How ADB's Supply Chain Finance Program brings finance to small and medium enterprises.
Small and medium-enterprises, or SMEs, represent more than 90% of all businesses across Asia. The contribution of SMEs to trade, jobs, and economic growth is constrained by many factors – one of which is inadequate access to finance.
A 2016 ADB survey showed that SMEs experience the highest rate of rejection – more than half of trade finance proposals sent to banks. Weak finances and a lack of collateral often prohibit SMEs from getting loans or financial support from banks.
Supply chain finance is an innovative way to bring financing to SMEs. It offers a relatively low risk, low cost, and efficient way of getting money to SME suppliers by leveraging the credit rating of large buyers in a supply chain.
Here’s how it works.
A supplier delivers goods to its customer. The buyer inspects the goods, accepts them, and commits to pay the supplier at a later date. The supplier typically has to wait anywhere between 30-180 days to be paid by the buyer.
With supply chain finance, the supplier can approach the financial institution to request early payment so that he or she can use the money to grow their business. The buyer then pays the financial institution at an invoiced due date.
By financing at this stage in the supply chain, the financial institution is removing SME risk. And at the same time, providing timely finance to the SME. This approach lessens risk and brings additional finances to SMEs that may not have been considered bankable in the past.
ADB enables financial institutions to grow supply chain finance programs by funding or just guaranteeing transactions for pre-approved buyers. Thanks to its Triple A (AAA) status, ADB enables financial institutions to release capital to book new transactions and can reach out to more SMEs in developing Asia.
We support transactions involving suppliers in emerging markets in Asia for all kinds of industries. The Supply Chain Finance Program is now looking to move deeper into the supply chain by providing finance to SMEs at an early stage in the supply chain cycle. And even pre-export finance, where market gaps for support to SMEs are the greatest.
Closing market gaps for SMEs is critical to the growth and job creation that reduces poverty.
ADB can’t do it alone. But working with partner banks to reduce market gaps and demonstrating to the broader market what is possible, it’s already making a positive difference.