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 combined $5.2 trillion credit gap. We recently explored the idea of supply chain finance (SCF) as a tool to drive financial inclusion 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.
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:
- Digital payments from merchant to supplier for inventory delivered.
- Digital invoice management by suppliers and merchants.
- Digital inventory management systems, allowing transparency of downstream inventory levels to the supplier.
- The ability for the supplier or merchant to quickly and easily apply for credit against its receivables or invoices due.
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.
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.