Closing the $1.7 Trillion Trade Finance Gap

March 30, 2023

The global pandemic revealed startling weaknesses in our supply chains, and then Russia’s unprovoked invasion of Ukraine further illustrated the need for greater supply chain resilience across the globe.

One issue is that many buyers still utilize time-consuming, unpredictable, and inefficient payment practices. This causes significant friction and weakens the relationships on which resilient supply chains are built.

Supply chain finance usually means invoice discounting or factoring. But suppliers — particularly smaller ones — often need money much earlier, before the invoice is sent, to buy raw materials and pay wages to people who will produce the ordered products.

Amsterdam/Madrid-based Twinco intends to change the way suppliers in emerging markets access credit. It offers a global supply chain finance solution that covers the full production cycle — everything from the purchase order to the final invoice payment. It pays as much as 60% up front when the supplier receives the purchase order.  It pays the remainder upon delivery. Then Twinco (not the supplier) waits for the buyer to pay on the invoice’s due date.

Twinco is betting that it can accurately judge the ability of the supplier to deliver the order on time, on budget, and to the buyer’s exacting quality standards. To do this, Twinco needs to look beyond balance sheets when assessing the creditworthiness of suppliers. It does this in part by leveraging the data buyers already have on their vendors. Its risk model complements a traditional view of financial risk with commercial performance and ESG data. The firm uses machine learning to gage the strength of the commercial relationship between buyer and supplier.

Twinco is supporting SMEs in developing markets with large Western customers and is already working with roughly 100 suppliers based in 12 countries including Bangladesh, China, Indonesia, Pakistan, South Korea, Spain, Thailand, Turkey, and Vietnam. The company hit the $100 million mark in purchase order funding at the end of last year.

In January, Twinco announced that it had raised $9 million in equity and $3 million in venture debt. The equity portion (Series A) was led by Quona Capital, which invests in fintech innovators that are advancing inclusion in emerging markets. Working Capital Fund joined the round, as did existing investors Mundi Ventures and Finch Capital. Zubi Capital provided the venture debt.

Launched in 2019, Twinco has approximately 25 employees. The startup is offering a fully digital experience for buyers and suppliers. Sandra Nolasco, co-founder and CEO, believes that supporting SME participation in global supply chains will generate further economic growth and innovation.

Sandra Nolasco Twinco Capital CEO
Sandra Nolasco

Q.  Sandra, Twinco is in the middle of a two-sided marketplace, and you are exposed to risk on each side. You are betting that the supplier will fulfil the order in a satisfactory fashion and that the buyer will pay the supplier as agreed. Let’s look at the buyers first. How do you assess the ability and willingness of the buyer to pay? We’ve recently seen examples of well known, established retailers like Americanas playing accounting games with supply chain finance, and some retailers, such as Bed Bath & Beyond, just look like bad bets.

A.  It’s a very interesting question, Jim, as our position in the middle of the transactional flow gives us a significant advantage in terms of risk analysis. Your mention of Americanas is noteworthy as they were involved in reverse factoring. This only entails funding the invoices of a company, without much interaction with the supply chain or an in-depth understanding of the suppliers issuing those invoices and their performance with the buyer.

At Twinco, however, by funding suppliers from purchase order to final invoice, we are privy to that relationship as it happens on a daily basis, allowing us to better evaluate risk. We have a privileged insight on the patterns and behaviour of the recurrent trade flow between suppliers and buyers. In addition, because we focus on the core products of the buyer (e.g., for a fashion retailer, Twinco funds the suppliers of t-shirts, not the suppliers of the paper bags you put the t-shirts in), we can rely on data that reflect fairly stable and well-established commercial relationships.

Q.  And how do you go about underwriting the suppliers, which are small and midsize businesses in emerging markets? Do you have access to additional data that helps you underwrite them?

A.  Focusing on one industry provides a strong network effect. We gain comprehensive insights into a vast group of suppliers’ performance across multiple buyers, including purchase order fulfilment, quality, delay frequency duration, and even how they rank in terms of performance with each of their buyers. In the end, our knowledge of supplier performance surpasses that of individual buyers themselves, allowing us to have a reliable understanding of the industry’s dynamics, enabling informed decision-making. It gives us a robust overview of what’s really happening.

Q.  So when you on-board a new buyer, they share data on the historical performance of their supply chain with you?

A.  That is correct. We then enhance that data with Twinco’s own data from portfolio transactions and with other external data sources that supplement information of financial, ESG, and performance data.

Q.  Do you have people on the ground in the various countries in which you are making loans to suppliers?

A.  From a servicing and risk management perspective we provide a fully digital experience. Therefore, local presence is not a requirement to scale.

Having said that, we do believe that having local customer relationship support provides additional value to our customers and strengthens the relationships. We plan to establish local teams in core markets during 2024. For the time being customer relationship teams are centralised, although with native-speaking capabilities.

Q.  How do you determine the appropriate rate to charge?

A.  The interest rate depends on the supplier and buyer’s risk, the country, and the tenor of the transaction. The supplier does not pay to register on the platform, and there is no obligation to fund purchase orders through us. They only pay for the funding they use. Suppliers can register and then choose to discount orders when needed. They are totally in control. 

We can price the risk more efficiently and provide funding that is affordable because we rely on the suppliers’ commercial performance (on how well they produce and deliver) rather than on the size of their balance sheet. 

As important as the competitive interest rate, is the terms of the funding:

  1. The fact that we pay up to 60% upfront — at the moment that starts production — and the remaining upon delivery.
  2. The fact that we do not require collateral. We rely 100% of the recurrency of the trade flow — we will offset a non-performing order with future orders.
  3. The liquidity is aligned with the export flow of the suppliers — they get the funds they need for production when they need it and they do not have to pay back (there is no cash outflow). All they need to do is export and their customers will then pay us on invoice due date.

Q.  How are higher inflation and rising interest rates impacting your business?

A.  Inflation and rising interest rates have two “opposing” “immediate” impacts:

  • On one hand, it impacts suppliers’ resilience, increases cost, and puts pressure on the margins. This requires enhanced risk management, making sure that the companies we fund have the substance and reliance to weather these times.
  • On the other hand, it has a direct impact on the demand for the types of alternative funding that Twinco offers:
    • From the suppliers, the flexibility, transparency, and competitiveness of Twinco’s proposition are ever more evident and this is reflected in the increased demand we have seen for our services.
    • For the buyers, the need to enhance and secure the resilience of their supply chain is reflected in the increased demand for buyer-led funding supply chain solutions that go beyond reverse factoring.

Q.  Why did you tackle the fashion industry supply chain first?

A.  There are three main reasons why we chose to focus on this industry. Firstly, it’s an industry in which we thought we could have a large impact. It sources a lot of goods in emerging markets, providing employment for underprivileged and vulnerable communities, particularly women. Secondly, the industry has large buyers in developed countries with diverse supplier networks in emerging markets, including many small and medium-sized enterprises (SMEs). Finally, the industry has a lot of small, short-term orders that allow for rapid testing and adjustment of the business model.

Q.  Let’s go a little deeper on that. Fast fashion gets criticised appropriately for its negative environmental impact, and a lot of manufactures in the fashion supply chain treat their workers poorly (and some of those workers turn out to be children). How are you able to help buyers build environmentally and socially responsible supply chains?

A.  We recognized the importance of ESG from the beginning and hired an ex-head of ESG at Telefonica to help us establish the Twinco ESG Tilt.

Our onboarding process includes an ESG analysis based on the risk exposure of our suppliers from this perspective. We noticed that existing market scoring systems fell short in many ways for risk management. Many buyers lacked a tool to manage ESG risks beyond exclusion criteria. Our analysis has more to it, and considers factors such as minimum wage, school rates, and vulnerability to climate events. By paying suppliers 60% in advance and developing relationships with them, we have access to crucial information that allows us to improve their conditions and increase the likelihood of buyers choosing them.

Q.  How do you control for greenwashing? If you’re in Madrid and I’m a supplier in Bangladesh, I might tell everything is rosy here even when it’s not. How do you evaluate and corroborate this kind of data in these markets?

A.  We gather detailed information on suppliers’ transactions, including their sources of goods, shipping methods, and health and safety certificates. We use an AI tool to analyse databases and locate information on working conditions and generators. We verify information with buyers’ compliance teams. By establishing risk and mitigation strategies, we can set goals for suppliers to improve working conditions, reduce CO2 emissions, and other ESG factors. As buyers provide preferential purchase conditions for meeting these goals, we have less risk and can offer better funding conditions. Our tool benefits both buyers and suppliers, allowing suppliers to showcase their investments and create a more responsible and competitive supply chain.

Q.  Based on what you’ve learned about the fashion supply chain, which industry would it be logical for you to expand to next?

A.  We have several industries in our pipeline. The automotive industry is an obvious choice, given its size and the fact that 30% of its suppliers are SMEs, many of which are located in emerging markets. In addition, we are also looking into the electronics and consumer goods industries.

Q.  Access to data is frequently a stumbling block for fintech startups. Training machine learning models to predict creditworthiness and flag fraud must have required a great deal of relevant data. Where did you turn to access that data before clients came on board?

A.  Twinco set out to establish a supply chain finance solution that went beyond reverse factoring to include purchase orders. In that sense, it established a buyer-led solution from the outset. The initial set of data was the historical data set of our first large (buyer) customer. From there, as we added more buyers and suppliers, we gathered a significant proprietary database that provides an intersection of financial, commercial performance and ESG data from several different suppliers with several different buyers. To that, we added additional data sets related to trade flows, AI-driven ESG related events, etc.

Q.  How do you integrate with suppliers on one side and buyers on the other? Are the SMEs all capable of connecting with your platform digitally?

A.  Yes, the platform is entirely web-based, enabling users to access it wherever they are. The more complex integration is actually with the buyers.

Q.  Have you effectively created a marketplace? If I want to get into fashion retailing, can I come to you and say, “Hey, you already know all the fashion suppliers out there. Connect me to the people who are best at producing belts, or shoes, or blouses, or ties.”?

A.  Our product is not designed for those new to the industry. However, we believe that our Twinco rating and information will be valuable to the industry and to validate the performance of a supplier that wants to present itself to a new customer. 

Our data and machine learning models for risk assessment have already been shared with our customers for their own risk and supply chain management. We are incorporating invaluable business intelligence models into our product. 

If in the future customers ask for a supplier’s Twinco rating before onboarding them, we hope it helps improve transparency in the industry. Our main objective is to create robust commercial relationships and level the playing field for SMEs that struggle to access working capital, hindering their growth potential. We strive to empower SMEs and increase their share in global trade.

Q.  Do you compete with e-invoice companies, or will you complement them?

A.  We are complementary. We welcome the possibility of forming an alliance with an e-invoice company. In fact, we believe that in the future we will partner with ERP companies, FX providers, and international payment platforms. We will be a catalyst to make funding and risk management for all the players in global supply chains.

Q.  How are you approaching fraud detection?

A.  Due to the very nature of where we stand, the risk of fraud is minimal. Initially, we engage with the buyers, assess their data, and determine which of their suppliers meet the eligibility criteria. We then invite eligible suppliers to participate, and all the data received from the buyer and supplier undergoes verification. 

Q.  We touched on this briefly before, but how many languages are you working in?

A.  English remains the official language. However, we have team members who speak Mandarin, Bangla, Spanish, of course, and we plan to incorporate someone fluent in Turkish. While we are expanding our language capabilities for service and relationship management purposes, the platform is currently only available in English, which we believe is intuitive to use. We are exploring the possibility of translating the platform into Mandarin.

Q.  And how many currencies?

A.  Currently, our operations are limited to dollars and euros. Since invoices are quoted in these currencies, suppliers actually prefer to receive payments in hard currencies as opposed to local currencies.

In our roadmap, we plan to add a foreign exchange capability, which we intend to achieve through partnerships with other organisations.

Q.  You’re growing very rapidly. What are the biggest challenges to maintaining or accelerating that growth?

A.  Indeed, we have been growing exponentially. Our main focus now is to:

  1. Structure the portfolio as an asset-class (securitization). This will optimise the cost of funding which we can then pass on to our customers. From an investors point of view, it offers them the opportunity to make purposeful investments into SMEs in emerging markets at very competitive risk adjusted returns.
  2. Continue to invest in our machine learning algorithms to provide increasingly more efficient funding to our customers.
  3. Finalise the MVP of our ESG & Business Intelligence modules, which are key pillars to the value proposition to our customers.

Q.  The fundraising environment has changed a lot in the last year. Founders who read this interview will want to know about your recent fundraise. How long did it take?

A.  The round was led by Quona Capital, a U.S.-based global fund with expertise in emerging markets and financial inclusion that aligns with our mission to level the playing field. Their founders, Monica and Jonathan, are highly experienced. It is a privilege to partner with them.

From our experience, one of the most important things to the success of a funding round is having been able to establish relationships with potential investors well ahead of the rounds that they are meant to invest in. 

We met Quona back in 2018, knowing full well that — at that time — we were far too early in our journey for their type of investments. We believed in their team and in their investment strategy. So we introduced our project and kept them abreast of our developments. Once we were ready for them in 2022, the process was quicker and easier.

For us it has been a critical factor, the ability to nurture a network of investors and funders that share your views and can add value, making them part of your journey, well before they invest in you.

Q.  There’s also a venture debt component to this round. Is this debt being used to fund your lending activity?

A.  The venture debt supports the debt we raise to fund the purchase or trade receivables. In every transaction, we have a junior tranche covered by equity/venture debt and the rest is senior debt provided by banks and alternative debt providers. 

Q.  You mentioned this briefly. As you grow, you’re planning to go to the capital markets to finance your expanded funding of suppliers?

A.  Right. The company is prepared to securitize trade assets, which are short-term, stable, and recurrent. Securitizing trade assets can offer an appealing risk/return profile for investors and a chance to make an impact in emerging markets. Twinco is providing investors with a unique avenue to bring liquidity to SMEs in emerging markets, having an impact while at the same time generating attractive risk adjusted returns.

Q.  You are impact driven. How are you measuring your impact? Do you have specific KPIs you follow?

A.  Twinco’s mission is to empower SMEs to participate in global trade and earn a larger share of it, leading to more jobs and innovation. While there may be some overlap with the concept of impact in the ESG world, it’s important to note that Twinco’s focus is on economic growth and inclusion. Key performance indicators include the ability of SMEs to increase their share of wallet with their customers, the improvements in terms of commercial performance, improvements in mitigating certain ESG risks, etc.

Q.  What can we expect to see next from Twinco?

A.  There are three exciting developments that we are looking forward to this year.

Firstly, we are currently test driving our ESG tool with some of our customers, and we aim to launch and showcase it in the market during the second half of the year. This is a significant milestone for us.

Secondly, we are launching full-scale programs for the five large new buyers, which will be supported by an additional $100 million debt facility we expect to close before summer.

Thirdly, we will be launching the MVP of our business intelligence module, that provides our customers (both suppliers and buyers), with supply chain risk management tools that are linked to funding conditions. 

Overall, these three developments are essential for our growth and success, and we are excited to see them come to fruition.

Q.  What else would you like people to know about Twinco?

A.  In a nutshell, Twinco is delivering a supply chain finance solution that goes beyond reverse factoring! We are set out to close the trade finance gap. It is a huge challenge, and we are well aware that it will take the involvement of fintechs, incumbents, buyers and suppliers to address it. We are always open to talk on this matter — whether you are a customer that needs our services or a bank/funder that would like to partner with us.

Q.  Are you hiring?

A.  Yes! We are currently hiring for multiple positions, including risk and origination roles. Later this year, we plan to expand our data team, and we are actively recruiting for positions in our technology team at the moment. Whether you are an experienced professional or a fresh graduate, we encourage you to apply and join our dynamic team as we continue to grow and evolve. Please see our open job offers here:

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