How Twinco Capital's founders are stretching the boundaries of SCF in developing markets - and where ESG fits in
Unique is a much-abused adjective, but it can justifiably be applied to two former bankers who are on a mission to lengthen the chain of supply chain finance, writes Paul Golden
In a market as large and established as supply chain finance it is hard to imagine how there could be any opportunities yet to be exploited. But six years ago, Sandra Nolasco (former head of structured trade finance at BBVA) and Carmen Marín (a 16-year veteran of Santander) decided that large corporates needed help offering their suppliers access to affordable funding at a much earlier stage of the process.
Despite their banking backgrounds, they are scathing of the approach banks have taken to supply chain finance.
“The traditional approach has been to fund just the tail end of the trade flow, when the supplier has delivered the goods and there is an invoice which has been accepted by the buyer,” says Nolasco (right).
All this is doing, she suggests, is funding the payment terms of large corporates.
“The biggest component of the funding requirement is the production process – buying the raw materials, paying employee salaries - and this is all borne by the supplier.”
In this scenario the producer has to have sufficient credit lines in place with its bank to fund production, which is expensive and demands a lot of collateral, potentially limiting its production capacity. Therefore, Twinco’s co-founders took the view that supply chain finance should kick in right from the start of the production process.
“Once a supplier has received the purchase order and the buyer has set up the finance programme, we advance the manufacturer up to 60% of the value of that purchase order,” explains Nolasco. “The big difference compared to the conventional approach is that we take performance risk on the supplier.”
This might suggest that the company they founded, Twinco, has more exposure than conventional supply chain finance providers. However, its CEO reckons its risk level is actually lower than the wider market because it focuses on large corporates with a stable base of suppliers and analyses years’ worth of data on the orders placed with each supplier.
“If you think about a local bank funding a supplier in a developing market in particular, the bank only has access to information on the supplier’s financials and balance sheet,” explains Nolasco. “In contrast, we have access to historical and current data on whether the supplier delivers to its buyers on time and whether there are any issues with quality.”
The Twinco business model only requires the supplier to deliver for the company to be paid by the buyer.
“We are in the middle of the strongest commercial relationships of these suppliers and everyone is aligned,” she adds.
“The supplier wants to deliver to their main customer, and the corporate wants to get the product on time because otherwise it cannot sell to its customers.”
Knowledge is power
If knowledge is power, the ability to tap into the ERP systems of major corporates to determine the performance of each supplier is an extremely valuable tool for any funding provider. This data is supplemented with information from the supplier, from external databases, and from transactions in the form of bills of lading, packing lists, etc.
To optimise its data analysis, Twinco developed a proprietary risk algorithm that incorporates financial and commercial performance, as well as ESG metrics to assess supplier risk.
“This gives us the ability to price and assess supplier risk much more effectively than what is being done elsewhere in the market,” says Nolasco. “Because we are funding the supply chain we are constantly adding new data on how suppliers are working with buyers. This means that if a buyer announces that it will be cancelling some orders, we know which suppliers will be affected.”
The company is in the process of developing a business intelligence module that suppliers and buyers can access to determine the quality and the strength of their supply chains.
The average transaction value across the more than $150 million of purchase orders funded to date is around $20,000. There is no cost for suppliers to be registered into the platform - the supplier only pays for the funds it uses. The cost for the buyer lies in the investment in integrating its systems with Twinco so supplier data can be extracted.
Last month we reported that Twinco had raised $12 million in new funding, led by Quona Capital with participation from Working Capital Innovation Fund alongside existing investors Mundi Ventures and Finch Capital.
“Quona Capital has a significant footprint in emerging markets and a focus on financial inclusion, which is a good fit with our strategic objectives,” says Nolasco. “Working Capital Innovation Fund is a new backer with an emphasis on supply chain and a commitment to social and labour rights issues. This is particularly relevant since we are currently test driving an ESG business intelligence tool, embedded into our financing programme that will benefit both buyers and suppliers.”
The purpose of this initiative is partly to enable corporates to incentivise suppliers to meet specific ESG criteria. This deepening of the relationship between buyer and seller will enable Twinco to offer better terms to those suppliers that can demonstrate improved ESG performance.
Given that the company only loses money if the relationship between supplier and buyer is disrupted in the instance of a default, it is clearly useful to have an understanding of where suppliers might be vulnerable to infrastructure issues arising from natural events.
Financial services firms established and run by women are not as rare as they used to be, although there are not that many in the supply chain finance space.
Various studies (including this one from the Royal Society) have suggested that women are better than men when it comes to multitasking. As the CEO of a female-led business in a male-dominated industry, Nolasco reckons this is an asset.
“In a business with so many variables it is an advantage to be able to assess multiple factors,” she concludes. “The downside of being a woman is that sometimes you have to push harder to get heard – and we do that too.”
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