The past two years have been the most revolutionary for the Indian startup and investment ecosystem. With new-age fintech companies and platforms whipping up a storm in the economy, there is no stone being left unturned in exploring finance as a space. India’s financial markets have had a massive influx of investors who have pumped in money in various asset classes. Much of this is due to robust investor education programs helmed by fintech companies and partly due to the emergence of newer asset classes themselves, catering to the diverse interests and risk profiles of investors. The investment market is no longer expanding exponentially on the equity and mutual funds side of assets, but new-age asset classes have popped up in the fintech space that focuses on the benefits of the under-tapped debt market in India. They are not only helping investors make money but are also helping solve an impending problem of debt shortage that countless businesses face.
This is a 2-in-1 solution that supply chain finance (SCF) offers- short-term debt to finance the supply chain operations for businesses, making SCF an investable asset class for lenders and financiers.
Also known as reverse factoring, SCF is a technology-backed financing solution that provides short-term credit to suppliers to optimize their cash flow and working capital.
Key stakeholders in the supply chain finance process generally include:
- The company or the borrower who seeks access to funds to finance their supply chain & pay their vendors on time without denting their working capital.
- The vendors and the suppliers who get funds from the company or the buyer on time. This helps enhance the buyer-supplier relationship in the long term.
- The financier or the lender gets an added return on their money, which may be higher than the quintessential investment forms.
Thus, investors, lenders, and high net worth individuals become the fulcrum that will facilitate supply chain financing and the supply of short-term credit to companies in need, while making a buck themselves.
It is important to note at this juncture about the reluctance of banks as the largest credit lending agencies to finance the supply chains and operations of small businesses (and also small businesses directly approaching banks as first lead), particularly due to extensive documentation requirements, rules around collateral, large NPA ratios, and the high operational costs involved in last-mile coverage. Of course, NBFCs have the network and the local reach, but lack the liquidity to fund the burgeoning credit gap in the SCF market.
Let’s look at some stats to understand the size of the SCF market. The supply chain finance market is largely unexplored in India. The value of the addressable supply chain finance market in India is nearly Rs 60,000 crore, while the total supply chain finance market is estimated to be worth Rs 18 lakh crore.
With this enormous potential in the supply chain finance market and India on its way to becoming a $5 trillion economy, financiers, lenders, and investors find themselves in a sweet spot with a golden opportunity to tap this potential. Of course, high net worth individuals are also realizing this investment avenue as an opportunity to make money and grow their wealth by investing in supply chain finance. It is after all not an entirely new concept in the market as such! SCF is nearly 4000 years old and was first practiced as trade financing in the Mesopotamian civilization! This age-old process has been refined and regularized for it to become one of the most sought-after means of how companies get their supply chains financed.
While the supply chain finance revolution has benefitted the buyers, suppliers, and financiers alike, the problem that remains to be addressed is that so far, the SCF ecosystem has catered to corporations, big companies, and businesses with fat order books. But as we see now, the actual scope for investors lies in financing the credit requirements at small businesses, MSMEs and startups that continue to reel under a debt deficit, marring their growth. How can wealthy investors access this untapped potential?
Yubi’s supply Chain finance platform, Yubi Flow is challenging this notion that SCF is only for large companies. With its innovative, API-driven supply chain financing platform, Yubi Flow is getting small businesses, MSMEs, and startups access to credible supply chain financiers to help them boost their business. While Yubi Flow helps inject funds to the underserved business communities and priority sectors, it gives investors an incredible chance to make monetary gains at the same time. Call us today to learn more.
Extending short-term credit to the burgeoning micro, small and medium-sized businesses in India to fulfil their orders is an opportunity ripe for the picking for willing high net worth individuals. Apart from the fact that you stand a chance to make some money on the sidelines from your investment, it is also an opportunity to participate in the India Growth Story! The platform to facilitate investments in SCF is being promoted by Yubi. On Yubi Flow, one can finance companies’ supply chain operations as per their convenience, investment corpus, and negotiate the interest rate and repayment schedules.
Raking in higher returns with SCF as an investment
When you finance a company’s supply chain, you are getting into an agreement with them wherein you will get your investment amount back in 30-180 days along with a pre-decided interest rate. Both the repayment tenure and the rate of interest are dynamic and are negotiated by both the parties in advance. On average, when financing a company’s supply chain, a standard 8.8-11.25% of interest is charged on the principal amount.
Now, let’s compare this with the average returns delivered by some popular asset classes.
- Government bonds: You get a meagre 2.5% return per annum. In addition to this, your money gets frozen for 5-7 years until maturity.
- Savings bank account: You get a 2.5-6.5% return per annum, which is not ideal to beat rising inflation. Essentially, your money loses its value if you keep it in a basic savings account.
- Fixed deposits: You can get a maximum return of 8% per annum. However, a TDS of 10% is deducted if the interest amount is over Rs 10,000
It can be inferred that conventional investment classes offer a low return, and a liquidity crunch can haunt you if you keep your money in these asset classes. High net worth individuals and lenders with a significant investment corpus may delve into alternative asset classes like private equity or hedge funds. Although the return on these asset classes is relatively high, the investor’s money gets tied up for years at end, sometimes even decades. Thus, liquidity becomes an issue for the investor who may not be able to access their funds even in case of emergencies.
Let’s face it, ensuring that a long investment beats inflation and provides a high return of interest is a desire that many HNIs and investors echo. In addition to this, alternative asset classes like private equity and hedge funds have a limited entry barrier- not everyone with a large investment corpus can invest in these asset classes- you might need connections and networks that can invite you to invest in these asset classes. Not to mention, these are some of the riskiest asset classes known to humankind where the investor’s wealth becomes dependent on the skills and expertise of a fund manager to navigate the markets.
This is where SCF steps up the game.
Not only is SCF’s return higher than most conventional and non-conventional asset classes, but it also beats inflation by leaps and bounds. For instance, XYZ lends Rs 20 lakh to the company. The rate of interest decided is 11%, and the company will repay the lender in 180 days, i.e., 6 months. Since this is a short period, lender XYZ will get their funds back in less than a year, and on this amount, the lender will get Rs 1,10,000 as interest- all within 6 months!
Guide to investing via SCFs
India has over 6.3 crore MSMEs and small businesses. The number is growing by the day, with young Indians riding high on the spirit of entrepreneurship. Most of these businesses have a high margin due to their nature of work. However, most of these businesses also struggle with negative working capital and need immediate funds to execute orders. This makes SCF a fuss-free alternative to get short-term credit in a hassle-free manner.
When a borrowing entity has a history of on-time payments, has no default history, and has projects and orders in the pipeline to put them on the path of growth, investors can align with them for a long-term commitment. With SCF, both lenders and borrowers can retain liquidity; the lender is assured of higher returns, and the borrower can convert the investor into a long-term financier for their company. As a result, SCF investment by an investor in a company can run for decades like a well-oiled machine where the investor pumps in liquidity for the company to execute orders and get the promised return on time.
Thus, SCF becomes a money-making instrument for investors. Incredible returns within a short investment tenure make it an attractive asset class for HNIs who want to grow their wealth and re-invest it in other asset classes.
Bonus benefits for investors
Apart from incredible returns, there are three other benefits that SCF investors can enjoy:
Since there is not much active participation by the investor, investing in SCF can become a source of passive income. All you need to do is analyze the company’s financial health and scale of growth and wait for the agreed tenure of investment.
Seasoned investors understand the importance of diversifying into various asset classes to protect their investments against market risks. Since SCF is not related to market-linked risks, it can help diversify your investment portfolio. Did you know that supply chain finance was one investment avenue that did not see even a single percent of negative returns during the 2008 financial crisis? It helped investors retain some balance in their portfolios when there was a bloodbath across the global markets. During the severe downturn of events in 2008 and a few years following the crisis, supply chain finance was one of the crucial means to ensure that businesses across the globe had access to liquidity to get back on their feet; ergo, making it a win-win situation for both investors and the borrowers.
Boon for those with limited financial knowledge
SCF is a great asset class for investors who have a moderate risk appetite, have a significant investment corpus, and want to make capital gains but lack financial knowledge.
Supply chain finance demands the attention of investors due to its self-liquidating structure, short-term nature of receivables, low risk, and high returns. This can also help form a long-term relationship between the financier and the buyer, making supply chain financing a regular operation.
Supply chain finance can help usher in a sustainable investment path for investors with a high net worth and financiers who want to expand their offerings. Supply chain finance is looking at a glorious growth period as an investable asset class outside the realm of traditional investments known to the conventional investor. With high demand, uncorrelated yield, and banks making space for institutional investors, supply chain finance is on its way to becoming the next big thing in the asset class market. The fact that this is a clean, transparent and organized form of investment makes supply chain finance a much sought-after investment mode for individuals who want sustainable growth and returns and do not want to limit themselves to the equity or debt market.
There are asset management firms in the U.S that have begun to tap into the potential of supply chain finance as an investable asset. There even are specialized portfolio managers in the U.S that have begun launching dedicated supply chain finance funds that target institutional and high net worth investors. Data from the Alternative Credit Council suggests increasing the number of institutional investors planning to increase their capital allocation to supply chain finance. The major attraction for supply chain finance as an investable asset class is attributed to its secure, short-term yields.
While India’s journey towards supply chain finance funds may be long drawn out, technology-driven platforms like Yubi Flow are empowering the startup and MSME ecosystem by allowing financiers and investors to invest in the supply chain of these companies. The technology to make supply chain finance is being developed by leading players like Yubi, which will form the backbone of supply chain finance as an investable asset class in the years to come.