Why Supply Chain Finance is the Future of SME Lending

Problem

The current Australian economic climate is serving up more than its fair share of challenges for the SME sector, with capital markets drying up due to tighter lending restrictions imposed on our banks. This is mainly off the back of APRAs APS120 and Basel 3 & 4 requiring deposit taking institutions to hold more Tier 1 capital on its books against its stack of risk weighted assets.

As if this wasn't challenging enough, we are seeing more and more SMEs becoming the import “conduit” between international suppliers and local large corporates or institutionals.

These SME's have a hard time finding efficient source of funding due to their receivables being highly concentrated against these large Corporates/Instos who make up a majority of their debtors.

Many of these suppliers, currently would be operating through traditional lenders providing them with a vanilla debtor finance facility. However, because their debtors may only be 1 or 2 large Corporates, they would rarely be getting > 50% advances against their receivables, despite the fact that the debtor maybe triple A rated credit risk.

For example, if we take a $5M ledger with one single debtor representing 80% the company in question may only ever be able to draw on circa $2.5M, leaving the other 50% disapproved and ultimately not funded.If the business in question doesn’t have additional assets to seek funding against, they tend to end up in a cash flow trap, which ultimately does much unneeded harm to the entity.

On the flip side, the large corporate Buyer would be looking to also protect its supply chain, to ensure goods or services are being delivered as ordered and in a timely fashion.

Solution

This is where Supply Chain Finance shines without peer, affording the large corporate to push out their payables to 120 days, at no cost to them, whilst providing their suppliers with 100% of the value of their invoices, paid as early as they desire.

Furthermore these facilities do not interfere with the large corporates banking covenants in any way or form.

Octet has engineered and perfected its Supply Chain Finance offering, now working with some of the countries largest names, across multiple verticals.

A seller simply uploads its invoices for a large buyer to then authorise, the seller gets paid 100% of invoice value instantly and the large buyer now has extended terms up to 120 days... its that simple.

For more information contact your local Octet Rep or reach out to us at info@octet.com