Small businesses have traditionally struggled to access the same trade finance as their larger peers.
In an interview with PYMNTS, Sandra Nolasco, CEO at Madrid-based trade finance platform Twinco Capital, said that the problem boils down to the way traditional lenders assess creditworthiness.
According to Nolasco, standard lending models in the space limit growth because “your credit is capped by … by your balance sheet.”
“That means that even if you’re a good supplier and [the buyer] wants to triple the order, for example, they can’t because you don’t have enough money to buy the raw materials,” Nolasco pointed out.
Stepping in to meet this challenge and plug part of the $1.7 trillion global trade finance gap in the sector, Twinco is looking to shake up the way small- to medium-sized businesses (SMB) suppliers access credit.
To do this, Nolasco said the firm is focused on risk assessment models that are built around suppliers’ performance rather than their balance sheets.
In fact, when it lends money to SMB suppliers, mostly based in the major manufacturing economies of Bangladesh, China and Pakistan, instead of simply digging into their numbers, Twinco first engages with the buyer placing the order.
And because the handful of buyers that Twinco works with are all huge European apparel businesses that have many suppliers, the company is able to leverage the wealth of supply chain data they have collected over the years.
“We look at all the data that is related to the performance of their supplier base then compare this with data from other buyers across the industry to get a picture of how well a given supplier has met its contracts in the past,” she explained.
In this model, supplier risk assessments are not based on how big their balance sheet is, but on how good they are at producing t-shirts, Nolasco further said, adding that they leverage that rich dataset combined with machine learning to predict a supplier’s creditworthiness .
The performance-based approach to supply chain financing also allows Twinco to release funds at an earlier stage.
As Nolasco observed in a previous interview with PYMNTS, traditional trade financing efforts target invoice payments, accelerating the speed with which suppliers get paid, but only once they have delivered an order.
Twinco’s proposition, on the other hand, introduces a credit line at a much earlier stage of the value chain — at the point of the purchase order, rather than at the point of invoicing. This approach, she said, has a much larger impact on SMB’s working capital and empowers suppliers to take on larger orders, knowing that they have the funds to buy the raw materials.
As Nolasco reiterated, “we don’t care how big you are, we care how many orders you get.” This means that regardless of the size of the order, approved suppliers can access 60% of its value upfront so that they have enough liquidity to continue growing.
Creating Additional Value from Data
As Twinco has evolved, the data-based approach to lending has given firms access to information that is valuable for both buyers and suppliers. Accordingly, the company is increasingly moving into the business intelligence space as a natural extension of its lending business.
Moreover, Nolasco noted that there is growing demand from buyers, not just for financial data on their suppliers, but also for information on their environmental, sustainability and governance (ESG) credentials.
And because Twinco is embedded in the supply chain, it has data-driven insights that are of value to European buyers, particularly whether the supplier’s materials are organic or not, or the means of transportation are used.
With this information, buyers are able to offer preferential terms to suppliers that meet their ESG requirements, enabling Twinco to offer them preferential funding conditions in turn, she added.
Going forward, he said the company is also interested in giving the suppliers it works with greater visibility into the wider market for their goods. And thanks to a $12 million Series A funding round it recently closed, Twinco is better placed than ever to invest in its data tools.
Giving the example of a jeans manufacturer, Nolasco said that Twinco has a lot of information on the denim production market as a whole that would be of use to such a business. This includes pricing and efficiency data, but also ESG metrics.
“That’s all the data that we’re collecting and that we want to give back to our customers,” he noted.
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