improving cash flow and maintaining regular operations for many companies. Essentially, it provides companies with the credit facilities to buy goods, such as raw materials or necessary products needed to grow their business. However, it does not provide credit for the costs of labor or other administrative running costs. 

While this is obviously beneficial for the enterprises utilizing these services, the banks offering these programs are faced with a monumental challenge: an exorbitant amount of tedious, but necessary paperwork. Managing and keeping track of this paperwork requires large and dedicated teams, the cost of which usually outweighs the return from offering supplier finance solutions, particularly when servicing SMEs. In short: supplier financing doesn’t provide enough return to make it viable for banks. 

Although supplier financing is often the difference between an SME finding success or failing, it admittedly makes financial sense for banks to be pulling their programs. So what other options are out there?

Luckily for SMEs, the past two decades have birthed a number of technological innovations - or disruptors - in the supplier finance space. While slow to start, we’re now starting to see the emergence of automated systems designed to streamline the documentation process via blockchain. So how does this help our struggling SMEs? 

It’s simple: a blockchain-powered supplier finance solution solves the issue of record keeping via ‘smart contracts’ that enable all parties within a supply chain to act on a single shared ledger. These smart contracts mean a supplier and manufacturer, for example, along with every other participant along the chain are able to solely update their component of a transaction, enabling both efficiency, trust and transparency on a single, immutable ledger record. This means that the exorbitant amount of paperwork usually required for supplier finance is completely replaced by a tamper-proof, single source of trust, which no longer requires a dedicated team to maintain or manage. 

This technology offers great potential for SMEs and financiers in terms of increased control, speed and reliability of their supply chain at a fraction of the cost of current bank infrastructure, while also enabling the tokenization of unpaid invoices. This tokenization removes banks from the equation completely, instead, the tokens open up accessible financing options for SMEs as anyone - not just banks - can participate in the purchase and trade of these tokens via invoice trading marketplaces. Further benefits are added for SMEs through this tokenization, as the competitive nature of marketplaces means that funders are required to compete in the purchase of invoices, enabling SMEs to secure the best rates possible. 

Although banks are moving away from the supplier finance space, SMEs don’t need to worry. Through blockchain powered smart contracts and the tokenization of supplier invoices, a new era is just beginning to start: one of viable and beneficial supplier financing options, minus the paperwork or crippling rates.