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Photo credit: ermakovep / 123RF Stock Photo.

If you’re running a small enterprise – say you’re in the business of supplying large restaurants and hotels with fresh fish – it’s easy to get into a situation where you’re short on cash, even though you have paying clients.

That’s because clients sometimes pay late, but you must meet deadlines, like paying office rent and salaries. Or you need more cash than normal to make an investment. The traditional, but ultimately costly, way would be to take a loan to fill the gap.

Ang Xing Xian’s father is a fish supplier in Malaysia, and observing this business made Ang understand common cash flow problems. He also learned that there are ways to improve access to cash with technology while he was studying in the UK.

Ang ended up worked at an invoice financing company there. That’s a type of platform where small and medium-sized enterprises (SMEs) can sell their yet-to-be-paid invoices to investors or financial institutions who want to purchase future cash flows.

Back in Malaysia, Ang went on to “boast about this concept,” according to Dion Tan and Edwin Tan. Ang was impressed by how effective it was.

The two Tans soon became Ang’s co-founders in a startup called CapitalBay. They wanted to find out how to apply this idea in their home country.

Worsening gap

As former management consultants, their first instinct was to dig up data to understand the business opportunities.

“Over the last three years, we conducted an analysis to compare the revenue and trade payables of the relevant top corporations listed on Bursa Malaysia,” Ang says. That’s Kuala Lumpur’s stock exchange.

They found that the situation was actually worsening for SMEs. Suppliers were having to wait longer and longer before getting paid. And it was the largest of the Malaysian companies who were extending their payment terms more than the other companies.

“This is not unique to Malaysia,” Ang explains. “Many countries have seen similar issues and their governments stepped in to implement supply chain finance as a solution.”

Supply chain finance is similar to invoice financing, but takes it one step further.

A typical transaction cycle could go like this: A supplier requests for early payment on their invoice through the platform. Then, a funder approves and pays the amount to the supplier. The buyer then pays their invoices to the funder at the end of the payment terms.

But the platform not only allows SMEs to request fast payment, it also incentivizes companies that owe money to suppliers to pay early, at times when they are cash-rich. That’s made possible by the third party financial institutions and banks who sit in the middle. It’s no longer a case of one supplier waiting for the bills to be paid by one particular client. Instead, there’s a marketplace that can fluidly match the need for cash with an oversupply of it across its different members.

Government supply chain financing schemes have been implemented in the UK, the US, the Netherlands, and India, Ang points out. But in Malaysia the concept is still nascent.

Early adopters

Ang admits it wasn’t easy to get the first customers to try out CapitalBay, but eventually, they were successful. “Some forward-thinking large corporations spotted this as the opportunity to gain a competitive edge,” he says.

Now, a handful of the top Bursa Malaysia-listed companies and their suppliers have completed several transaction cycles through the platform.

CapitalBay is open to working with all banks and financial institutions and found that it works best for smaller banks that don’t offer similar products. Development banks are another good partner, Ang says.

For each successful financing transaction, CapitalBay charges a small fee based on the supplier’s invoice amount. Currently, it does not charge any fees to buyers or funders for using its platform.

The startup today locked in its first round of venture capital, a US$477,000 seed round led by KK Fund. This will be used to accelerate product development and customer acquisition, Ang says. So far, CapitalBay is run by a 10-person team, with a few supporting members in administrative roles.

Ang believes CapitalBay is the only bank-independent supply chain financing provider in Malaysia for now. Indirectly, it competes with banks who offer traditional financing solutions, he says. But all banks could use the platform to avoid the costs of developing their own supply chain financing products.

Converted from Malaysian ringgit. Rate: US$1 = RM 4.19.

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