Agricultural supply chain financial solutions

China's agricultural supply chain finance is still in early stage. However, its operation is complex and involves numerous processes. Financial institutions or Internet finance companies need to closely monitor enterprises in the upstream and downstream of the supply chain. 

 

The advancement of agricultural modernization in our country has given rise to a huge demand for funds among small and medium-sized agricultural enterprises. In this area that traditional banks rarely venture into, Internet finance companies, by adopting a vertical supply chain financial service model for industries and relying on the strong strength of core agricultural enterprises, effectively serve farmers or distributors with relatively weak comprehensive strength in the upstream and downstream, promoting the development of the entire industry. In this article, researchers from Yuanlifang Financial Services will mainly introduce the models of agricultural supply chain finance and related cases. 

 

Agriculture is an important industry for the development of China's national economy. Agricultural enterprises are a significant force driving the economy. China's agricultural modernization has entered a stage of accelerated implementation and advancement. However, researchers from Yuanlifang Financial Services have observed that through traditional financing methods such as bank loans, bond issuance, and equity financing, small agricultural enterprises find it difficult to obtain financial support, and their development cannot be enhanced. 

 

In recent years, the emergence of supply chain finance has to some extent alleviated the financing difficulties faced by small agricultural enterprises. Many financial institutions and Internet finance platforms have also seized this opportunity and thus entered this field. According to the data released in the "Blue Book of Internet Finance for Agriculture, Rural Areas and Farmers" in August 2016, by 2014, the financial gap for agriculture, rural areas and farmers in China had already exceeded 3 trillion yuan. In 2015, the scale of Internet finance for agriculture, rural areas and farmers in China was 12.5 billion yuan, and it is expected to reach 320 billion yuan by 2020, with broad development space. 

 

First, it is difficult for agricultural enterprises to obtain financing 

 

The main reasons for the difficulty in financing for agricultural enterprises are as follows: 

 

(1) The enterprise itself is relatively weak in strength 

Agricultural enterprises generally have relatively weak foundations, small business scales, and lack modern enterprise management and operation concepts. Their internal company management and financial systems are not complete or standardized. Moreover, the professional skills and innovation capabilities of most of their employees are not high, which leads to weak continuous improvement capabilities of the enterprises and a lack of market competitiveness. Due to their own insufficient strength, including internal control systems and market awareness, small agricultural enterprises have relatively weak risk resistance capabilities. Therefore, once they are disturbed by the external environment or impacted by the market during their operation and development, they will face considerable risks, which bring certain risks to enterprise financing. Moreover, the characteristic of agricultural enterprises being vulnerable to natural disasters also increases their risk. 

 

(2) The credit rating of the enterprise is low 

For the majority of small agricultural enterprises, there exist problems such as product homogeneity and vicious competition, which lead to low profit levels, small business scales, and low standardization of enterprise management and financial authenticity. Moreover, the credit awareness of managers is weak, resulting in generally low credit ratings for small agricultural enterprises and affecting the enthusiasm of banks to issue loans to them. 

 

(3) Lack of mortgage collateral 

Mortgage and guarantee are important guarantees to ensure that financial institutions can issue loans. However, most agricultural enterprises are engaged in the processing and production of agricultural products or the construction of industrial bases, have few fixed assets, and lack effective collateral. For instance, specialized equipment cannot be mortgaged, land is generally scarce, and guarantee companies are reluctant to provide guarantees. This has led to a very low success rate for agricultural enterprises in applying for loans. 

 

(4) Difficulty in entering the capital market 

For small and medium-sized agricultural enterprises, it is very difficult to obtain equity financing. Researchers from Yuanlifang Financial Services believe that on the one hand, agricultural enterprises generally lack specialized talents and material and technical foundations for company capital operation, making it difficult for them to connect with equity investment institutions. On the other hand, small and medium-sized enterprises have relatively weak overall strength, with considerable uncertainty in their development. They have weak risk resistance and low financial transparency, making it difficult for them to meet the conditions for going public and for equity to exit. 

 

Overall, there are a large number of farmers and small and micro enterprises in the agricultural supply chain. Most of them are unable to provide standardized and transparent production and financial reports due to high management costs or low educational levels. As a result, they have the characteristics of scattered, small-scale and short-term financing. Without bank credit lines, it is almost impossible for them to obtain financing from banks. However, supply chain finance takes advantage of the credit strength of core enterprises. It extends from core enterprises to the upstream and downstream of the industrial chain, connecting the logistics, capital flow and information flow of the entire chain. It ties scattered, isolated, high-risk and low-yield farmers and small and micro enterprises together with powerful large enterprises, achieving the effect of shared benefits and risks. Change the traditional one-to-one credit granting model between financial institutions and farmers to solve the problem of information asymmetry between lenders and borrowers. The promising development prospects of supply chain finance in agriculture have also attracted a large number of Internet finance companies to enter. 

 

The model of agricultural supply chain finance 

 

Agricultural raw materials, from procurement and production, to processing and storage, and all the way to retail by end customers, constitute the entire agricultural industrial chain. All the participants in the chain, including farmers, farms, agricultural supplies dealers, agricultural product processing enterprises, and agricultural product sellers, may encounter the problem of capital shortage. Researchers from Yuanlifang Financial Services believe that supply chain finance can cover the entire industrial chain and provide financing services through the bundling of upstream and downstream. The agricultural supply chain finance model mainly includes three types, which respectively take accounts receivable, agricultural enterprises and big data Internet platforms as the core to provide financing services. 

 

Model 1 centers on accounts receivable 

 

This model refers to the entry of Internet finance companies into supply chain finance by using the accounts receivable of enterprises in the agricultural industrial chain. Specifically, it is: Farmers or agricultural supplies companies and other suppliers transfer the income rights of accounts receivable arising from the sales or service contracts they have signed with purchasers to factoring companies. After conducting due diligence and risk control reviews on the transactions involved in the accounts receivable, the factoring company provides financing services to the suppliers. Subsequently, the factoring company transfers the beneficial rights of the accounts receivable to the cooperating Internet finance company. After maturity, the factoring company recovers the principal and interest from the supplier and then pays it to the Internet finance company.