How Deep-Tier Financing Empowers Businesses!

What is Deep Tier Financing?

Deep-tier financing is an innovative solution that helps address working capital issues for suppliers throughout the supply chain, extending beyond just tier-one suppliers. By utilising blockchain technology, it offers a secure and transparent financing option for all vendors. This method promotes financial inclusion, ensuring that every supplier has access to the capital they need to grow and strengthen the entire supply chain.

Background

At present, most financing platforms primarily focus on Tier-1 players in the supply chain. These are the vendors who sell directly to large companies or the customers who purchase from them. This financing includes both backward support for vendors and forward support for customers. However, this approach often overlooks smaller suppliers in lower tiers, leaving them without the financial assistance they need to grow and succeed. Therefore, to create a more robust supply chain, it’s essential to develop solutions that also empower these deeper-tier suppliers, ensuring that everyone in the supply chain can thrive.

In this context, FinAGG has partnered with the RBI as part of their Sandbox Cohort 5 to develop an innovative deep-tier financing solution. This collaboration, if successful, has the potential to make a significant impact on thousands of business owners, providing the financial support they need to grow and thrive.

Evolution of Deep Tier Supply Chain Financing (DTSCF)

1990s

• Emergence of Supply Chain Finance: In the 1990s, supply chain finance emerged, initially benefiting large corporations and their immediate suppliers. However, traditional models primarily focused on tier-one suppliers, which left deeper-tier suppliers underserved. As a result, this approach highlighted the need for broader access to financing throughout the entire supply chain.

2000s

• Recognition of Financing Gaps: Financial institutions and businesses soon began to recognize the limitations of traditional supply chain finance models. Consequently, it became clear that inclusive financing solutions for smaller suppliers were essential. However, despite this growing awareness, practical frameworks for deep-tier financing were still missing.

2010s

• Introduction of Deep Tier Supply Chain Financing: Deep Tier Supply Chain Financing (DTSCF) emerged as a vital solution to bridge the financing gap for small and medium-sized enterprises (SMEs) in lower tiers. By leveraging the creditworthiness of anchor buyers, this model not only empowers deeper-tier suppliers but also enables them to access favorable financing rates, thus promoting financial inclusion across the supply chain.

• Technological Advancements: The integration of digital technologies, such as blockchain and smart contracts, significantly enhanced transparency and efficiency in DTSCF. 

2020

• Normalization and Standardization: Organizations like BAFT (Bankers Association for Finance and Trade) and the Asian Development Bank published white papers outlining the principles and benefits of DTSCF. As a result, these efforts helped establish a clear framework for its implementation, encouraging broader adoption across industries and ensuring that the model gained traction in diverse sectors.

2024

• Mainstream Adoption: Today, Deep Tier Supply Chain Financing (DTSCF) has gained significant traction as a viable solution for enhancing supply chain resilience. Many businesses are actively implementing DTSCF strategies to support their entire supplier ecosystem, ensuring that even the smallest suppliers have access to essential capital.

• Global Impact: The continuous development of DTSCF focuses on addressing the persistent trade finance gap, promoting financial stability, and fostering economic growth among SMEs worldwide. This collective effort underscores the commitment to building a more inclusive financial landscape that empowers all suppliers.

Challenges Faced In The Implementation of DTSCF 

Credit Risk Concerns

Lenders often hesitate to finance smaller suppliers in the supply chain because they perceive higher credit risks. These risks typically arise from the lack of strong financial histories among smaller suppliers. Consequently, finding better ways to assess credit risk becomes crucial for building lenders’ confidence and encouraging them to support these suppliers.

Technological Adoption

Implementing advanced technologies like blockchain in Deep-Tier Supply Chain Financing (DTSCF) demands significant investment and operational changes across the supply chain. For many organizations, this transformation can be challenging. Therefore, providing adequate support and resources is essential to helping them successfully adopt these technologies.

Legal and Regulatory Frameworks

Inconsistent legal rules across regions complicate cross-border transactions and create uncertainty for both lenders and borrowers. To address these challenges, stakeholders must develop a unified legal framework that simplifies the global implementation of DTSCF.

Geographical Accessibility

Smaller suppliers in remote areas often struggle to connect with financial institutions, which limits their access to financing. As a result, financial institutions face difficulties in engaging effectively with these suppliers. Developing innovative solutions to bridge these accessibility gaps is critical for extending financial inclusion to every part of the supply chain.

Proposed Solution

FinAGG is transforming supply chain financing by leveraging blockchain technology to tokenize invoices. This cutting-edge approach enables smaller suppliers, including vendors and sub-vendors, to access funding with greater ease. Through this solution, FinAGG is empowering businesses and driving growth across the supply chain.

How It Works

1. Token Flow: When an invoice is tokenized, it creates digital tokens that vendors and smaller suppliers can redeem from lenders or financial institutions. These tokens carry a value determined by a discount rate, which serves as the financing rate for each tier in the supply chain, ensuring fair and structured access to funds.

2. Open Accounting: Each vendor is eligible to redeem a specific number of tokens based on the value they add and the margin they generate at their tier. The remaining tokens are passed further down the supply chain, ensuring smaller suppliers also have access to financing.

3. Master Agreement: A master agreement is established between the anchor (the main buyer), lenders, the Tier 1 vendor, Tier 2 sub-vendors, and Tier 3 suppliers. This agreement outlines the financing for goods supplied to the anchor.

The Financing Process

• Step 1: Invoice Upload: A Tier 3 supplier uploads an invoice for raw materials sold to a Tier 2 sub-vendor on the platform.
• Step 2: Processing: The Tier 2 sub-vendor processes the raw materials into finished goods and uploads an invoice for these products.
• Step 3: Delivery: The Tier 1 vendor receives the finished goods, enhances them, and ships the final product to the anchor. They then upload the final invoice.
• Step 4: Approval: The anchor inspects the product and approves the final invoice on the platform.
• Step 5: Token Generation: After approval, tokens equivalent to the invoice amount are created and distributed to all parties based on their contributions.

Transparency and Accuracy

All transactions and token distributions are managed by smart contracts, thereby ensuring transparency and accuracy throughout the financing process. Moreover, when the anchor brand repays the loan on the due date, the corresponding tokens are destroyed. This systematic approach ensures clear closure of financing and maintains the integrity and transparency of the supply chain.

The Role of Banks in Supply Chain Financing

Banks play an important role in supply chain financing once Tier 1 vendor invoices are approved by the anchor. Here’s how it works:

1. Identity Verification (KYC): Banks verify the identities of all participants, including vendors, sub-vendors, and suppliers, to ensure compliance with regulations and effectively manage risk before providing financing.
2. Funding and Loan Processing: Banks fund the vendors’ early payment requests by issuing loans. To process this, they deduct a small interest from the token value and send the remaining amount to the vendor’s accounts, ensuring quick access to funds.
3. Token Exchange: In return for the funds, banks receive tokens from the suppliers, enabling a seamless flow of money within the supply chain.
4. Transaction Completion: On the due date, the anchor pays the banks. Subsequently, the banks burn the tokens, marking the transaction as complete. This ensures the tokens are no longer valid and the loan is fully settled, maintaining transparency and efficiency throughout the process.

This process makes supply chain financing more efficient and transparent.

Conclusion

Deep-tier financing is an important solution that helps suppliers beyond tier one by using blockchain and tokenization. This innovative method ensures that all vendors, including smaller ones, can access the capital they need, thereby promoting financial inclusion and strengthening the supply chain.

As this financing model continues to grow, it tackles the challenges faced by smaller suppliers, thus improving overall resilience and fostering growth. Furthermore, partnerships like those between FinAGG and the RBI are essential for creating inclusive solutions.

By prioritizing transparency and efficiency, deep-tier financing empowers businesses of all sizes, ultimately leading to a stronger and more sustainable supply chain.