Limited access to finance has long been the largest challenge for small and medium enterprises (SMEs). Due to higher risks associated with small scale activities, less reliable information available in the public and a lack of collateral, SMEs are less likely able to obtain bank loans at an appropriate cost than large firms. As the International Finance Corporation (IFC) estimates, 40% of SMEs in developing countries have an unmet financing need of $5.2 trillion every year, which is equivalent to 1.4 times the current level of the global SME lending.
To reduce the financing gap and make the development of SMEs sustainable, innovative financing ideas have been come up in recent years. Supply Chain Finance (SCF), also known as Reverse Factoring, is one of the most attractive ideas.
By providing suppliers, usually SMEs, with access to advantageous financing facilities through leveraging the buyers’ credit ratings, SCF is benefiting both suppliers and buyers in better managing liquidity and strengthening their balance sheet.
However, SCF is not free from challenges:
SCF is traditionally operated offline in a relatively inefficient way as complicated processes are involved for financial institutions to check and chop paper materials and sometimes business trips are required to make sure that contracts are safely signed, which is very time-consuming.
Besides, information asymmetry makes it difficult for financial institutions to verify the business and financial status of enterprises requiring financial facilities and inevitable data and credit fabrication may put banks and factors at high risks.
Moreover, it takes a long time for suppliers to get receivables and finish reconciliations, reducing liquidity and the ability to expand their business.
All these problems can be attributed to the lack of TRUST among suppliers, buyers and financial institutions as the information they get come from disparate sources. How to destroy this information island and build a reliable platform to make SCF work better and allow SMEs financing in an easier way, we may resort to blockchain, the innovative technology named as “The trust machine” by the Economist.
Features of Blockchain that May Benefit SCF
1. Data recorded on blockchain are, to some degree, unalterable. That is to say, contracts, invoices and logistic records among suppliers, buyers and financial institutions, once uploaded to blockchain, can hardly be changed and fabricated, which helps to increase financial institutions’ confidence on SMEs, even though they have no collateral, and make it easier for SMEs to obtain loans.
2. Data are recorded on blockchain in a traceable and transparent way. In this setting, all nodes in the blockchain have the same records of the latest information, which helps all parties in SCF to be equally aware of key messages.
3. Files like invoices, contracts, etc. are stored and transferred on blockchain in electronic copies, improving the efficiency of processing them and reducing storage cost.
4. Smart contracts on blockchain help to deal with transactions and payments automatically once certain conditions are fulfilled. This makes sure SMEs can obtain loans and other financial facilities on time and have a healthier cash flow.
5. Asymmetric encryption guarantees that only necessary information is revealed in a way to better protect private data like business confidentiality.
Financing Worth Over 300 Million RMB (About 42 million USD) Happened with Wanxiang Blockchain Supply Chain Finance Solution
Taking advantages of the features mentioned above, Wanxiang Blockchain put forward a supply chain finance service solution to facilitate capital flow among suppliers, buyers and financial institutions. As critical information like contracts, invoices and transactions are uploaded to blockchain, all parties are now cooperating with each other in a more reliable and efficient manner. In this connection, Wanxiang Blockchain Supply Chain Finance solution has attracted more than 100 clients and assisted them to finance over 300 million RMB (about 42 million USD).
How on the earth does this solution work?
Wanxiang Blockchain’s Supply Chain Finance solution reﬂects the transactions in an entire supply chain by connecting ﬁnancial institutions, core enterprises and each level of suppliers on the blockchain, leveraging the existing transactional relationships so that businesses in desperate need of credits could have easier access to ﬁnance.
What makes this solution valuable?
1. Reduce ﬁnancing cost for SMEs
Transparent and traceable blockchain transactions help ﬁnancial institutions better evaluate the creditability of SMEs in a supply chain, so that SMEs are more likely to obtain the loans from financial institutions at a lower cost.
2. Make risks more controllable for financial institutions
Since key business data of supply chain are recorded on blockchain, ﬁnancial institutions have better access to the information about SMEs.
3. Make financing process more efﬁcient
Storing and transferring contracts, invoices and transaction records on blockchain improves process efﬁciency and reduces business cost. Besides, electronic vouchers on the blockchain can be divided and transferred indeﬁnitely, allowing enterprises to use it for more ﬁnancing service.
4. Make business data safer
The immutable data and transparent rules on a blockchain help reduce illegal transactions and protect private business data.
How is this solution put into practice?
Let’s look at our cooperation with Jiangxi Bank, the only urban commercial bank at provincial level in Jiangxi Province, south-east of China, and Zhengbang Group, the first private-owned enterprise that went IPO in Jiangxi.
Suppliers of Zhengbang Group obtained financial facilities from Jiangxi Bank by sharing the group’s credit rating and pay the bank at receivables maturity. By uploading contracts, invoices and transaction records to blockchain, Jiangxi Bank got a better understanding of the SME suppliers and felt more confident to lend to them. At the same time, suppliers were able to make the best of their receivables as useful tools for settlement and financing so as to obtain the necessary capital for sustainable development. As for Zhengbang Group, it also benefited from the healthy operation of its suppliers. Therefore, it is safe to say that Wanxiang Blockchain Supply Chain Finance solution contributes to all-win cooperation.
Wanxiang Blockchain has always been dedicated to making all industries working better with the blockchain technology. We are proud to see our Supply Chain Finance Service solution facilitating more and more SMEs to get easier access to financing facilities and tap into their full potentials in development and looking forward to more clients joining us in the revolution of finance.