HSBC and Tradeshift launch supply chain finance ‘game changer’
HSBC sees new lending opportunities in the increasingly digital exchange of purchase orders and invoices between big companies and their smaller suppliers.
|Christian Lanng, co-founder and chief executive of Tradeshift
Constraints on access to working capital for small and medium-sized enterprises (SMEs) continue to bedevil even larger multinational corporations that depend on these firms as suppliers.
C2FO, a market place for working capital, surveyed 1,800 SMEs in the US, UK, Germany, France and Italy last year.
The majority of SMEs (55%) reported cash flow as the biggest obstacle for business growth and while more than 40% indicated an increase in working capital needs compared with the prior year, more than a quarter (29%) had no or limited ability to borrow.
This is primarily due to high interest rates – in the era of zero policy rates, SMEs struggle to borrow at below 8% – and the difficulty in obtaining any loan from a traditional banking partner.
Three quarters of these SMEs finance themselves primarily out of internal cash flow, not helped by increasingly late payment from buyers.
Sandy Kemper, C2FO
“It is therefore increasingly important for those SMEs to consider alternative financing options that can close this gap,” says Sandy Kemper, chairman and chief executive of C2FO.
However, maybe, instead of surrendering this large market to alternative lenders and new fintech disruptors, big incumbent banks could embrace new technology to address it themselves.
On Thursday, HSBC and Tradeshift, a platform company that connects large corporations to the SMEs that they buy from, announced a new strategic partnership to integrate the offering of finance into supply chain management.
Many large companies and their smaller suppliers now connect through Tradeshift’s cloud-based software.
“We are a global network, like a LinkedIn of Facebook for enterprise customers, which we have made free for their suppliers to join,” says Christian Lanng, co-founder and chief executive of Tradeshift, who helpfully wore a snapback hat at the launch to emphasize his background as a tech entrepreneur.
Its software has enabled large and small companies to digitize previously manual and paper-heavy processes from interactions across their supply chains, including purchase orders and invoices.
Lanng says: “We have been looking to link provision of financing, a market that has traditionally been very fragmented and manually driven, into the physical supply chain.”
HSBC took a stake in Tradeshift’s series D funding round in June and has been working with it since then on a way to integrate the offer of supplier financing against invoice collateral directly into its platform.
The two partners announced on Thursday that this offer will go live in the summer, with an imminent soft launch among a small number of customers in Europe. The two partners claim this is a game changer.
“It stretches finance deep into the supply chain and is not restricted to the largest suppliers,” says the smartly suited Vivek Ramachandran, global head of propositions, global trade and receivables finance at HSBC.
“We will be able to unlock financing and lend to more clients, earlier in the production process and at better pricing for them than on clean lending against their own credit. We can track matching patterns for purchase orders and invoices, and lend against those.”
Ramachandran won’t be drawn on the size of the market opportunity other than that it is “big”. C2FO suggests that $46 trillion is tied up in accounts receivable worldwide, which many suppliers, who typically take on average 60 days to be paid, would be delighted if they could turn into working capital today.
Lanng at Tradeshift says the new partnership could unlock some of the $9 trillion of payments outstanding globally.
The financing option will be integrated onto the Tradeshift platform and while accessing it might require borrowers to upload additional documentation, they don’t get linked to a separate portal.
“Over time it’s possible we could move to automated processing and pricing at pre-approved credit limits, perhaps even for pre-shipment financing taking supplier risk, though that is still some way off yet,” says Ramachandran.
He sees plenty of opportunity for HSBC across the globe, adding: “Even in areas and industries where it wasn’t previously a pressing issue, for example in the Middle East and in the oil sector, constraints on working capital in the supply chain is becoming much more topical.”