As ongoing supply chain volatility pushes working capital needs earlier into the cash conversion cycle, a shortsighted view of suppliers’ creditworthiness risks locking them out of the finance they need to meet demand. Could turning trade data into credit scores through artificial intelligence be the answer?

 

Once a relatively niche product, supplier finance came into its own during the Covid-19 pandemic, as large anchor buyers sought to shore up their supply chains amid the shutdowns and movement restrictions that threatened to upend global trade.

With port blockages, geopolitical tensions, supply shortages and shipping interruptions now the order of the day, demand for supply chain finance (SCF) – which provides smaller suppliers with working capital by leveraging the creditworthiness of their anchor buyers – shows no sign of abating, says Ajay Sharma, Asia Pacific head of global trade and receivables finance at HSBC. “In the first half of this year alone, we have rolled out more than 80 supply chain programmes in Asia, enrolling over 16,000 suppliers,” he says.

But in today’s turbulent environment, the only constant is change. As working capital needs evolve, banks are being called upon to provide new levels of support to help businesses keep the wheels of trade turning.

“SCF is relatively easy. In essence, you’re really talking about anchor client risk, and that’s something all banks are comfortable with,” says Sharma. “Increasingly, though, the working capital needs of suppliers are starting much sooner than the invoice stage.”

 

Getting finance earlier in the cash conversion cycle

Before issuing an invoice, which can then be financed via SCF, suppliers often rely on cash in hand to cover raw material sourcing and production costs. This was generally sufficient in the era of the lean ‘just-in-time’ supply chain model, whereby supplies were only ordered and received as needed in the production process.

Following the roll call of disruptive events that have impacted global trade over recent years, this model is fast being replaced by the inventory-heavy ‘just-in-case’ system. As buyers pre-order higher levels of stock to guard against potential disruptions, suppliers are finding themselves stretched thin. Add to this the soaring cost of raw materials, from semiconductors to foodstuffs, and the need to bridge cashflow gaps and mitigate risk at the raw material and manufacturing stage has become an urgent one.

For many suppliers, however, getting access to working capital when an order comes in is easier said than done. Small and medium enterprises (SMEs) in particular don’t always fit into the boxes created by traditional credit models, which means that many businesses are unable to tap into the finance they need to keep up – no matter how successful they are.

In spite of this, the clear market need for the product has driven a growing interest in pre-shipment, or purchase order financing, which has become something of a holy grail for working capital solution providers of late. Numerous fintechs have entered the market to provide funding on a small scale to suppliers in certain industry verticals or in certain geographies, but offering this kind of finance on a global scale – often with no recourse to the anchor corporate – requires an innovative credit model to be successful.

 

Putting data to work for supply chain resilience

Enter data-based decision making. This model, developed by HSBC in collaboration with large buyers around the world, means that eligible suppliers can be assigned a trade performance risk score based on historical trade data, rather than on financial data, and can therefore access finance based on the strength and resilience of their relationships with buyers.

“We’ve proven that several years of business performance data can make more sense than whatever financials a supplier might be able to provide,” says Sharma. “If an SME is supplying to the largest companies in the world, and has a three year track record or more, why shouldn’t that be an indicator of its bankability from a risk perspective?”

In 2020, HSBC launched its first trade finance solution to utilise real-time third-party data for loan approval. Created in partnership with Cainiao Network Technology, an Alibaba affiliate, it enables e-commerce merchants to access rapid loans of up to US$500,000 by authorising HSBC to access the information Cainiao holds on them, including business background, primary brands, real-time inventory and receivables information and operation status, to conduct a credit assessment. The efficiency gains from this digital financing solution reduced the period between account application and approval to as little as seven working days.

“The fast-paced and competitive nature of the e-commerce sector makes funding efficiency essential,” says Sharma. “We have created a very elegant solution whereby borrowers receive a near instantaneous response, making it easier, faster and simpler to access and optimise working capital.”
HSBC rolled out a similar programme in 2021, in partnership with shopping and entertainment platform HKTVmall. Using commercial data such as turnover, types of goods, as well as return and refund records, eligible HKTV merchants are able to access 90-day trade facilities without having to provide financial statements.

It is not only the e-commerce sector where this model can be applied. A recent HSBC survey of over 400 organisations across the Asia Pacific region found that digitisation is now the top strategic priority for corporate supply chains, with respondents highlighting the business value of being able to connect with an ecosystem of suppliers, buyers, customers, and other third parties across markets and regions.

As data ecosystems continue to develop in industries from automotive to pharma, the amount of operational data that can be harnessed to get finance to where it’s needed in supply chains will only increase – addressing a trend flagged up by HSBC survey respondents that pre-shipment and purchase order finance will be their most requested supply chain financing products in the coming year.

“As well as lending money at the invoice stage, when the anchor buyer issues a purchase order, we can use this data to approve pre shipment financing,” says Sharma. “We have developed a killer app. This is what many fintechs have been trying to achieve, but they don’t have the reach and access on a global scale, nor do they have the trust of large buyers, because they don’t have the balance sheet that we do.”

 

Democratising access to finance when it’s needed the most

An important difficulty in providing pre-shipment finance to suppliers, and a large contributory factor to the US$1.7tn trade finance gap, is the cost to serve high volumes of relatively low value customers. In short, under traditional models of banking, it simply isn’t economical at scale.

“Going to that small customer base is a challenge in itself. Therefore, it has to be largely digital,” says Sharma.

“The purchase order comes in, and the pre-shipment financing is provided on an automated basis. There has to be minimal human intervention; it’s really a portfolio-driven, exception-managed system,” says Sharma, who adds that the bank is currently running this intelligent credit assessment to enable efficient pricing, scalability and end-to-end processing in markets including Hong Kong, China and India.

What’s more, by rethinking the way they address this smaller client segment, banks can promote profitable growth, as well as contribute to a more inclusive future for trade.

The International Finance Corporation estimates that SMEs in East Asia and the Pacific have an unmet financing need of US$2.4tn a year, with half of them lacking access to formal credit. This is due in large part to an inability by banks to create the right solutions for SME customers – in spite of their vital role in the world’s supply chains.

“Through SCF programmes, we have been able to open the door for multiple suppliers to access finance. We don’t onboard them, we don’t require them to open accounts, it’s very simple,” says Sharma. “With this very timely addition to what we do, we now not only finance them on a post-shipment basis but then give them financing on a pre-shipment basis the moment a purchase order is issued, and have them become clients of the bank.”

 

Leading trade finance into the future

One of the most pervasive contributors to the global trade finance gap is the inability of well-performing SME suppliers to meet collateral and documentary requirements for traditional trade and supply chain finance offerings.

As disruptive events continue to roil the world’s supply chains, finding new solutions to ensure that businesses can access the working capital they need to adapt and succeed in a volatile landscape has become an imperative.

A non-traditional approach to credit decisioning that considers all parameters that influence the strength of the supply chain – instead of simply relying on balance sheet and financial information – can inject increased financial stability even earlier in the cash conversion cycle, and make working capital financing both smarter and more efficient.

“We started our trade transformation journey five years ago, and as the world’s largest trade finance bank, we feel it is our duty to lead the market into new areas,” says Sharma. “HSBC has demonstrated that data-driven automated pre-shipment finance is a reality, and not just a hypothetical future concept. This, for us, is really the next frontier.”