Banks, Not Investors, still Funding many Vendor Platforms

I recently did a post where I sized the supply chain finance application market, see Supply Chain Finance Application Market Still Small

Some of these vendors rely heavily on the banking community for their fee income (ie, the banks fund their programs off their platform, in essence, a cash for asset deal).

From a corporate perspective, this poses two risks:

First, the bank may not be in a position to fund the program over time. This could happen for a myriad of reasons, and shortage of capital is a prime one – see post European Banks need to raise 700+ billion in new capital as an example.

As one corporate explained to me,  "The subject of risk management doesn’t change. Our first priority is to give our suppliers the best service we can provide. We are concerned which banking institutions are standing behind the program. We are interested in geographical risk and political risk and look 6 to 18 months out if the banks behind the program are at risk of X, Y, Z."

Just look at the example of French banks when they lost USD funding and various French banks had to pull their USD funding of various SCF structures.

I have argued that insurance companies are prime investors for Supply Chain Finance programs, the big programs the likes of what Lowes or John Deere do. The National Association of Insurance Commissioners (“NAIC”) has approved a program that treats certain receivables (what the bank market calls Supply Chain Finance or Approved Trade Payables) as an exemption for the current rule that receivables must be part of a security.  Insurers, while regulated, have less capital requirements than banks for the below investment grade companies.

Second, some vendors are stuck and finding it difficult to grow.

It’s an ongoing thing. Some vendors have done a latest round of financing and are growing via equity, adding new resources to sell their solutions, invest in continued R&D, and new locations. Others must grow with cash, and that is hard. I have seen in other start-ups that I have worked with that it is difficult to grow beyond $10M because the founders must release control. Once you are able to move beyond $10M (no easy task), the challenge of scaling, fighting off competitive threats, keeping up with technology, etc. is not trivial and the run rate is expensive.

So those vendors that are reliant on bank funding need to find alternative investors. That will not be an easy task.

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