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Starting a corporate spend solution for SMEs: 3 practical tips

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The financial services industry has undergone transformative innovation in the last decade, arguably accelerated by rapid advances in the internet, machine learning and IoT globally. Despite the reversion to the mean where funding in the sector dropped to 2020 levels, fintech funding still remains relatively strong. Within fintech, the payments sector is making headwinds. According to the 2022 Capgemini Research Institute’s World Payment Report, global non-cash payment volume will grow at a CAGR of 16.5% in the next few years. In tandem with this growth is the proliferation of startups providing corporate spend solutions for small medium enterprises (SMEs). 

SMEs are the backbone of the global economy, contributing on average 50% of the global GDP. However, they are often underserved. Since the 2008 financial crisis, traditional financial institutions have been significantly more cautious in catering to this less privileged segment. This is why it is heartening to see more corporate spend solutions available to SMEs across different verticals.

These are 3 tips, if you are interested in providing such a solution to SMEs, which tend to have a riskier profile as compared to large established corporations. 

Underwriting good clients

To keep default rates low, you always want to underwrite good clients who have the track record of paying back. Therefore, you should conduct robust Know-Your-Customer (KYC), Know-Your-Business (KYB) checks, and detailed cash flow analysis on the company you are underwriting. There are data providers such as Experian and Dun & Bradstreet, that can provide relevant information for you to run your underwriting model. Each model tends to be different for each industry vertical because the spending behavior differs.

Monitoring ongoing risks

Once you underwrite a client and approve them, it is important to build models to monitor risks of each client, so that you can step in if the client has a high probability of default. Repayment timeliness of the client and granular transaction data may be examples of inputs that should go into this model. These models are paramount because it will inform you on whether the risk profile of the client has increased or decreased across time, and if so, what should be done (e.g. increasing/decreasing credit limit, or lengthening/shortening the credit cycle). 

Collections Process

To deal with delinquent and defaulted customers, you should start thinking about your collections process early on. This may involve contracting a collections agency to help with collections or building the pipeline in-house (e.g. implementing an installment plan for defaulted clients to pay back across time). The former makes more sense for an early-stage startup.

From 2022, there is a slight shift in attitude away from “Growth at all cost”. It is important that if you want to offer a corporate spend solution, you should track the delinquency and default rates carefully, given the risk profiles of SMEs.

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