Andrea Horak

Iain Brougham

Jason Loughnane

Kathleen Yaworsky

Prateek Shrivastava

Priya Punatar

Scott Stefanski

Advisory Services

Alternative Data

Appropriate Product Design and Delivery

Banks

Credit

Delivery Channels

Digital Credit

Digital Financial Services

Enabling Environment

Entrepreneurs of MSMEs

Financial Inclusion Strategy

Financial Service Providers

Financial Technology

Fintechs

MSME/SME Finance

Partnerships

Supply Chain Finance

Underserved Groups

Article

Report

Toolkits and Guides

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 <a href="https://www.ifc.org/wps/wcm/connect/03522e90-a13d-4a02-87cd-9ee9a297b311/121264-WP-PUBLIC-MSMEReportFINAL.pdf?MOD=AJPERES&amp;CVID=m5SwAQA">IFC analysis.</a> 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 <a href="http://documents.worldbank.org/curated/en/653831510568517947/pdf/121264-WP-PUBLIC-MSMEReportFINAL.pdf">141 million</a> 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, <a href="https://www.accion.org/series/supply-chain-finance">supply chain finance (SCF)</a> has been used only by the largest firms and their primary buyers and suppliers. Establishing <a href="https://www.accion.org/the-supply-chain-finance-opportunity">collaborative partnerships that leverage digital data</a> can bring the benefits of this solution to smaller businesses. Many firms, including members of the <a href="https://iccwbo.org/publication/standard-definitions-techniques-supply-chain-finance/">International Chamber of Commerce</a> and a partnership between <a href="https://btca-prod.s3.amazonaws.com/documents/332/english_attachments/Driving_sales_through_digital_working_capital_loans_for_small_merchants.pdf?1528522098">Mastercard, Kenya Commercial Bank, and Unilever</a>, 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.
<h2>Why hasn’t supply chain finance reached MSMEs?</h2>
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.
<h2>Eight key areas to enable supply chain finance</h2>
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:

<img class="wp-image-19901 size-full alignnone" src="http://content.accion.org/wp-content/uploads/2019/10/scf_graphic.png" alt="Supply chain finance model" width="974" height="704" />
<ul>
 	<li>Data &amp; 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.</li>
 	<li>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.</li>
 	<li>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.</li>
 	<li>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.</li>
 	<li>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.</li>
 	<li>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.</li>
 	<li>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.</li>
 	<li>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.</li>
</ul>
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. <a href="https://sokowatch.com/">Sokowatch</a> and <a href="https://ke.kcbgroup.com/jaza-duka">Jaza Duka</a> 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 <a href="https://www.ifc.org/wps/wcm/connect/45f62b14-ef6b-4c89-9403-511dd2291d39/Credit+to+Merchants.pdf?MOD=AJPERES&amp;CVID=mCrv7gV">15-25 percent increase in inventory turnover</a> — 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, <a href="mailto:glassupport@accion.org">reach out to us</a>.

Stay tuned for our ongoing <a href="https://www.accion.org/series/supply-chain-finance">insights on supply chain finance</a>.

Arisha Salman also contributed to this article.

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

Business Leader

Financial Service Provider

Accion Global Advisory Solutions

Supply chain finance

<h3>Executive Summary</h3>
Supply chain finance (SCF) offers high-quality, low-risk financing to the small merchants that tend to be underserved by traditional lenders. These microentrepreneurs often lack the credit data traditional lenders need and are seen as too costly to serve at scale. SCF leverages data generated by businesses when they buy from suppliers and sell to customers, using this information to evaluate the creditworthiness of small merchants. It is a useful tool to expand financial inclusion for the 141 million microenterprises in developing countries and to promote inclusive economic growth globally.  

SCF benefits merchants with timely access to credit; it also benefits merchants, suppliers, and fast-moving consumer goods companies (FMCGs) with higher sales, faster turnover, and more efficient operations. Lenders benefit as well: SCF reduces risk and costs, allowing financial service providers (FSPs) to cater to new markets.

We believe that platform-based models, those that consolidate data produced by the movement of money and goods in the supply chain, are best suited to deliver SCF. Platform-based SCF models can satisfy the interdependent needs of multiple stakeholders simultaneously and facilitate coordinated decision-making. FSPs and FMCGs are well positioned to develop SCF platforms. 

This brief discusses how SCF platforms can help small merchants, FMCGs, suppliers, and FSPs realize their economic potential. For institutions interested in developing an SCF solution, access our recent in-depth guide and playbook, <a href="https://www.accion.org/how-digitized-supply-chain-finance-can-help-small-merchants-grow/">How digitized supply chain finance can help small merchants grow.</a>

&nbsp;

Small merchants such as grocery shops, corner stores, and other micro-retailers employ <a href="https://www.smefinanceforum.org/sites/default/files/analysis%20note.pdf">more than half</a> of the world’s labor force and contribute significantly to global GDP. These merchants rely on personal savings, family and friends, and sometimes personal credit to meet cash flow needs, but collectively these businesses face an <a href="https://www.smefinanceforum.org/sites/default/files/Data%20Sites%20downloads/MSME%20Report.pdf">$8.1 trillion credit gap</a>, creating a significant barrier to inclusive growth.  This global credit gap is almost entirely a supply-side problem, as micro, small, and medium entrepreneurs’ (MSMEs’) demand for financing is significant. Serving this market is challenging for lenders. Small merchants have little to no business documentation, are often unable to provide high-quality collateral, operate primarily in cash, and require loan sizes that are not always worth the operational cost of serving them, making it difficult to assess credit risk and sustainably offer products that meet small merchants’ needs.

By addressing this problem and helping MSMEs obtain the financing they need when they need it, we help microentrepreneurs restock their shelves, expand operations, and hire more employees. By addressing this credit gap, we can help more people around the world realize their economic potential.

The supply chain finance opportunity

Citi Foundation

Financial Inclusion Practitioner

This guide is for institutions interested in developing a supply chain finance solution. For those interested in better understanding how supply chain finance can help small merchants, fast moving consumer goods companies (FMCGs), suppliers, and financial service providers (FSPs) realize their economic potential, access our report, the  <a href="https://www.accion.org/the-supply-chain-finance-opportunity">Supply Chain Finance Opportunity.</a>
<h3>Executive Summary</h3>
Supply chain finance (SCF) is the use of financing mechanisms that can optimize the management of liquidity tied up in supply chain processes. SCF solutions have long been offered by big banks to large corporations, such as fast moving consumer goods (FMCG) companies and manufacturers, to support trade.

However, today SCF techniques are being transformed by technology, expanding the addressable market to include micro, small, and medium size enterprises. Improved connectivity, increasingly available customer data, and new technologies lower the cost and make it possible to extend digital SCF solutions to the small merchants at the end of global supply chains.

By tying credit to the flow of goods, SCF facilitates more efficient business operations and cash flow management for all actors along the chain – resulting in higher sales, faster turnover – and ultimately, increased profitability and growth.

A platform-based model that satisfies the interdependent needs of multiple stakeholders simultaneously using digital innovations is well suited to provide SCF solutions. Platform models consolidate digitized data produced by the flows of goods and money throughout the supply chain, building trust and facilitating coordinated decision-making. The net effect is to provide deeper insights into merchant and consumer behavior.

We believe independent third-party technology providers are best positioned to mediate between multiple stakeholders and take the lead in operating a flexible and scalable SCF solution. We also see a major opportunity, particularly for FSPs and FMCGs, to lay the groundwork for such a platform approach to succeed.  A digitized SCF solution will not only help merchants to grow their business but will drive meaningful financial inclusion for the millions left un- or underserved by the status quo. With nearly 141 million microenterprises in developing countries, digitized supply chain finance represents a scalable solution to drive greater sales through the supply chain, which will propel inclusive growth.

<img class="aligncenter" src="http://content.accion.org/wp-content/uploads/2018/09/Citi-Foundation.png" width="240" height="162" />

Accion would like to thank the Citi Foundation for supporting this report. The Citi Foundation works to promote economic progress and improve the lives of people in low-income communities around the world. The Citi Foundation invests in efforts that increase financial inclusion, catalyze job opportunities for youth, and reimagine approaches to building economically vibrant cities.

&nbsp;

How digitized supply chain finance can help small merchants grow

Tienda Pago

In emerging markets, small merchants often struggle to keep their shelves stocked. Since many of these merchants aren’t being served well by the traditional banking sector, they can’t use credit to stock up on enough inventory to meet demand. The challenges small businesses face are a massive global problem — nearly 300 million micro and small enterprises worldwide face a <a class="markup--anchor markup--p-anchor" href="http://www.worldbank.org/en/topic/smefinance" target="_blank" rel="noopener noreferrer">combined $5.2 trillion credit gap</a>. We recently explored the idea of <a class="markup--anchor markup--p-anchor" href="https://medium.com/accion/small-businesses-play-a-huge-role-in-communities-but-they-need-help-31665eac1ef1" target="_blank" rel="noopener noreferrer">supply chain finance (SCF) as a tool to drive financial inclusion</a> for these businesses.
Emerging technology platforms that allow substantial data collection in the supply chain make supply chain finance solutions possible. This data can enable small merchants to manage their cash flows and business inventory better, and it can unlock funding for them, even if they don’t have a robust formal financial history. Just-in-time credit, which is a line of credit offered to small merchants when they place orders with their suppliers, can have benefits throughout the supply chain. For example, Heineken Mexico distributes half of its volume through small merchants across the country. They currently have financing agreements with their larger wholesalers, such as Walmart, which allow for payment to be received in 60–90 days from delivery, whereas most of their small merchants are obliged to pay the same day in cash. If Heineken could partner with a financial service provider to offer just-in-time finance to these small merchants, they might be able to ensure better sales as they would no longer be competing for whatever cash the shop has on hand that day.
Supply chain finance involving the last mile distributor and a small merchant is classified as downstream finance. The graphic below illustrates how downstream supply chain finance works. Since many small merchants lack a formal credit profile, a financial service provider reviews the merchant’s supply chain transactions, such as order and payment history, and then agrees to pay the supplier on behalf of the merchant. The merchant will repay the provider the invoice amount and any finance charges over the term per the agreement. In this scenario, the financial institution mitigates risk by ensuring that the funds are used to purchase the specific inventory items.
<img class="progressiveMedia-image js-progressiveMedia-image" src="https://cdn-images-1.medium.com/max/1440/1*6lVnLOKEEQR84PkaFb0h4w.png" />
Increasing penetration of smartphones and strong data networks in emerging markets make it easier than ever for businesses to place orders, access financial services, and make payments. Improvements in technology and connectivity also mean that the downstream supply chain finance model is now within reach, even for small merchants. While financial service providers have a valuable opportunity to serve this market, their model needs to be data-enabled and technology-driven to scale sufficiently and make a meaningful dent in the massive funding gap for small businesses. An enabling ecosystem for developing downstream supply chain finance products should include:

<ul class="postList">
 	<li class="graf graf--li">Digital payments from merchant to supplier for inventory delivered.</li>
 	<li class="graf graf--li">Digital invoice management by suppliers and merchants.</li>
 	<li class="graf graf--li">Digital inventory management systems, allowing transparency of downstream inventory levels to the supplier.</li>
 	<li class="graf graf--li">The ability for the supplier or merchant to quickly and easily apply for credit against its receivables or invoices due.</li>
</ul>
It’s also critical that the solutions are developed with the right actors in mind. Based on the size of the suppliers, distributors, and merchants, different types of financial service providers may be involved. Microfinance entities would be most familiar with micro and small merchants, whereas larger commercial banks will have relationships with large fast-moving consumer goods (FMCG) suppliers and distributors. The graphic below lists the ecosystem actors necessary for downstream supply chain finance to work and depicts the flows of goods and financing across the supply chain.
Each actor will have their role to play and accrue benefits from a data-driven, micro-enterprise supply chain finance model for financial inclusion.
<img class="progressiveMedia-image js-progressiveMedia-image" src="https://cdn-images-1.medium.com/max/1440/1*DKsH9TiwvSsuNbnjoTOiUw.png" />
Just-in-time financing could help small merchants manage their businesses better and improve their lives. Smart solutions will take into account the interests of the involved stakeholders so that the benefits outweigh the risks for all. Our next piece in this supply chain finance series will dive deeper into the business case for an integrated solution that delivers value to each of these actors.

How supply chain data can unlock credit for small businesses

Small merchants, such as “mom-and-pop” retailers, restaurants, and micro-grocers, are an important part of society — bringing life’s essentials within easy access for families and employing <a class="markup--anchor markup--p-anchor" href="https://www.ifc.org/wps/wcm/connect/9ae1dd80495860d6a482b519583b6d16/MSME-CI-AnalysisNote.pdf?MOD=AJPERES" target="_blank" rel="noopener noreferrer">more than a third</a> of the world’s labor force.
However, these merchants can’t currently realize their full potential to support themselves and their communities. This is because they often lack access to the core resources or services they need to buy stock, sell goods, and run their businesses effectively. A lack of access to credit for buying stock is a key example of this. According to the IFC, approximately <a class="markup--anchor markup--p-anchor" href="http://www.worldbank.org/en/topic/smefinance" target="_blank" rel="noopener noreferrer">70 percent of the 365–445 million micro, small, and medium enterprises (MSMEs</a>) in emerging markets lack access to credit, resulting in a financing gap <a class="markup--anchor markup--p-anchor" href="https://www.smefinanceforum.org/sites/default/files/Data%20Sites%20downloads/MSME%20Report.pdf" target="_blank" rel="noopener noreferrer">of $5.2 trillion</a>.
The need for credit is difficult for merchants to predict and often requires funding to be available at the point of purchase. Historically, this type of lending, known as “just-in-time” credit, has been difficult for formal financial service providers to offer due to the lack of accessible data that can be used to assess creditworthiness quickly. This dearth of data is primarily driven by merchants’ reliance on manual operational processes and cash-based transactions, which are often not recorded and difficult to verify.

<h4 class="graf graf--h4">Time to scale up supply chain finance solutions for small merchants</h4>
Supply chain finance is not new — big banks have long offered it to large corporations to support cross-border trade, and informal mechanisms have existed for centuries. However, as markets evolve, the variety of available technologies capable of digitizing business operations today mean that now more than ever this type of financing can benefit small merchants.
<a class="markup--anchor markup--p-anchor" href="http://www.accaglobal.com/ab111" target="_blank" rel="noopener noreferrer">Supply chain finance</a> (SCF) is the use of financial mechanisms and technologies for optimizing the management of liquidity tied up in supply chain processes. It enables merchants and other supply chain participants to apply and gain approval for credit to fund purchases at the point of sale. Merchants can purchase goods as needed, as opposed to only when they have cash.

<h4 class="graf graf--h4">Merchant-centric services can alleviate critical pain points for merchants and ecosystem</h4>
The lack of credit for small businesses has an impact on the merchant themselves, the local communities where they operate, and nationwide trade and fast moving consumer goods (FMCG) distributors, such as Unilever and Coca-Cola. For merchants, the lack of credit means their ability to restock is limited by the amount of cash they have on hand, which has been generated from previous sales. This lessens their efficiency and ability to scale. As a result, communities miss the chance to have the job growth and convenience that thriving local businesses bring. FMCG distributors have to deal with a lack of consistent demand and low visibility in a supply chain where they are trying to operate as efficiently as possible.
As merchants buy and sell, this creates transaction and behavior patterns that can be used to provide finance. Traditionally, financial service providers’ (FSP) ability to leverage those patterns and behaviors was limited by the lack of a digital footprint. Today, as with innovations in consumer credit, new technologies can also help small merchants develop a digital data ‘<a class="markup--anchor markup--p-anchor" href="https://www.youtube.com/watch?v=yhdTyqjUMEI&amp;feature=youtu.be" target="_blank" rel="noopener noreferrer">footprint</a>’ to show their creditworthiness. Organizations such as <a class="markup--anchor markup--p-anchor" href="https://medium.com/accion/dan-cohen-of-tienda-pago-d57c77c53fe8" target="_blank" rel="noopener noreferrer">Tienda Pago in Mexico and Peru</a> and <a class="markup--anchor markup--p-anchor" href="https://medium.com/accion/using-fintech-to-support-small-businesses-in-nigeria-f7dff3d6ff23" target="_blank" rel="noopener noreferrer">Lydia in Nigeria</a> have already begun tapping into the data streams of small merchants by offering them business services that encourage digital transactions. One way Lydia helps businesses build a digital footprint is through enabling access to invoice management tools. These provide a more convenient and efficient method for merchants to track debtors and allows for the capture of invoice data to be used to assess creditworthiness. But innovations in supply chain finance have not yet reached small merchants at scale.

<h4 class="graf graf--h4">How can we help merchants buy better, sell better, and run better?</h4>
Enabling merchants to buy better, sell better, and run better through the use of technology is the first step to implementing a merchant-centric supply chain finance solution at scale. These solutions could include access to marketplaces for better pricing on purchases, the use of digital channels to drive customer engagement, and digital means of tracking and managing inventory, payables, and receivables to allow greater visibility of cash flows.<img class="graf-image" src="https://cdn-images-1.medium.com/max/1080/1*ek-ocLutQGYiy673lPDCMw.png" />
We at Accion believe supply chain finance can be a useful tool to drive significant adoption and usage of financial services and therefore meaningful financial inclusion, but to implement successfully at scale, we first need to understand the market thoroughly, to ‘get the equation right’ between the merchant and others along the supply chain. Each merchant has unique needs within their market context, and comprehending these needs is essential for the design, launch, and optimization of merchant-centric services. A full understanding of each market can reveal where pain points are and help identify which digital mechanisms will be most conducive to driving change. With a growing focus on digital payments and merchant acceptance, the time to develop scalable merchant-centric solutions is now.

Small businesses play a huge role in communities, but they need help

Lidya