Business Relationships – Supply Chain Finance

Indian start-up capital funding Credible came up with the very credible idea of ​​underwriting loans for small and medium supply chain suppliers. It does this by leveraging its buyer relationships and business history to hedge against risk.

CredAble Executive Vice President and Head of Credit Ranjit Singh told Karen Webster of PYMNTS that the SME space in India is being held back due to a lack of access to reliable sources of credit. Without access to capital, many small suppliers can struggle to fill large orders, to the detriment of the customers they supply.

“The fundamental problem we are trying to address is that typically small and medium enterprises can only access debt financing in the form of loans taken out on property and land,” Singh explained. “So instead of doing that, we’re looking to leverage their business performance and buyer relationships to create a new lending base while making sure we can still get our money back.”

Singh said it’s in the interest of large companies, which he calls “anchors”, to help their suppliers get the financing they need, and he thinks they’ll be motivated to work with CredAble. . If they don’t, the only real alternative is for the anchors to support their suppliers themselves financially – with a loan or by prepaying an order, for example – but this is far from ideal. Not only does this mean that the anchor bears an additional interest burden, but it also means that it carries more risk on its balance sheet.

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“The more direct financial support you provide in the form of loans and guarantees to your supplier base, the greater the financial and performance risk you carry,” Singh explained. “The risk of their failure is transferred to your balance sheet.”

So the most obvious solution is to have a reliable source of supply chain finance. This is what CredAble aims to provide, and it needs the anchors to help them deliver it – first, by showing that they have a strong relationship with individual vendors, and also by committing to continue to do business with this supplier. Anchors are really the main lubricant for fundraising, Singh explained.

“Then the risk is on us as a lender. That is why we need the presence of a large anchor to mitigate this risk,” he added. “Having a strong anchor in the mix ensures that cash will continue to flow through the value chain.”

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Singh said the majority of CredAble’s business thus far has been anchor-focused, with anchors typically referring to a set of vendors they have a growth program with. These providers, while reliable, do not have access to working capital – so it is in the presenter’s interest to try to play matchmaker.

CredAble does not intend to use its own capital to fund all of these vendors. Rather, he plays the role of the originator of the loan, Singh said. The idea is that it can create many loan portfolios from different anchor providers and then sell them to capital markets, banks and other financial institutions (FIs) that don’t have the technology to collateralize loans from the suppliers themselves.

“We will be able to make these portfolios available to financiers whose cost of capital is lower than ours, and whose cost of lending is lower than ours,” he explained. “The proof of concept has been completed, and now it’s up to us to develop this activity. I think the first goal is to become a bigger book and create more portfolios, and then start looking at distributing those loans in the capital market.

CredAble also has bigger plans. Singh said the company would eventually see itself building a kind of pyramid of reliable vendors who not only have the ability to deliver what their customers need, but who are also financially stable.

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“A typical supply chain will have different levels of suppliers. So you have the main supplier, then the sub-suppliers supplying it. And then the sub-vendors have their own suppliers,” Singh said.

By the time CredAble has built this vast pyramid, it will have an equally extensive database that it can then tap into to seek out even more opportunities.

“That’s the alternative strategy,” Singh said. “Right now, we are focusing on the right B2B proposition for the SME sector. Once we establish this, we will be able to leverage the data we have and lend to new vendors. »

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On: Forty-two percent of US consumers are more likely to open accounts with financial institutions that facilitate automatic sharing of their bank details upon sign-up. The PYMNTS study Account opening and loan management in the digital environmentsurveyed 2,300 consumers to explore how FIs can leverage open banking to engage customers and create a better account opening experience.

Darcy J. Skinner