While financial technologies related to peer-to-peer lending, insurance, remittance and digital payments have been getting all the attention, SME trade finance, itself a huge market, is much less talked about.
Owners of small and medium sized businesses in China and Hong Kong have always been complaining about the difficulties in accessing bank credit, but they are not alone.
Globally over half of trade finance requests by SMEs are rejected, according to the World Trade Organization.
The funding gap is estimated at US$2 trillion globally and US$200 billion in Asia.
It is not difficult to understand why. Traditionally, banks tend to look at the balance sheet and financials of the borrower. SMEs are typically at a disadvantage compared with big companies.
The size of the transactions also compare unfavorably in terms of cost effectiveness. Capital cost concern is another discouraging factor for banks.
To fill the gap, startup Velotrade has come up with a platform that matches SME exporters seeking financing and investors interested in diversifying into such short-term assets.
This is how it works. Approved SMEs put their invoices on the platform for investors to bid on. When customers settle the bills, investors get their money back plus interest.
Breaking with the way banks assess the creditworthiness of SME borrowers, Velotrade focuses more on SMEs’ clients, or debtors in an export transaction, as well as the strength of the trade relationship.
This makes sense because often SMEs in the supply chain are far less well-known and established compared to, say multinational corporations which procure from them.
For example, if the buyer is Apple Inc, the chance of them not paying would be limited, Vittorio De Angelis, executive chairman and co-founder of Veotrade explained.
Among other things, Velotrade will look at past transactions, study the volume and frequency, and compare the expected payment and the actual payment time to determine how strong and sustainable the trade relationship is between two parties.
To investors, there are several layers of protection. First, all invoices are vetted individually to make sure they truly exist by confirming with the SME customers who place the order. The vetting procedure is critical given that fraudulent events did take place in the industry previously.
Second, all the deals are insured against debtor bankruptcy by Euler Hermes, which is wholly owned by Allianz. There is also a guarantee mechanism where sellers of the receivables are under contractual obligation to buy them back if a trade fails because of other reasons, e.g. sellers not paying due to dispute over the quality of product delivered.
Cash disbursements are designed in a way to minimize the chance of failure. When a seller discounts the invoice to Velotrade, it will only get 80 percent minus fee, so that if there is dispute, sellers are more incentivized to mediate and get the problem solved. The seller gets the remaining balance minus interest after the customer settles the full amount.
Investors can expect 5-9 percent return on a per annum basis. Duration varies, but the average is about 55 days. Invoice size varies from US$50,000 to several million dollars. But they can invest in only a fraction of a invoice to spread the risk.
A mobile app is available to allow investors easy access to the platform to check the latest offerings and their portfolios.
While not legally required to do so, Velotrade spent 20 months to get a Type 1 SFC License to give additional visibility and reassurance to institutional investors.
Comparing to borrowing from banks, besides the restricted access, SMEs getting trade finance often have to use other bank services in bundled way, which may not be the most desirable, De Angelis noted.
However, Velotrade is not necessarily aiming to compete with banks. In fact a credit line with a bank is regarded as a positive indicator. The platform is more like an extra funding channel, serving as a complement.
Imagine this; an SME might tap into an existing credit line with its banker on a regular basis. But all of sudden, a big client wants to double its order. That is good news, but the SME would, however, need money to pay for the upfront expenses, wages, materials, etc.
Asked to increase the credit line, the banker may not be flexible enough to do it quickly, if at all. In this situation, selling the invoices to Velotrade would represent a positive and quick solution.
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