How supply chain finance can close the funding gap for SMEs
June 16, 2016
Global Trade News
By: Andrew Tananbaum
Typically, small and medium sized enterprises (SMEs) transacting global business face the strongest obstacles in accessing financing on affordable terms. Around the world, SME business leaders point to the availability of finance as a major barrier to their capacity to trade.
This finance gap is of particular concern because SMEs are a leading driver of trade, economic development, and employment. According to World Bank estimates, formal SMEs (legally registered businesses) contribute up to 45% of total employment and up to 33% of national income (GDP) in emerging economies. Those numbers are significantly higher when informal SMEs (businesses that are not legally registered) are included.
In the US, nearly 6m businesses are considered small. According to the US Census Bureau: “Small- and medium-sized companies (those employing fewer than 500 workers, including number of employees unknown) comprised 97.7% of all identified exporters and 97.1% of all identified importers.”
The finance challenges that these important contributors face was the topic of a recent analysis by the World Trade Organisation (WTO). In its May 2016 study, the WTO proposed a six-part list of recommendations to address the SME finance gap.
In its action plan, the WTO report called for action on several fronts – including efforts to increase existing finance programmes; maintain open dialogue with trade finance regulators; and improve the capacity of the international community to read markets and predict problems. Weaved throughout the report was a discussion of the power of innovative supply chain finance (SCF) solutions in helping bridge the finance gap for SMEs.
Fintech and the democratisation of finance
In underdeveloped countries …“local access to factoring is almost non-existent and SMEs are largely excluded from private supply chain financing systems,” the WTO reported. However, that’s about to change. SCF is no longer only for larger importers and the game-changer is financial technology (fintech).
Of course, SCF is not new. Supplier financing and reverse factoring have long been offered by the big banks to large – or investment-grade – corporations to support cross-border trade. However, today SCF techniques are being transformed by technology and that transformation maximises opportunities for SMEs and financial institutions alike.
By cutting through the bureaucracy and operational restrictions inherent in traditional financial solutions, new SCF tools extend beyond only the largest importers. New and innovative financial technologies have opened the doors to an entirely new set of financial players, giving them a broader reach and allowing SMEs to take advantage of opportunities formerly only available to large enterprises.
As these new online tools become more established and lenders become more comfortable assessing the risks associated with making advances or loans to small importers or retailers, businesses that previously had to rely on traditional banks for loans or lines of credit are able to take more control of their ability to fund inventory. In some cases they can go directly to manufacturers, as opposed to using an importer. Businesses that previously found their growth stifled because financing wasn’t available to them are able to thrive.
Additionally, thanks to advances in technology and the rise of fintech, the number of SCF options available to SMEs is diverse and growing. Small businesses selling their goods on platforms such as Amazon, eBay, or Alibaba are now offered working capital lines and loans by those very platforms facilitating the sale of cross-border goods. Last year, Chinese online marketplace Alibaba and online loans specialist Lending Club formed a partnership to provide small financial facilities for manufacturers, wholesalers and retailers in the US for buying products and supplies directly from Chinese companies over the Alibaba ecommerce site.
According to the New York Times’ Dealbook: “Rather than have to rely on banks or other traditional lenders who require collateral for their financing, these customers can instead use Lending Club’s systems to procure an unsecured loan with near-instant approval.” They can also use the services of business credit specialists, which provide advances to SME importers and credit guarantees through the purchase of receivables from suppliers and short term loans to importers of all sizes, around the world.
Timing and guaranteeing payment obligations
SCF doesn’t just support working capital; it can also support growth. Because the buyer doesn’t have to pay its supplier as quickly, SCF programmes often enable the buyer to pay up to 120 days after the actual receipt of the imported goods, so that money can be put to work for growth purposes.In addition, SCF provides assurances to manufacturers and suppliers that they will be guaranteed payment upon timely performance. This can help in the negotiation of more favourable terms and strengthen international working relationships.
For example, a middle market retailer of men’s apparel was able to secure funding to go directly to offshore suppliers and disintermediate its traditional importer/wholesaler by taking advantage of SCF. While many suppliers were dubious of the company’s ability to pay, the SCF facility provided a level of reassurance that satisfied manufacturers while providing the company with an extra 90 days to pay for the goods that were being produced overseas.
Benefits to SMEs and banks alike
Although the concept of timing payments is not new, the ability to manage the transactions from a dashboard in your office is. Web-based SCF tools mean that cross-border business becomes a viable option for SMEs, importers and exporters alike, whether they are in urban areas or remote locations.
An International Chamber of Commerce (ICC) global survey concluded that supply chain finance is a market with huge potential to be tapped. In an increasingly global marketplace with perpetually volatile economies, the ability to time payment obligations can make a huge difference for a small or medium- sized business.
SCF gives SMEs more control over their ability to free up working capital and manage inventory. It changes the cross border relationship from being product-centric – when its goods arrive, the company makes a payment – to one of a collaborative partnership. It could even change the traditional role of importers, as small retailers will be able to go directly overseas for goods rather than relying on a middleman for its product.
Indeed, it just might be able to close the SME trade finance gap identified by the WTO and give SMEs the fuel they need to trade, expand, and thrive.