How banks, fintechs, and corporations can expand supply chain finance

To enable MSMEs to benefit from supply chain finance, we need a collaborative and digital approach

Small business owners like Yesenia León Castañeda and José Luis Calla Taipe, clients of Tienda Pago in Peru, can benefit from supply chain finance.

Small businesses are crucial for unlocking job growth and sustainable development, but they can’t succeed if they aren’t able to keep their shelves stocked. Micro, small, and medium enterprises (MSMEs) face a $5.2 trillion funding gap, according to IFC analysis. This gap means business owners struggle to stock the supplies they need, which makes it impossible to serve more customers and grow a business. In developing countries alone, there are 141 million MSMEs. If they had the opportunity to grow, imagine what that would mean for families, for communities, for economies around the world.

It turns out there is a solution that could unlock more inclusive growth.  Until recently, supply chain finance (SCF) has been used only by the largest firms and their primary buyers and suppliers. Establishing collaborative partnerships that leverage digital data can bring the benefits of this solution to smaller businesses. Many firms, including members of the International Chamber of Commerce and a partnership between Mastercard, Kenya Commercial Bank, and Unilever, are already pursuing the supply chain finance opportunity. The excitement is palpable from banks, fintechs, and corporations alike, and it is clear that the time and environment are ripe for this solution.

Through SCF, small merchants that tend to be underserved by traditional lenders can access high-quality, low-risk financing. This gives them the flexibility to order supplies as needed and take advantage of opportunities to grow. But everyone else in the supply chain also benefits from the merchants’ success: fast-moving consumer goods companies (FMCGs), agribusinesses, distributors, and retailers along the chain could see higher sales, faster turnover, and increased net profit through greater efficiency and lower costs of credit. And financial service providers (FSPs) have a low-risk way to build relationships with untapped micro and small business market segments.

Why hasn’t supply chain finance reached MSMEs?

Despite the benefits for all parties, no one along the supply chain has had a straightforward path for helping MSMEs benefit from supply chain finance. Fast-moving consumer goods companies don’t interact with end merchants directly, so they aren’t well-positioned to extend financing to MSMEs. Corporate efforts to work through their banks to provide funding are complicated because banks that serve the large corporations do not usually serve small businesses. Financial institutions that do typically work with MSMEs face difficulties in lending because credit histories and collateral are scarce. While these institutions could benefit from supply chain data to assess credit risk, they don’t always have relationships with large corporates to facilitate supply chain financing. Distributors face challenges in the collection and reconciliation of cash. Suppliers sometimes resort to offering credit to merchants, but this subjects suppliers to risks associated with collecting cash from merchants and managing delinquency.

For a solution to work, it will need to remove the barriers of working in silos to make the process run smoothly and unlock the knowledge to provide supply chain financing. A collaborative — and digital — approach will make SCF beneficial to all.

Eight key areas to enable supply chain finance

Bringing supply chain finance to small and micro businesses will require a holistic approach. It demands a robust business model and strong partnerships, which address a range of interdependent activities, as illustrated below:

Supply chain finance model

  • Data & Risk Analytics: SCF leverages trade flow data among merchants, suppliers, and end customers. This data includes inventory purchases, goods sold, and payments made. It can be leveraged by FSPs to evaluate the creditworthiness of small businesses, which often lack credit histories.
  • Lending: By working closely with merchants, distributors, and suppliers, financial service providers gain increased visibility into stock and turnover so they can provide the right amount of working capital. Suppliers will no longer need to extend credit to the merchants they work with, which frees up funds in the supply chain.
  • Education of Chain Participants: MSMEs have limited exposure to SCF and require dedicated education programs to explain the value proposition, learn how it works, and, most importantly, build trust in a new solution.
  • Merchant/Distributor Acquisition and On-boarding: A successful SCF solution needs to have a lot of merchants and distributors on board. Suppliers can leverage their existing distribution networks, and FMCGs can actively engage with merchants who demonstrate the potential for achieving the highest sales. Innovative business models should leverage existing networks and automation to achieve scale.
  • Payments: SCF solutions need to facilitate easier payments for supply chains to operate smoothly. Payment solutions need to expedite the flow of payments among buyers and sellers while easing the disbursal of loans and their repayment through multiple channels. Digitizing these payments unlocks data for critical loan analytics.
  • Account and Collections Management: Underlying SCF is a need for an account to facilitate distributions and repayments with MSMEs. Managing this account and the collections process requires digital methods to achieve the level of scale needed.
  • Orders and Invoicing: Accurate and valid orders and invoices create high-quality data that makes SCF possible. Mobile applications are simplifying this process and expanding accessibility to the smallest firms.
  • Stock and Distribution Management: The logging of stock and inventory has cascading positive effects on FMCGs, distributors, and suppliers who can orient their operations to cater to the needs of merchants and the demand of end consumers. It’s also crucial for extending SCF to those with no credit history.

Digital innovation allows this comprehensive approach to work. Digital platforms facilitate coordinated decision-making among multiple stakeholders, record movements of goods in real-time, and reduce the risks associated with cash. Sokowatch and Jaza Duka in East Africa are promising examples of digital partnership-based models. The business case for these models is clear, as merchants that have access to SCF experience a 15-25 percent increase in inventory turnover — which translates to higher sales for corporations. Based on our analysis, a corporation that sells 20 percent of its products to MSMEs would see a 2-3 percent increase in overall revenue for the region, assuming only half of the merchants they serve have access to SCF.

At Accion, we’ve been researching, investing in, and advising on supply chain finance for the last few years. We’re eager to ensure this solution reaches its potential for driving financial inclusion among small businesses. Whether you are an FMCG, FSP, distributor, wholesaler, or supplier, if you’re interested in working with MSMEs in emerging markets, reach out to us.

Stay tuned for our ongoing insights on supply chain finance.

Arisha Salman also contributed to this article.

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