As the holiday shipping delay season fades into the books, the feeling of ordering something and doubting its arrival should be fresh in the minds of American consumers. Now imagine that same feeling, with thousands — or even millions — more dollars at stake.
Welcome to the world of international trade finance and the business of smoothing over the 90-plus day payment lags and quality fears that trading partners often half a world apart must routinely contend with on a daily basis.
“The core problem we are trying to solve is, ‘How do you make credit access available for small businesses, which are engaged in cross-border trade?’” said Pushkar Mukewar, co-founder and CEO of Drip Capital in a conversation with PYMNTS’ Karen Webster. “For most of these businesses, the only credit option is perhaps their local bank, and banks are just not geared to service this segment well, and there are multiple reasons for it.”
Whether it’s the requirement of collateral, the bureaucracy or the fact that most trade finance banks focus mainly on larger corporations when it comes to extending credit, Mukewar said “a very large chunk” of the market remains underserved.
“When you think of any cross-border transaction — let’s say an importer in the U.S. places an order with an overseas exporter — the exporter has to procure raw materials, manufacture the goods, ship those goods out, and then wait another 60, 90 days to get paid,” he said. “And this creates a working capital gap for them, and that’s what we are trying to address with our solution.”
In addition, Drip uses technology and data to calibrate and price the risk involved in brokering these deals, seizing upon the increased digitization of trade-related data records in recent years.
“Another very important aspect of our product is looking not just at traditional financial metrics, but also leveraging electronic trade data to be able to really assess the risk of every transaction which we finance,” Mukewar said.
Track Records And Sector Agnostics
When it comes to targeting certain industries, Mukewar said Drip is “pretty sector agnostic” these days, having grown and diversified its portfolio to include 15 different lines of business, including ready-made garment exporters, agriculture and commodities — including seafood, meat, rice, spices and processed food — as well as industrial and engineered goods. But no matter the business lines, Mukewar said the concerns of buyers and suppliers are fairly consistent.
“On the buyer front, we work with a number of third-party global credit agencies which provide us data on the creditworthiness of buyers,” he said. “On the supplier side, what we really focus on is looking at track record.”
That knowledge of previous business dealings is especially valuable, he said, when a supplier and buyer already have a relationship of past shipment patterns.
“Typically, what happens is when suppliers and buyers have been working with each other in the past and they have a track record of continuously working with each other, even if some shipments have some disputes or some quality issues, they typically resolve it between themselves,” Mukewar said. “As a financer [in those situations] we’ve seen that either the buyer or the supplier makes us whole.”
There’s also a time value involved in tracking shipment data, where a small- to medium-sized business (SMB), over time, is able to secure better financing rates due to the tracking record it has built.
COVID Was A Much-Needed Stress Test
“Going into COVID our model had not been stress-tested for a pandemic or recessionary scenario,” Mukewar said.
As much as he said he thought his company and the trade finance business would perform well under duress, “we didn’t really have data, and we didn’t really have any actual learnings” to back that.
Ten months and what feels like light years later, and Mukewar said Drip Capital now has proof that it can keep trade flowing under high stress circumstances.
In addition to that degree of reassurance, the pandemic brought other teaching and adaptations to the business, including an increase in buyers looking for more time to pay or extended payment terms.
“So [a buyer may have] contracted payment terms of 60 days or 90 days with their suppliers,” he said. “Many buyers, knowing we were also a financing entity, started approaching us and saying, ‘Hey, we would like to get another 60-day extension, and we are willing to bear the charges to do so.’”
While every business is different, that financial flexibility can mean the difference between life and death for many SMBs that struggled with cash flow management. However, even when clients did succumb to the economic upheaval caused by the pandemic and prompted a credit default, Mukewar said Drip was covered and made whole by its credit insurance partners.
The other way Drip changed and benefitted amid the challenges of the pandemic was that the disease allowed it to “take a break or a pause” from the typical daily grind and hustle.
“[It allowed us to] really automate a lot of our processes because what happens is when you’re in the growth mode, you’re constantly running late and trying to catch up,” he said. “But that two-, three-month window when business had slowed down, it provided us an opportunity to automate a lot of our processes and truly build a very strong customer experience.”
Blockchain To Bangladesh
Like so many growing businesses, whenever Drip Capital clears one hurdle, another challenge or change is typically not far behind. While the company is currently doing business in the U.S., India and Mexico, Mukewar said it has near-term plans for Latin American expansion into Ecuador and Asian growth into Bangladesh.
“The penetration of international banks is pretty limited in these regions, and domestic banks are also somewhat limited,” he said. “So, what we observe is that the pricing tends to be even higher [than we get in Mexico or India] because of the underserved nature of the market.”
Taken together, he said he predicts the company will grow by another 30 percent to 40 percent this year, and he noted Drip is also doing a pilot program that involves blockchain technology which would allow for multiple parties in a transaction to use one platform and be able to authenticate transactions in real time.
“I think we now have basically two products,” he said. “One is a supplier side product, which [allows them to] get paid early for shipment. And then there’s a buyer side product, which is like a buy now, pay later option.”