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How deep-tier supply chain financing is transcending the conventional boundaries of MSME financing

For banks, it presents a massive opportunity to extend their reach into global supply chains, tap into the MSME market, and service a whole new tranche of companies—ultimately leading to new revenue streams.

Given how trade finance has undergone phenomenal changes recently, supply chain financing enables businesses to optimise their cash flow and free up working capital trapped in global supply chains. This involves the process of leveraging invoices and receivables as intermittent collaterals to finance suppliers.

By 2024, the supply chain financing market is estimated to register a remarkable CAGR of 17.1%, resulting in an incremental spend of USD 82.75 Billion. That said, SCF is limited in its reach, mostly catering to first or second-tier suppliers and missing out on those in the lower tiers.

Economic growth and stability are at stake as deep-tier suppliers grapple with insufficient financing. Micro, Small, and Medium Enterprises (MSMEs) at the lower end of the supply chain, bear the brunt of high borrowing rates, which can skyrocket to double-digit figures. To fortify supply chains against disruptions and promote transparency, and sustainability—empowering MSMEs in the lower tiers is paramount. This is where deep-tier supply chain finance comes into the picture. With its multi-tier approach, deep-tier supply chain financing ensures that suppliers even in the lower tiers are provided with timely access to funding.

The need to improve access to MSME finance
The MSME sector is experiencing a steady resurgence, recording a substantial increase in credit demand in 2022. Despite that, access to finance remains one of the biggest challenges for this sector.

Global supply chains are deep and complex networks, housing multiple business relationships. In the supply chain ecosystems, tier-1 suppliers rely heavily on MSME suppliers in the lower tiers. However, the penetration rate of established SCF models is relatively low. Besides, given the lack of access to affordable credit, MSMEs today suffer global economic shocks and trade disruptions more acutely compared to larger suppliers. With SCF volumes on the rise and new providers stepping into the space, there is a dire need to fund the strategically important MSME suppliers. Most of which are operating in the deeper tiers of the supply chain.

How does deep-tier supply chain financing address the financing gap for MSMEs?
By unlocking the power of deep-tier financing, financial institutions and fintechs are able to offer affordable financing solutions to the whole ecosystem of suppliers. They are equipped to extend financing beyond the top tier of large suppliers, who already have a strong credit backing—and cater to MSMEs in tier two, three and so on; up until the nth supplier down the chain.

This form of ecosystem financing leverages business relationships within the supply chain. It forges ties that stretch all the way from the lower tiers of the supply chain to the corporate anchors.

Deep-tier financing is not only upgrading supply chains to facilitate greater transparency and stability, but it is also empowering MSMEs by effectively addressing their trade financing shortfalls. By making credit available at a fast pace to the smallest of MSMEs, deep-tier supply chain financing is bolstering MSME growth—strengthening their supply chain and cash positions at scale.

Fin-techs play a pivotal role in channelling financing to MSMEs
Traditional financial institutions have fallen behind in their efforts to meet the rising SCF demands. An underlying issue that hinders legacy players from carrying out supply chain financing at scale, is the lack of a cost-effective technology infrastructure. The absence of an end-to-end supply chain financing platform is among the major challenges that most banks face in the SCF realm.

FinTechs are bridging the financing gap by digitising the interactions between multiple entities in the supply chain. With AI-powered technology platforms, real-time analytics, and app-based financing capabilities—fin-techs are making the entire lending process more transparent and flexible.

FinTechs have differentiated themselves from banks by offering solutions beyond traditional loans and working capital financing services. With a renewed focus on financing the MSME segment, fin-techs have launched multiple technology innovations and flexible product offerings such as deep-tier financing. Dynamic discounting models offered by fin-tech have encouraged early payments from buyers in return for discounts. Additionally, fin-techs leverage analytic-based business models that have helped them effectively assess supply chain ecosystem risks and identify new MSME financing opportunities.

The plug-and-play capabilities and customer-centric tech stacks offered by fin-techs have been crucial in filling the MSME credit gap in a cost-effective and timely manner.

The overarching goal
Deep-tier supply chain holds immense potential in serving the underserved MSMEs at the bottom of the supply chains.

For banks, it presents a massive opportunity to extend their reach into global supply chains, tap into the MSME market, and service a whole new tranche of companies—ultimately leading to new revenue streams.

Considering India’s vision to expand its export market, deep-tier supply financing is a compelling solution that will significantly ease working capital pressures for MSMEs, make them globally competitive, and strengthen their ties to international supply chains.