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Introduction
It takes as long as 10 days for large businesses to process a single invoice and as long as 180 days for an invoice to be paid out, which we have personally experienced. For the logistics and supply chain industry, which is heavily populated by small-scale operators, this can prove to be disastrous as it is a highly capital-intensive industry that needs large injections of capital in order to provide the service, let alone wait long enough for the invoice to be paid out.
B2B Lending in an ideal world, plays a large role in bridging the gap between a small-scale transporter meeting their next contract servicing timeline and when they get paid. Unfortunately, in Africa, that is a state that is unreachable with over 80% of small-scale transporters, especially those within township economies, unable to access most traditional credit products that are available on the market.
Furthermore, those who go through the credit application process are plagued by onboarding processes that severely limit their ability to access the credit that they need. So, how do we bridge this gap between logistics and credit accessibility?
In this White Paper, we explore the importance of B2B Lending from Thumeza’s perspective as a Fintech using a loan management platform to provide credit to small-scale transporters through partnerships with FMCG companies and Logistics Aggregators. Additionally, we’ll showcase how in today's market, banks, lenders and transporters themselves can capitalise on the available opportunities in B2B Lending for Logistics.
Understanding the bipolar verticals of Logistics
To date, 80% of small-scale transporters active in Africa’s $300 Billion logistics and supply chain industry state that they are unable to get access to credit. The most common reasons are that they do not have collateral or operational data that makes sense to a financial institution that would want to finance them.
Source: The Africa CEO Forum
However, there is another more sinister underlying reason for the inability for credit to be accessed by this demographic; an inability to understand the logistics and supply chain industry, its behaviours, and its needs by financial service providers. This is emphasized even more when you are on the other side of a Loan App or a Credit Officer’s desk as a transporter trying to explain what you do within the logistics and supply chain and somehow failing to articulate it in a way that is enticing.
Below, to lay the groundwork for the problem that we are aiming to solve, I am going to outline the different verticals in logistics predominantly as well as the differences between logistics enterprises that are in the formal sector against those that operate within the informal sector.
B2B Lending for Small Scale Transporters
B2B Lending to the logistics industry in itself is not a new concept with terms such as trade finance, invoice factoring, discounting, and lines of credit abounding with various costs of credit with some as high as 70% per annum. However, where B2B Lending has fallen behind for the logistics demographic is in its relative accessibility.
Traditionally, B2B financing has been a complex, manual process that may have unparalleled underwriting capabilities from traditional financial providers, but a way needs to be found to digitize, automate, and speed up their application and verification processes, to make their financing quickly, and easily whilst still managing their risk appetite for a small scale likely informal logistics operator.
However, in South Africa, whilst the NCR Act covers B2C lending with regulatory frameworks that are easy to follow as well as pre-set systems such as Nuupay that allow disbursements, tracking of transactions, and collections of funds, unfortunately as you venture into the B2B space, it becomes more tricky. Setting up of processes is being left to the discretion of the lender thereby setting a tendency to stick to what is known in order not to rock the boat.
B2B systems differ wildly with certain elements such as risk appetite, size of the business as well and the liquidity of the lender contributing to the quality of infrastructure that is available on the market. This can range from simple Excel sheets (yes, tech startups are also guilty of this), and sophisticated loan management systems that are deeply entrenched within their client's industry value chain.
Working capital and asset purchase are the two most common uses of capital within the logistics space with funds flowing from a client, various logistics partners, to the end consumer and back.
Source: Lobb
Delayed payments trickle down to the entire supply chain affecting productivity and revenue loss. Among stakeholders, the most affected are the small-scale transporters, who need money to move from point A to B and meet en-route expenses. As a result, if the small-scale transporter does not receive money from the Logistics Aggregator/Company or Agent or FMCG Company, they end up halting the truck which is more expensive for them as they forego revenue yet keep incurring fixed costs.
To solve the issue, Logistics companies/ aggregators or the small-scale transporters themselves are borrowing working capital at high rates which further cuts into existing margins.
For a first-time entrant into the industry, the main focus is on purchasing vehicles in order to be able to handle capacity which is key for them. However, accessing the capital to purchase the appropriate vehicles is quite difficult, hence we see the trend mainly in the informal sector where a transporter will start off with a bakkie (carrying capacity of about a ton), gets a small contract that they can, are usually intramodal and build off from there. As a result, they are extremely limited in terms of scale and usually survive invoice to invoice with terms such as Cash on Delivery, in order to meet their working capital needs as well.
On the other hand, a more seasoned transporter with 5 vehicles or more, has more of a focus on working capital as their vehicles, as well as likely assumed formality, allows them to get into the value chain of larger entities who have longer net payment terms. They therefore need the working capital as stated above in order to purchase fuel and pay for import/export duties as well as other day-to-day operational expenses as they wait for payments from their clients. Whilst this demographic is usually able to get access to formal credit, it is extremely limited to the current risk appetite of their financial provider which limits their ability to scale in comparison to the speed in which they are able to attain new contracts.
Therefore, there are still gaps to be explored for these two particular demographics which we will explore below. As we do so, we need to remember that small-scale/informal transporters are B2B clients too and need all the careful consideration that would be attributed to blue-chip companies with years of accolades and existence.
Opportunities in B2B Lending
Lending for formal and informal transporters are two vastly different scenarios. To maximise potential credit products that also incorporate the informal sector, maximise the loan approval process as well as work on limiting default rates, lending institutions need to offer a specialised B2B Lending product. Some of the gaps that such a product would be looking to address are;
Source:Thumeza
Why does B2B Lending in Logistics need its own Solution?
Logistics operators represent a large portion of the revenue earned as well as movements of cash due to their capital-intensive operations. B2B Lending doesn’t only improve the prospects of transport operators but also benefits the ecosystem that the truckers rely on ranging from the fuel industry, servicing and maintenance facilities, and parts suppliers all the way to local governments, regulators et al who collect taxes, tolls, and other fees.
Benefits
Increased Customer Exposure. Working with players within the logistics industry, particularly logistics aggregators, and FMCG companies who heavily outsource among others, allows banks and lenders to easily expand their reach and and get access to thousands of new prospective clients than they usually would be able to not.
Deploy more Capital as Loans. Loans in their various forms from prepayment loans, and early invoice settlements to straight lines of credit, can be distributed easily through working with logistics players within the value chain. In the past, when a transporter needed credit, going to the bank was usually a resort looked upon with trepidation. However, working with 3rd party players who can manage customer acquisition as well as the management process can allow transporters to easily engage lenders they usually would not.
Positioned as a Preferred Logistics Lender. To compete in today's world of instant financing, banks and traditional regulated lenders, need to become modern lenders who are able to cater to even the most highly specialized of demographics.
Risk Mitigation. Working with other players within the logistics ecosystem such as aggregators allows lenders access to a pool of clients who are pre-vetted and have both a credit as well a behavioural risk profile that is very useful in predicting default rates as well as potential growth opportunities for the end client.
Solve the financing dilemma. Starting and scaling operations for logistics operators can be a hassle as they are faced with a dilemma of how to get the capital both to start as well as to scale. One needs capital to grow but needs operational data and history in order to do so. Allowing alternative products such as pre and post-invoice financing that are industry-specific will help to get more informal and small-scale transporters into more value chains.
B2B Lending for Logistics is the way forward
Whilst logistics and B2B Lending have many nuances, their marriage is one that can open doors for both the logistics as well the financing industry. They have a myriad of qualities in common such as both being long-standing industries, seeing large quantities of cash flowing through them as well and both being ripe for disruption. Ensuring that the disruption that takes place is one that benefits both industries is key.
About Thumeza
Thumeza is a fintech company that uses a loan management platform to provide credit to small-scale transporters. Using our platform as well as partnerships with logistics aggregators and FMCG companies, we are able to disburse, manage, and collect funds loaned to pre-vetted small-scale transporters using behavioural operational data as a framework.
