Trade finance innovation positioned to fuel growth of China SMEs

China suppliers have highest need, highest likelihood for adoption, and largest opportunity to benefit from trade finance innovation, according to the C2FO third annual Working Capital Outlook Survey.

Across the globe, small and midsize enterprises (SMEs) report many of the same challenges and opportunities. While these executives share many concerns, survey respondents in China faced some of the more significant challenges in building an affordable working capital mix to fund their operations. Ninety-nine percent of China respondents were receptive to alternative finance options and ninety-six percent value customers who offer supplier-friendly early payment options.

Executives who participated in the survey shared their need for access to affordable funding, adequate liquidity to meet demand in a growing economy and for improved relationships with their large corporate customers.The survey data contains important insights for corporates with global supply chains, Chinese enterprises, and stakeholders in China’s economy.

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China’s rapidly growing economy drives growing need for liquidity by SMEs

Chinese SME executives report a high cost of capital, the highest expectation of an increasing need for liquidity, and the highest usage of traditional funding in the C2FO survey. More than half of those surveyed are unable to access capital at rates less than eight percent.

cost-of-liquidity

China leads the world in growth of alternative finance

China’s alternative lending market has 205% compound annual growth, according to data from the Global Partnership for Financial Inclusion. China is recognized as the global alternative finance market leader in the 2017 Asia Pacific Alternative Finance Industry Report. The overall alternative finance for business market grew by 107 percent from 2015 to 2016.

C2FO’s survey validates those findings, noting that China SMEs demonstrate the most willingness to try new cash flow alternatives. However, those executives also report a desire for more lending options. The market is dominated by peer-to-peer personal and business lending as well as balance sheet lending.

Uncertainty for China SMEs centered on buyer relationships

China’s SMEs report that uncertainty characterizes buyer relationships. More than one-third of those surveyed note that customers are often late with payments. In a related development, 24 percent of large corporate customers extended payment terms in past year.

Ninety-three percent of China SMEs are open to dynamic discounting

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China SMEs are open to dynamic discounting, a trade finance innovation that allows suppliers to offer a discount in exchange for early payment from their customers. Ninety-six percent, believe it is “very to extremely important” that customers offer supplier-friendly accelerated payment options.

Dynamic discounting offers a direct and mutually beneficial relationship that provides lower cost and consistent supplier funding. In turn, dynamic discounting provides corporates with a short-term investing strategy with a no-risk return.

Supplier benefits:

  • Improved payment terms
  • Reduced uncertainty around payments, contracts, and market conditions
  • Improved relationships with customers who offer this option
  • Flexible access to affordable working capital without fees or underwriting
  • Lower cost working capital than factoring or other lending options

Corporate benefits:

  • Enables SME suppliers to grow and invest in their operations without increasing supply chain risk for their customers
  • Earn a no-risk yield on short-term investments
  • Put funds to work in China, earning margin improvements while helping its economy grow

Advantages of improving supplier relationships

For large corporates looking to improve supplier relationships and reduce supply chain risk, offering supplier-friendly accelerated payment terms is also an opportunity to boost profitability. Research reveals that strong supplier-buyer relationships are directly linked to increased profitability.

Supplier trust is correlated with their pricing decisions, according to an article published in Supply Chain Management Review. In a case study, authors determined that low trust relationships between a large auto maker and its suppliers cost the company $688 per light vehicle sold in the U.S. between 2001 and 2013, resulting in $24 billion in lost operating profit.

Benefits extend beyond mitigating risk and increasing profits to:

  •  Increased customer support from the supplier
  • Higher quality and more honest communication
  • Increased willingness to collaborate on process and product innovation ideas
  • Greater willingness to invest in innovation that could benefit the customer

Providing more funding options and improving relationships with China SMEs offers significant value for corporates, beyond improved margins and no-risk yield from C2FO. China SMEs have a need, desire, and willingness to adopt dynamic discounting when that solution is part of a collaborative and mutually beneficial relationship.

About the Working Capital Outlook Survey

Each year, C2FO interviews SMEs globally to uncover current perceptions around working capital financing and the impact of political and economic factors on funding, growth and business relationships. Survey participants were asked a series of questions related to how they currently finance their growth, deploy capital and preferences related to working with their buyers, and their economic concerns.

Download our white paper, “The state of working capital for small and midsize enterprises: challenges and opportunities for the global economy.”

A total of 2,672 CEOs/CFOs/Owners of SMEs in Europe, China, India, and the United States were surveyed during August and September 2017. Annual business revenue ranged in size, some upwards of $70 million. Company size ranged from one to 10 employees to 100-500 employees.

Sources

“Alternative Finance and Credit Sector Reforms: The Case of China,” by Noemie Lisack, The Bank of England, November 2017

“China’s commercial banks need to focus more on small business,” Nasdaq.com, Dec. 6, 2017

“Cultivating Growth: The 2nd Asia Pacific Region Alternative Finance Industry Report,” Cambridge Centre for Alternative Finance, Australian Centre for Financial Studies, University of Cambridge and Monash University, September 2017

“Lost Supplier Trust,” by Henke, Stallkamp and Yeniyrt, “Supply Chain Management Review,” May/June 2014