Supply Chain Finance and Financing Constraints on SMEs—An Empirical Analysis of Software Company

With the perspective of small and medium-sized enterprises in China, it has trouble getting financing. Based on cash cash flow sensitivity model, this paper figures out the existence of financial constraints on SMEs in software industry and supply chain finance’s effect on it. The cash flow sensitivity of cash and supply chain finance’s effectiveness are evaluated using a large sample of listed companies on the SME boardfrom2008 to 2018. Through empirical analysis and robustness checks, it is concluded that SMEs in software industry have financing difficulties and supply chain finance can alleviate this financial dilemma to some extent. Furthermore, the essay analyzes risk points of three different forms of supply chain finance and puts forward some suggestions about risk management for small and medium-sized enterprises, bank and third-party logistics.


Literature about Relevant Model
As for the model used in this field, most research is based on investment -cash flow model proposed by Fazzari et al. (1988) and cash -cash flow sensitivity model in Almeida's (2004) essay. In the first model, sensitivity of investment to cash flow is used to measure the extent of financial constraints, which assumes firms rely on internal cash flow for investment when limited by external financing. This indicates a positive sensitivity of investment to cash flow. The basic theory contained in the second model is that the severer the financing constraints are, the more frequently companies will save cash out of cash flow, or in other words, positive cash -cash flow sensitivity.

Literature about Risk Management in Supply Chain Finance
Risks of supply chain management has been thoroughly studied over the last six decades. The authors of this paper selected and analyzed articles that relate closely to the topic and help achieve the purpose of this article. Supply Tang (2006) divided risks of supply chain management into four categories, supply, demand, product, and information management after summarizing the quantitive models that applied in over two hundred journal articles. Rao and Goldsby (2009)  This paper is related to four main studies on financial risk assessment. Tsai (2008) simulates cash flow risks that are related to supply chain finance through the value of standard deviation of cash inflow, cash outflow and net cash flow in each period of a project horizon. In Tsai's research, suggestions for corporations which provide financing services are also given. The author proposed the best policy of asset-backed securities to finance receivables, so as to shorten the cash conversion cycle and reduce the risk of cash inflow. Liu and nagurney (2011) established a variational inequality model to investigate the effects of foreign exchange risk and competition intensity on supply chain companies participating in offshore outsourcing activities. Simulation results show that in general, the profitability and risk of risk averse enterprises are lower than that of risk neutral enterprises. There are two other studies that focuses on generic supply chain finance risks. Franca et al. (2010) has developed a programming model that involves multiple objectives with Six Sigma concepts to assess financial risk. The results show that the financial risk becomes lower with the improvement of sigma level. Lastly, Liu and Cruz (2012) looked into the influence of supply chain corporations' financial risks and economic uncertainty on value, profit and efficiency of decision-making of the whole supply chain. The contribution of this article is discovering suppliers' willingness to lower their profit margins in order to get more opportunities for business transactions from the manufacturers, who possess relatively lower financial risk and sensitivity to economic uncertainty. However, these methods have a common disadvantage of low practicability because these investigations all focus on simulation data rather than real case data.

Proposition
Compared with large companies, small and medium-sizedenterprises (SMEs) in China have face challenges to obtain financing for their operations due to a relatively low credit, limited operating history and weak profitability, thus decreasing the willingness and possibility that financial institutions especially banks would lend money to them. Such financial constraints exert a negative impact on the development and growth of SMEs since it cannot afford spending and investment in the future.
However, supply chain finance, which links upstream and downstream firms, banks and third-party logistics for lower costs, makes full use of the core corporations' credit advantages and provides financing convenience to SMEs. Based on the above theoretical analysis, hypothesis 1 and 2 are proposed in this paper.

Methodology
In this essay, research is conducted by both qualitative and quantitative techniques to test two hypothesizes. In terms of the qualitative approach, we use semi-structured interview to ask employees and employers from 15 typical software companies several questions concerning financial constraints and supply chain finance. When it comes to the quantitative aspect, data from 61 small and medium-sized listed companies in software industry is evaluated by means of cash -cash flow sensitivity model.

Qualitative Method
As for qualitative method, semi-structured interview is applied to investigate two hypothesizes.
15typical SMEs in software industry, including YG SoftInc, DHC Software Inc and Guomai Technologies Inc, participated to this interview. We centered the inquiry on whether these corporations have face the difficulty of raising funds through traditional financing methods, their familiarity and usage of supply chain finance and what the implication of supply chain finance is. After the survey, their answers are collected and summarized in qualitative results. Detailed questions of the interview are listed in the appendix.

Quantitative Method
In the literature, there are primary two models to investigate the effect of financial constraints on SMEs: investment-cash flow model (Fazzari et al., 1988) and cash -cash flow sensitivity model (Almeida, 2004). However, investment -cash model is reported to be inconsistent with the real situation (Note 1).
Meanwhile, cash -cash flow sensitivity model has become more acceptable in academia and is used in this paper (Note 2). in other words, the cash flow sensitivity of cash. For instance, firms that lacks enough funds are more likely to hold cash for later payment while others might not suffer from this shortage. This means that financially constrained enterprises have a positive cash -cash flow sensitivity. Therefore, the cash flow sensitivity of cash can be regarded as an effective and reasonable criterion to assess financial constraints on SMEs. In Almeida's (2004) essay, there are two models: baseline and extended model. Here, we use the extended model to verify the cash flow sensitivity of cash and the impact of supply chain finance.
In order to test hypothesis 1, the first formula of model (1) (1), 1 is the cash-cash flow sensitivity and it will be positive if enterprises are in shortage of capital.
In order to test hypothesis 2, this paper establishes model (2), which is the expanded form of model (1) and adds the influencing factor of supply chain finance. According to indicators adopted by Xue and Zhang (2015), this paper measures supply chain finance in three aspects: short-term loans, commercial bills, and discounted bills (Note 3). The second equation of model (2) is shown below: ∆ , = 0 + 1 , + 2 + 3 * , + 4 , + 5 ∆ , + 6 ∆ , +

Results
This part is composed of two sections: qualitative results and quantitative results. At first, qualitative results provide a generous understanding of financial constraints and supply chain finance. Secondly, quantitative results directly reveal the relationship among different variables through concrete and accurate statistics.

Qualitative Results
After communicating with employers and employees from these 15 SMEs in China, it is found that almost every people assure the existence of financial difficulties in their companies while only part of software enterprises have ever used the supply chain finance to tackle such problems. This phenomenon indicates that supply chain finance is not widely accepted in China and it has great potential in capital market. Compared to supply chain finance, traditional financial approach, for example bank loan, is still the most frequently used among SMEs. For those who have already taken the advantage of supply chain finance, they illustrate the benefit of supply chain finance by persuasive arguments that supply chain finance provides easier access to raising capital than bank loans and relieves their financial constraints, thus improving the performance of SMEs. Moreover, the majority of them points out the increase of profit and sales revenue after the introduction of supply chainfinance.
To sum up, it can be deduced from the response of these 15 samples that SMEs in information technology industry have financial constraints and the development of supply chain finance can alleviate their financial constraints to some extent.

Quantitative Results
This paper takes small and medium-sized listed companies in software industry as the research subject and selects the data from 2008 to 2018 as the sample. The relevant data are from CSMAR database, processing excludes the samples of St / Pt and companies whose time of listing is less than 3 years, in order to ensure the stability of statistics and eliminate companies with missing and imperfect data. At last, we chose 53 software companies to make further examination. The data processing and statistical analysis of this paper are completed by Stata 12.0 and SPSS 20.0. After processing, this paper finally obtained 4576 sample observations. Table 2 displays the summary of major variables in this model. From the results, the average value of ∆cash is close to zero and its standard deviation is about 0.08, which implies the variation of cash holdings among SMEs in software industry is small. Additionally, the standard deviation of CF is 0.1677 and this means there exists fluctuation in the operating cash flow among SMEs to some extent.

Descriptive Statistics Analysis
Other variables are in a reasonable range and this ensures the reliability and representativeness of the survey data.  Table 3 shows the results of correlation analysis. It can be concluded that most correlation coefficients between variables are relatively low but some reach to approximately 0.5. Moreover, the correlation

Robustness Checks
In order to ensure the integrity and accuracy of previous empirical results, this part will use the basic cash -cash flow sensitivity model in Almeida's (2004) essay to test its robustness. Specific regression results are listed in Table 6. Although 1 in basic modelis smaller than the one in the former regression results, both are significant at 99% confidence level and this illustrates the existence of positive cash -cash flow sensitivity among SMEs in China. For the coefficient before SCF*CF, it is also negative under robustness checks. After that, the correctness of model is thus verified and the hypothetical relationship among ∆CASH, CF and SCF is proved sound.
Combined qualitative and quantitative results, we could draw the conclusion that SMEs in information technology industry have financial constraints and the development of supply chain finance can alleviate their financial constraints to some extent. Therefore, hypothesis 1 and 2 are correct.

Discussion
From the previous regression results, the development supply chain finance is beneficial for SMEs because it provides an alternative to raise funds. This innovative method, however, has some specific risks which we should pay attention to and offer some tactic to deal with. Therefore, this part makes a detailed summary of risks in supply chain finance for banks and enterprises and puts forward several suggestions to avoid, transfer and mitigate risks.

Variable Factors of Supply Chain Corporations' Financial Risk Level
The reasons why SMEs fail to obtain bank credit mainly due to low transparency of financial  Whether to use and save the natural property of the substance

Risks of Supply Chain Finance
When commercial banks provide credit service, risks of supply chain finance (SCF) need to be fully considered. For small and medium-sized enterprises, it is also important for them to realize the risk points so that they can regulate themselves better.
Risks for commercial banks are crucial to be analyzed, for it can help banks provide financing service better and help enterprises to complete their system. In the receivable financing mode, there are three main risk points, quality of account receivable, operation status of financing enterprises and credit status of financing enterprises. In inventory mode, banks need to watch out for regulatory risk, collateral security and value recognition risk. In prepayment financing mode, credit status and supervision ability of TPL enterprises are the main risks for banks to consider.
Risks of supply chain finance for enterprises can be classified into endogenous risk and exogenous risk.
When supply chain financial business is embedded in the enterprise's business, involving receivables financing mode, inventory financing mode and prepayment financing mode, it can cause certain endogenous risks in the operation or financial situation. This report will mainly focus on endogenous risks which can be solved or reduced.
Endogenous risks mainly come from the operation process where enterprises transfer funding risks to themselves in different modes. It involves two kinds of companies in the supply chain, companies who provide financing services and companies who require them. These risks can be analyzed in two aspects, management and finance.
Inefficient management of enterprises that need financing will lead to operational risk and cause losses to all enterprises in the supply chain. In the aspect of management, risks can occur among low supply chain correlation, small and medium-sized enterprises' poor credit status, fake supply chain trading background and ineffective supply chain management.
First of all, high correlation of supply chain system is essential. The more complete a supply chain system is, the higher integration degree is. When the capital flow forms a closed loop in the supply chain business, the enterprise can control the risk by tracking and managing each link. This kind of

Strategies to Deal with Risks of Supply Chain Finance
Solutions of supply chain finance risks can be analyzed in the following three modes. In the receivables financing mode, considering one of the sources of risks is small and medium-sized enterprises' poor credit status, enterprises should establish good cooperative relationship with core enterprises to obtain credit guarantee of core enterprises and strengthen the management of accounts receivable. Meanwhile, banks and other financial institutions should take measures to deal with the market risk of goods under accounts receivable. Additionally, strengthening the supervision of customer credit pledge goods, improving the internal operation management standards, and preventing operational risks are also solutions for ineffective management. Specifically, the logistics enterprises should constantly improve the level of warehouse management and warehouse management information, formulate a sound risk control plan for handling the warehousing and delivery of quality goods, and strengthen the supervision ability of quality goods. According to different service modes, logistics enterprises and banks should formulate strict operation specifications and supervision procedures to eliminate risks caused by internal management loopholes and irregularities.
In inventory financing mode, two sources of risks, low supply chain correlation and ineffective supply chain management need to be taken into account. According to Mak and Shen (2012), enterprises could select a professional third-party logistics regulator to participate. And the management of core enterprises to small and medium-sized enterprises need to be strengthened. Moreover, it is essential to establish a flexible and fast market commodity information collection and feedback system to avoid product market risks (Kull & Talluri, 2008). In the era of buyer's market, the quality of products, the speed of renewal, and the disclosure of positive and negative information have a direct impact on the realization value and sales of pledged goods. Therefore, logistics enterprises and banks should choose the right collateral according to the market bank, and set a reasonable pledge rate. Generally speaking, the products with good sales trend, high market share, strong strength and high popularity are selected as the pledged goods, and the monitoring mechanism of sales situation and price change trend is established for them, so as to obtain real information in time, avoid the evaluation distortion of pledged goods caused by information asymmetry, and control market risk.
In the prepayment financing mode, banks and other financial institutions should establish a complete set of management mechanism of prepayment pledge to prevent fake supply chain trading background provided by small and medium-sized enterprises. Core enterprises must take corresponding strategies to deal with the risks brought by buyback to enterprise management. Logistics enterprises and banks should share information, fully cooperate and strengthen credit management of customers. Logistics enterprises should give full play to their advantages in mastering the first-hand information of customers and pledged goods. Meanwhile, banks could use their credit assessment and risk control methods to establish a customer data collection system and credit investigation and verification system to conduct all-round credit management for customers and form an interactive supervision and control mechanism.
In conclusion, only when banks and all the enterprises on the supply chain interact well, a virtuous circle can be formed.

Conclusion
Reviewing the supply chain finance' development from offline "1+n" to online "n+n" in China, this essay compares bank loans with supply chain finance in liability, interest rate and payment clauses. As for small and medium-sized enterprises, traditional financing methods cannot satisfy their demand for raising funds and financial constraints are common among these companies. Therefore, the purpose of our research is to explore whether supply chain finance can relieve SMEs' financing burden and offer guidance about risk management along supply chain.
Using cash -cash flow sensitivity model, this essay links SME's financial constraints to its intention to save money for potential spending and investment. level of risk which requires awareness and attention. Subsequently, we provide strategies to deal with risks after evaluating specific uncertainty in receivable financing mode, inventory mode and prepayment financing mode.
The major innovation of our research is using both qualitative and quantitative methods in empirical analysis and concentrating on SMEs in software industry which face relatively severe financial constraints but lacks evident academic support. Since there are only 61 listed SMEs in software industry, relatively small number of sample is the major research limitation.
We hope future researchers could measure the quantitative impact of supply chain finance on SMEs' performance, for example sales and profit and then it could be a thorough and comprehensive guidance for SMEs.