Blockchain for supply chain finance: what treasurers need to know

Published  4 MIN READ

Large enterprises often act like J Wellington Wimpy from Popeye when setting invoicing terms with their suppliers: “I’ll gladly pay you Tuesday for a hamburger today.” Just replace 90 days with Tuesday, and you’ll get closer to the truth.

Sure, that’s a great deal for the large enterprises, but those longer payment terms cause a late payment chain reaction: instead of having cash on hand, they have to borrow money for operations. They don’t have the cash flow necessary to make strategic business decisions, hire new employees, and expand their business. A small enterprise needs access to that cash far more quickly to be successful. But that access to finance isn’t as available to micro, small and medium sized businesses (MSMEs) as it is to larger businesses.

Because, while there is a lot of talk about the value of MSMEs contributions to the success of global and local economies, the rules of the financing game inhibit their success.

Global numbers tell a depressing story. According to Ant Financial, 80 percent of the world’s MSMEs have no access to formal financial systems. And the Internal Finance Corporation finds that there’s $8.9 trillion in potential demand for MSME finance, but only $3.7 trillion is being supplied. A full 40 percent of microenterprises are either fully or partially constrained from access to finance, accounting for over 65 million enterprises. It’s not for a lack of trying: the World Trade Organisation estimates that more than 50 percent of international trade finance requests by MSMEs are rejected. And 41 percent of businesses report having experienced cash flow challenges.

The obvious question: if SMEs are so crucial to a country’s overall health, why aren’t financial systems supplying them with the funds to keep them thriving? Large and established companies don’t face nearly the same challenges when it comes to accessing finance.

And the obvious answer: lack of information. Banks don’t have ready financial information from MSMEs, whether it’s credit scores or collateral, to draw from to assess whether an enterprise is worth the risk of financing. And many MSMEs don’t have the access or the funds to provide insight for the financier. The business might have limited credit history available to access. Or any access to a bank at all, let alone access to sufficient collateral. And they might not have the resources to account for a high interest rate loan.

Simply put, with traditional models and limited access to financial information, banks can’t trust those enterprises.

Blockchain Shifts the Paradigm

To help address this need, Tradeshift partnered with Hyperledger, an “open source collaborative effort to advance cross-industry blockchain technologies.” Blockchain technology is touted for its myriad theoretical uses, but today, it has the potential to fundamentally change the way MSMEs work to gain access to financing. There’s already a lot of promising pilots running in developing markets utilising blockchain to address the need for finance in emerging markets. As early as 2016 in India, IBM partnered with Mahindra Finance to build a blockchain based solution for financing, Bright, a part of AMPP Group works to bring financial solutions to MSMEs, 7 top banks combined to serve SMEs with Hyperledger Fabric, and IBM and Twigga’s Partnership in Africa is working to bring solutions to merchants through cell phones.

In May, Tradeshift announced Tradeshift Cash, “real-time early payments product based on blockchain technology” for MSMEs. It’s explicitly designed to address the financial needs of MSMEs, whether in emerging markets or established. Make no mistake, these enterprises have to deal with a lopsided playing field. Not only are they less likely to get financing, they have to deal with longer payment terms that cut into their ability to build equity, hire new employees, and stay afloat.

Tradeshift Cash is one effort to unlock access to global supply chain finance for companies of all sizes. By utilising blockchain technology, enterprises can share more robust and relevant information to a potential financier, without there being any question on the validity of the data. This isn’t just ‘blockchain magic’. The solution uses what’s called ‘tokenisation’ to share this critical information. Tokenisation is the process of converting rights to an asset into a digital token on a blockchain. It supports settlements directly between enterprises and lenders based on smart contracts, without the need for traditional financiers. And it lets multiple parties connect and manage the whole loan process, from the lender to the borrower, and to the applicant.

New Future

The great promise of blockchain is in its ability to transition away from the traditional rules of finance: power held in just a few centralised centres. But with any innovation, we need to guard against the promise of decentralisation being co-opted by just a few players. The truth is, democratising trade only becomes easier as technology like blockchain becomes more accessible. Solutions like Tradeshift Cash will help make commerce for all a reality.