Thomas Y. Choi is a professor in the W.P. Carey School of Business at Arizona State University. Sam Bizri is the founder and CEO of Zeconomy. Wenting Li is a doctoral candidate in supply chain management at the W.P. Carey School of Business at Arizona State University; (Art note: a photograph and illustration accompany this article).
Small and medium-sized businesses, known as SMEs, which are deep in the supply chain, often face many financial challenges. They are several levels away from giant focal companies such as Unilever, Siemens and Dell, which can provide supply chain financing. Until now, all the support programs that the focal companies have provided, such as reverse factoring and dynamic discounting, were only available to their first-tier suppliers.
That’s where next-generation financial technology companies like Provenance, SumUp and Zeconomy come in (One of us, Sam, is the founder and CEO of Zeconomy). These fintechs have created innovative platforms that help SMEs address these challenges and leverage resources that were previously inaccessible. By leveraging these platforms, SMEs can better manage their cash flows and improve their business operations. Here’s how to do it.
1. SMB ASSETS CAN NOW BE DIGITIZED.
SMEs have three main assets they can use to obtain financing: approved invoices, inventories and purchase orders. Of these, organizations providing financing prefer approved invoices from larger companies; they are considered low-risk because they signify that the work has been completed and the shipment has been sent to the buying company. However, when these invoices come from other SMEs, financial institutions may consider them much riskier and look with caution. The same applies to purchase orders from other SMEs, and SME inventory.
Through fintech platforms, these SME assets can now be digitized. Once they are, they can be traded on a digital marketplace to match specific asset types with the risk and return profiles of various investors. Similar to how people playing fantasy soccer pick players from various teams, investors can assemble portfolios of SME assets. SME assets that were previously unfundable can be pooled into diversified investment portfolios.
2. CONNECTIVITY AND EFFICIENCY ARE IMPROVED.
The underlying technology behind the fintech software platform is blockchain. It provides a way for SME assets to be digitally connected to large focal companies. This provides several benefits:
— Allows focal companies to provide financing to these SMEs.
— Reduces the risks for external investors in lending to SMEs based on their assets
— It allows SMEs to obtain better financing conditions.
What’s more, the blockchain technology, which underpins these transactions, provides an additional layer of security and transparency for the financial transaction, while maintaining the privacy of suppliers’ confidential and competitive data.
3. ARTIFICIAL INTELLIGENCE PROVIDES CASH FLOW PREDICTIONS.
The way fintech platforms can help SMEs manage their cash flows is nothing short of revolutionary. These platforms can automatically compile transactional data and use artificial intelligence to analyze SMEs’ transaction histories and make accurate forecasts of their future cash flows. This data-driven approach allows SMEs to optimize their working capital and make more informed decisions, mitigating their risk of insolvency.
In addition, these cash flow forecasts can give investors more confidence when deciding whether to provide financing to SMEs.
Fintech platforms offer new avenues for SME providers to access funds. By digitizing assets and leveraging technology, platforms can increase the liquidity of SME suppliers and reduce their cost of funding. And by helping to strengthen SMEs, these platforms can help make the entire supply chain more resilient.