Even robust mid-market firms in emerging markets can experience difficulties in securing sufficient finance to grow. It can mean larger established-market buyers and suppliers are needlessly losing opportunities to work with these firms. TMI discovers how one fintech is seeking to bridge the funding gap.
Supply chains are often a complex global arrangement, with participants needing to source inventory that meets multiple criteria, including cost, quality, and delivery. With many potential suppliers and distributors located in emerging markets (EMs), it is essential that large international firms understand that working capital funding is not always easy to come by for some of these business.
Not only is this a lost opportunity for all if trade is not facilitated, where partnerships have been developed, funding issues can sometimes prevent and EM-located business from fulfilling an order. If this is a key part of the supply chain, potential disruptions may be felt throughout. It could certainly damage confidence in the relationship. But this is a problem that can be addressed, claims Alex Fenechiu, Co-Founder and COO of TMI Innovation Lab entry, Finverity.
Fenechiu, whose background is in London’s frenetic global investment banking market, mostly dealing with Fortune 500 enterprises, is a Romanian national. He says his heritage gave him a personal perspective on how smaller businesses plying their trade from an EM base often face the type of funding issues that his global corporate clients have long since left behind.
He has seen first-hand how, despite having a robust and creative offering that can compete on the world stage, many EM businesses, particularly SMEs, often struggle simply to buy the raw materials needed to produce the goods to supply the world’s larger buyers.
To illustrate how limited access to capital for supply chain purposes can impact a business, Fenechiu describes how a specialised office furniture manufacturer in Romania was on the verge of securing a contract to supply all the equipment for a vast new-build complex, to be occupied by a certain global marketplace player.
The manufacturing firm did not have the funds to purchase the extra raw materials and labour required to fulfil such a large purchase order. It went with some urgency to its banks. However, even with Fenechiu’s guidance, after three months of knocking on doors, all 10 banks approached failed to accept that settlement of the debt would come only after shipping the goods, in line with the buyer’s terms. With the manufacturing firm unable to settle a working capital loan before its buyer had settled its obligations, it marked the end of a deal that would have cemented the firm’s reputation on the international stage.
The frustration that an order from a global buyer could not be fulfilled simply because banks felt they could not take the risk, led Fenechiu and business partner, Slava Oganezov (a global business consulting expert), to seek a way of helping otherwise competitive midcap EM businesses participate on an equal footing. Finverity is the result.
Believing that “the only way the trade finance gap can be solved is by collaboration and unification”, Fenechiu describes Finverity’s role as a “global ecosystem for supply chain finance”. He sees it as a “one-stop-shop for all stakeholders in need of either capital, or assistance to participate in lending activity”. It draws upon the commonality of the invoice to every trade process as the core asset, and is motivated by the $1.7tr. trade finance gap that the International Finance Corporation (IFC) reports as being concentrated in EM territories (EMs are home to 74% of the global financing shortfall, with 60% of this figure affecting the SME sector).
By making trade finance into a “truly tradeable asset class”, Fenechiu believes that it is possible to begin reallocating capital from major developed-market institutions into EM SMEs, reducing that trade finance gap.
Of course, many SCF platforms already exist but a point of differentiation for Finverity, says Fenechiu, is that it targets only businesses in EM territories, and then largely midcap suppliers and distributors. It is also one of very few platforms that runs its own book.
Through the platform, commercial data related to its business clients is analysed. This helps Finverity rule out around 30% of applicants immediately as simply too risky for potential investors. Its in-house risk team then carries out deeper checks (in part using S&P’s Capital IQ platform), benchmarking performance metrics across multiple criteria.
“It means we quickly have a very clear idea of who we can progress with,” Fenechiu explains. “This helps us match the investment appetites of our network of bank and non-bank FI funders to the working capital needs of supply chain participants on the platform.”
Onboarding the initial set of funding providers took “three years and lot of red tape”. Fenechiu explains that the main challenge for most funding institutions in EM territories is that while developed markets such as the US and UK are broadly similar, and easy to understand and manage, “every EM is widely different from the next”.
The heterogeneous nature of many EM markets ensures trade finance is a challenging product to offer for many banks in these jurisdictions, hence the wide gap in funding. However, Fenechiu’s first-hand experience of the frustrations this creates drove Finverity to ensure its technology, its legal infrastructures, and its end-to-end verification and operational processes, rule out such difficulties wherever possible.
Of course, a platform of this nature needs to be used widely to make a difference, and this is why the platform is also being offered to banks as a white-label solution. By doing so, the aim is to reach many more needlessly struggling suppliers and distributors in EM territories.
Onboarding Finverity’s first banking clients was, Fenechiu recalls, a matter of even greater persistence and paperwork. “There was a lot of explaining and convincing, and a lot of collateral material preparation for us. But forward-looking banks seeking to differentiate from their peers know there is now a lot of space for bank/fintech collaborations.”
That collaboration cannot come soon enough for many EM SMEs, he continues. “The trade finance system is still not very good at understanding what each client needs. Fitting all businesses within a pre-defined structure – which was probably created for a Fortune 500 company 20 years ago – is no longer appropriate.”
Flexibility and speed
Finverity can provide a hybrid payables and receivables model. This might, for example, enable a smaller distributor to pay its larger suppliers early to achieve a discount, and simultaneously have an extension on the number of days before payment is due to its financiers. The distributor now has more time to convert inventory from its supplier into cash, enabling it to re-invest in discounted stock purchases, explains Fenechiu. “Incorporating a pre-payment and an extension is not something banks would normally offer; they may have separate alternatives, but these do not fully resolve the issue. We can solve both at once.”
One of the main issues for firms seeking growth is the significant volume of extra work required to bring in a working capital financier. As an example, a business taking its first steps into this space will have previously held a single ledger of maturing invoice payments to suppliers. When a bank finances selected invoices, two ledgers are now required; one for all invoices to be paid, and one for when bank-funded invoices need to be settled. “It’s an operational burden for the finance team,” declares Fenechiu.
The obligation to provide financiers with supporting trade documentation (various invoice types, bills of lading, delivery notes and so on) adds to that burden. This documentation is required regardless of how finance is arranged. However, Fenechiu explains that Finverity’s technicians can facilitate API connectivity between the platform and the client’s own systems of record. This can capture and format the correct data, and share it with funding partners (the banks or the non-bank FIs that seek to invest in these assets).
Where API connectivity is not possible, he says trade documentation can be uploaded to Finverity manually by the buyer or supplier, the system automatically mapping and processing the required data. In all cases, it will only permit a funding offer to progress once all necessary data has been received. This ensures no additional requests are submitted to the client at a later date, delaying the release of funding.
One of the most challenging issues for funders that Fenechiu notes in some EMs is that of rapid policy changes. These can see banks quickly exit sectors or whole markets that no longer suit their operational models, leaving funded businesses in a very difficult position. “That’s not going away. There can be strategic decisions in EM jurisdictions, sometimes overnight, that simply do not allow certain banks to continue offering funding,” he comments.
For an EM business with a large requirement for working capital funding, being able to split funding sources across several providers, while managing it through a single dashboard, is an essential risk mitigation tool in EMs, says Fenechiu.
Having onboarded numerous local and international banks and non-bank FIs, Finverity assumes operational responsibility. “This means daily interactions with each funding provider ensures we know about every domestic change, and if one source is likely to become unavailable to a client, replacements are sourced immediately.”
Closer collaboration between EM-based midcaps seeking working capital funding, and larger international organisations that wish to work with these firms but seek supply chain security, will be driven by the intersection between technology, automation, data and people, says Fenechiu. “This is why our focus is on creating a collaborative environment where we can deliver solutions that make sense to all parties.” With a top-line goal of “moving the industry towards a central ecosystem model”, he believes that Finverity puts the tools in place – including the legal structures, the operating models, the technology, and the knowledge of how certain trades should be structured – to achieve this.
There are operational complexities or misunderstandings that have demonstrably prevented adequate funding from reaching otherwise valuable EM-based business partners. Removing or mitigating these risks is essential for global supply chain health. As a platform that also seeks to provide for a financial sector that is looking for new investment opportunities, Finverity may be just the ticket.