Digitalised supplier finance offers lifeline to SMEs

28 July 2020
Lenders willing to invest in digitalised tools could reap the rewards of unlocking far greater supply chain finance flexibility and functionality for small and medium firms

The Covid-19 pandemic has impacted global businesses to an extent comparable to the worst financial crashes in history. In the Middle East and North Africa (Mena), it is small and medium-sized businesses (SMEs) in particular – the backbone of any regional economy – that are facing the most severe disruptions and losses.

Without improvements in the accessibility of financing solutions for SMEs in the region, global value chains are facing a crisis in sectors such as retail, construction and manufacturing. Globally, 44 per cent of manufacturers have invoked force majeure clauses or simply ceased production.

SMEs account for more than 90 per cent of businesses in the Mena region and are vital growth contributors. Yet even before Covid-19, nearly 63 per cent of these SMEs did not have access to finance.

Throwing SMEs a lifeline

With normal trade and cash flows under strain, one way in which lenders are supporting businesses is through supply chain finance (SCF), also known as supplier finance or reverse factoring.

Unlike traditional financing, which is typically initiated by the supplier, SCF is a financing solution initiated by the buyer or ordering party to help its suppliers finance their receivables more easily and often at a lower interest rate or with longer payment terms than might typically be offered directly.

SCF therefore offers businesses the opportunity to tap into value typically locked within their supply chain by enabling buyers to provide financial support to their suppliers and help them to optimise their cash flow without them having to rely on the often unsustainable debt burden of conventional finance.

SCF offers businesses the opportunity to tap into value typically locked within their supply chain by enabling buyers to provide financial support to their suppliers."

Historically, this process has been cumbersome and only feasible and accessible for bigger companies. However, innovation and increasingly sophisticated digital capabilities are making SCF more efficient and accessible to smaller businesses. So, for lenders interested in leveraging SCF to help Mena’s SMEs survive this crisis, embracing technology and digitalising SCF offerings should be a priority.

The benefits of implementing SCF in line with international best practices are increasingly being recognised by lenders, buyers and suppliers facing the strain of this crisis.

Innovation is overdue

Even before Covid-19, SME finance more generally was sorely in need of innovation. The Mena region had a credit gap in excess of $260bn.

Traditional SCF services are often too rigid, burdensome and outdated to properly serve today’s SMEs, often taking a one-size-fits-all approach that lacks the sophistication or flexibility that SMEs require.

Historically, the SCF process has also lacked transparency, with only limited visibility into the supply chain. Manual and document-based checks have also limited the efficiency of these services, exerting time and resource pressure on both lender and buyer. For SMEs, which often lack the resources and time to submit to these intensive requirements, SCF has been relatively inaccessible.

Rather than looking to well-established lenders, SMEs are turning to digital, dynamic and more flexible SCF specialists that can cater to niche sectors or requirements."

But SMEs are increasingly becoming smarter, savvier and more sophisticated in their search for the right financing partners than larger corporates. Rather than looking to well-established lenders, they are turning to digital, dynamic and more flexible SCF specialists that can cater to niche sectors or requirements.

With a growing pool of disruptive and technology-powered alternative providers simplifying and democratising access to SCF in the region, traditional lenders are beginning to recognise the risk of being left behind.

Flexibility and functionality

Traditional SCF lenders must adapt if they wish to serve the SME market and support Mena’s smaller businesses, and secure new opportunities in this space going forward. And functionality and flexibility must be at the heart of that change.

Historically one-dimensional lenders are increasingly understanding that a more flexible approach to SCF is required, allowing digital capabilities to fit seamlessly with existing systems and general ledgers.

By its nature, the product must also be adaptable to multiple jurisdictions and this means being able to meet various requirements, including regulations, taxation, secure connections to accounting systems and datacentres and flexible branding.


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Furthermore, as lenders look to tap into new markets – be they SMEs or specific sectors – and look to tailor fees or requirements, a one-size-fits-all approach simply will not be sustainable. For lenders already recognising the need to adapt, functionality is also one of the priorities of new systems.

Once rudimentary services require significant adaption if they are to become more straightforward to use for both internal teams and their customers, ensuring that previously time-consuming steps, from audit requirements and vendor checks to warranties and service level agreements are less burdensome. As a result, SCF services are now able to be brought onto a single platform, accessible by lender, buyer and supplier.

Reaping the rewards

For banks, this level of innovation and efficiency offers major benefits. The digitalisation of their SCF services not only lessens the pressure on their own resource working to once intensive, manual processes, it also allows them to support numerous partners in a fraction of the time and at a fraction of the cost, significantly increasing the profitability of lending to SMEs.

Furthermore, the value of adopting a sophisticated and centralised platform in reducing risk is also greater, providing lenders with greater oversight and transparency into both buyers and suppliers. While many lenders may look to run digitalised SCF programmes in-house, others are turning to managed or hosted services offered by leading technology providers.

The benefit of this is that lenders can avoid the time and cost burden of upskilling existing team members or recruiting new ones to manage the enhanced capabilities. In addition, deploying a managed service can help to avoid the red tape associated with launching a new application.

With Mena’s SMEs facing an unprecedented challenge, accessing efficient finance will be vital. In addition to the support from governments and the rest of the private sector, innovations in SCF can contribute to the shortfall in funding for SMEs struggling to keep afloat during the Covid-19 pandemic.

As these businesses are the future of the region’s economies, sophisticated and digitally enhanced SCF offerings are a crucial resource; lenders must take advantage of them to ensure that SMEs continue to play their part in the Mena region’s economic growth long after Covid-19 has passed.


About the author

Claudia Perri is regional commercial
director at HPD LendScape

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