Indian capital financing startup CredAble has hit upon the very credible idea of underwriting loans for small and medium-sized supply chain vendors. It’s doing so by leveraging its relationships with buyers and its business track record to hedge against risk.
CredAble Executive Vice President and Head of Credit Ranjit Singh told PYMNTS’ Karen Webster that India’s SMB space is held back due to a lack of access to reliable credit sources. Without access to capital, many smaller suppliers can struggle to fulfill large orders, to the detriment of the customers they supply.
“The basic problem we are trying to solve is that typically, small and medium enterprises can only access debt financing in the form of loans raised against property and land,” Singh explained. “So instead of doing that, we’re looking to leverage their business performance and relationships with buyers to build a new lending base while ensuring we can still recover our money.”
Singh said it’s in the interest of bigger businesses, which he calls “anchors,” to help their suppliers obtain the financing they need, and he believes they will be motivated to work with CredAble. If they don’t, the only real alternative is for anchors to support their suppliers financially themselves — with a loan or by paying upfront for an order, for example — but that is far from ideal. Not only does it mean the anchor is carrying an additional interest burden, but it also means it carries more risk on its balance sheet.
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“The more you provide direct financial support in the form of loans and guarantees to your vendor base, the greater is the financial risk and the performances that you carry,” Singh explained. “The risk of their failure gets transferred onto your balance sheet.”
The most obvious solution, then, is to have a reliable source of supply chain financing. That’s what CredAble aims to provide, and it needs the anchors to help them underwrite it — first, by showing that they have a strong relationship with individual vendors, and also by committing to keep doing business with that vendor. The anchors are really the main lubricant for the financing, Singh explained.
“Then the risk falls on us as the lender. That’s why we need the presence of a large anchor to mitigate that risk,” he added. “The presence of a large anchor in the mix ensures the cash will continue to flow through the value chain.”
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Singh said the majority of CredAble’s business so far has been anchor-driven, with the anchors generally referring a set of suppliers with which they have a growth agenda. Those suppliers, although reliable, do not have access to working capital — so it’s in the anchor’s best interest to try and play matchmaker.
CredAble doesn’t intend to use its own capital to fund all of these suppliers. Rather, it’s playing the role of the loan originator, Singh said. The idea is that it can originate many different anchor-vendor loan portfolios and then sell them on to capital markets, banks and other financial institutions (FIs) that lack the technology to underwrite the suppliers’ loans themselves.
“We will be able to make these portfolios available to financiers whose cost of capital is lower than ours, and whose cost of lending is lower than ours,” he explained. “The proof of concept has been carried out, and now it’s up to us to grow this business. I think the first target is to become a larger book and originate more portfolios, and then start looking at distributing these loans to the capital market.”
CredAble has bigger plans, too. Singh said the company eventually sees itself building a kind of pyramid of reliable suppliers that not only have the ability to provide what their customers need, but are also financially stable.
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“A typical supply chain will have various levels of vendors. So you have the main vendor, and then you have the sub-vendors who supply it. And then the sub-vendors have their own suppliers,” said Singh.
By the time CredAble has built that extensive pyramid, it will have an equally extensive database that it can then tap into when pursuing yet more opportunities.
“That’s the alternative strategy,” Singh said. “Right now, our focus is on getting the B2B proposition right for the SME sector. Once we’ve established that, we’ll be able to mine the data we have and originate loans to new vendors.”
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