In a Harvard Business Review article titled “Is a Gap in Small-Business Credit Holding Back the American Economy?“, former head of the US Small Business Administration Karen Mills writes about the challenges small businesses face in obtaining credit from traditional lending institutions such as banks.
The benefits of a financially strong SME supply base are well documented. The question is how to get around the lack of willingness from banks to provide this credit. In short, what are the alternatives?
Enter supply chain financing.
Supply chain financing in the form of invoice factoring has been around for decades. Despite its benefits as an alternative to traditional bank financing, a 2013 survey by the Institution of Financial Operations revealed that only 5% of the organizations who participated had offered trade financing to their suppliers.
As reported in a Spend Matters blog post, the biggest reasons for this lack of utilization is the “typical risks faced by financing receivables, such as fraud and dilution.”
By addressing and removing these risks, one would reasonably conclude that the gates to needed capital would open for SME suppliers.
In the context of trade financing, performance data and real-time access to reliable information is truly more valuable than pure financial data. Before unencumbered access to alternative sources of funding can be leveraged, it is critical to ensure that only valid and errorless invoices enter the buyers AP system. Having a real-time firewall that identifies problem invoices means the suppliers and buyers can address variances on a real-time basis. This in turn enables third-party trade finance providers to offer on-demand pre approved financing to suppliers at the right time, in the right place, and based on the best information available.
As the focus on building and supporting a strong economy based on small business enterprise continues to expand, the way we do business will have to continue to evolve to a more responsive, real-time capability.
This is where the partnerships between the P2P world and strategic non-bank financing sources carries the promise to close the credit gap that is holding back SME suppliers and our entire economy.