This Mumbai-based finance startup helps link supply chain financing to capital markets

Founded in 2018 by three bankers, finance startup Artfine creates bespoke supply chain financing products for corporates and converts them into tradeable capital market instruments.

This Mumbai-based finance startup helps link supply chain financing to capital markets

Tuesday September 29, 2020,

5 min Read

It’s no secret that COVID-19 has upended supply chain management systems around the world. Changing consumer preferences, labour disruptions due to mass migrations from cities, and impeded supply chains have added to SMEs and MSMEs’ woes, and the only way for them to get back on their feet is to continue working.

Supply chain financing companies bring in an aspect of cost saving, which could help SMEs/MSMEs if the economy was sound. Pooling in pre-approved loan applications to take to banks or NBFCs does result in lower interest rates and readily available credit lines, but it isn’t enough in the present economic environment.

Mumbai-based Artfine takes a different approach to supply chain financing. Instead of clubbing loans and taking them to NBFCs and banks, the startup converts them into a capital market instrument that allows people to invest in it.

These instruments are rated by credit rating agencies and are open to all investors - retail and institutional.

Founded by ex-bankers Arvind Rangarajan, Saini Rajgopal and Shantanu Bairagi in late 2018, Artfine, which stands for Accounts Receivables Technology Finance, has helped more than 500 SMEs and MSMEs, and arranged and advised Rs 700 crore as part of its financing portfolio.

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The problem Artfine is trying to solve

The main problem Artfine wanted to solve, which was missing in the banking sector, was customising the loan portfolio to suit corporates, as opposed to creating a product that was acceptable to banks.

The startup also wanted to help broaden the base of supply chain financing to outside of banking institutions and NBFCs.

“We asked ourselves: can we take these products to investors as capital market instruments, so that you can also invest in the supply chain portfolio of a company the way you can invest in shares of a company, bonds, or commercial papers? That was the ideation for Artfine,” Saini, the startup’s Co-founder, tells YourStory.

Banks cannot package the loans as capital market instruments because the two units handling those two products - loans and capital markets - are separate.

There were also several added advantages of structuring supply chain loans as capital market instruments: since the funding structure was bank or lender-agnostic, the product could appeal to a wider base of investors; it was more customisable than loan portfolios and could be as per a corporate’s requirements; the strength of the portfolio itself could be used to raise cheaper capital, among other things.

All these aspects together formed a strong conviction case in the founders’ minds, and they decided to engage in capital markets via supply chain financing.

The supply chain financing space particularly interested the founders because it was a less risky bet.

“Supply chain financing is probably the most well-run and well-oiled payment linkage because typically, for a corporate as well as its vendors and dealers - anything which is part of their own core business - defaults happen very rarely, and only when there is extreme stress,” Saini says.

For SMEs/MSMEs, a solution like Artfine’s makes good economic sense considering they mostly borrow from the unorganised lending market where interest rates are steep, and loans are disbursed on the basis of collaterals.

“What are we trying to do is basically bring competitive rate financing to MSMEs and SMEs - who may be either vendors or dealers - by actually tying up with the corporate anchor itself. That kind of lends the whole strength to the programme, because you have the corporate at the back of this entire thing,” the ex-Deutsche banker adds.

The startup’s financial solutions are designed to bridge the gap created by conventional financing sources and traditional banking products, and it offers off-balance sheet financing and product structuring suited for debt capital markets, aimed at optimal capital allocation and improved ROE.

Artfine’s eureka moment

Shantanu says Artfine’s eureka moment was when the HNI and wealth management segment opened up following the NBFC crisis, which happened when the three were in the throes of setting up the company.

“Because of the entire DHFL and IL&FS saga, which is market dynamic and will of course change in the future, we kind of veered into another very promising segment: high net worth individuals. A lot of them came to us and said we will be very interested in seeing these products,” says Shantanu, adding the company is currently engaged with a lot of wealth management teams to evaluate capital market products.

But ultimately Artfine hopes to achieve the democratisation of supply chain finance so that not only more people can participate in the sector, but SMEs and MSMEs can also get access to reasonably priced credit.

"If SMEs/MSMEs/businesses have to sustain over a longer period, they must not only have access to working capital but also growth capital, which is not readily available right now," Shantanu says.

Artfine’s main competitors include companies like KredX and C2FO,  which work on origination, and Northern Arc Capital and Vivriti Capital,  which look after distribution. However, they don’t have any direct competitors that engage with the supply chain end to end.

The initial capital for the venture came from the founders themselves, and they are currently engaged in discussions with investors for a funding round. The startup, which makes most of its money by charging the issuer of the debt instrument, generated close to Rs 1 crore last year, only through its advisory business.

Artfine had to adjust its expectations for the year due to the pandemic, but it still expects to exceed last year’s revenue, the founders say.

Edited by Teja Lele