Small businesses need better access to credit to strengthen global supply chains and prevent them from being vulnerable to disruptions, according to an expert from the Asian Development Bank (ADB).
In an Asian Development Blog, ADB Private Sector Operations Department (PSOD) Trade and Supply Chain Finance Program Head Steven Beck said supply chain financing should be extended to small and medium enterprises (SMEs).
Beck said the lack of access to credit by SMEs also stifles global trade growth. While supply chain financing has been available in the past few years, more can be done to extend these to small businesses.
“Supply chains are deep, complex, global networks, with the tier-1 supplier—the supplier at the top of the chain—relying on several lower tiers to deliver a finished good to the end buyer,” Beck said.
“The lower down the chain, the more likely that tiers will be mostly comprised of SMEs. This is particularly true for larger and more geographically dispersed supply chains which are said to have ‘long tails,’ such as the construction, electronics, automobile, and apparel industries,” he added.
Beck said the idea to create supply chain finance was first initiated in the 1980s but only took off in 2015 when $330 million was made available to firms.
He said this amount of financing has grown to $1.8 trillion in 2021 representing a 38 percent growth in 2020 volumes.
Beck said 2021 posted the most substantial growth in Asia and Africa, where supply chain finance rose 43 percent and 40 percent year-on-year, respectively.
“Supply chain finance comes in a variety of forms but in essence it’s a simple concept: use the credit standing and mutual dependence of supplier inputs of a company at the top of a supply chain to enable financing for companies lower down the chain,” he said.
“In that way, suppliers to large corporate buyers can get the cash flow they need to run continuous operations and expand, rather than wait to be paid by buyers, which stunts growth and productivity,” he added.
To include more SMEs among those who are able to access credit through supply chain financing, Beck said deep-tier supply chain finance should be implemented.
However, among the challenges in implementing this is that much of global trade was still conducted in analog fashion.
Countries, Beck said, must agree on what deep-tier supply chain finance entails and define its use in legislation. This legislation, Beck said, should work across borders.
“With some effort and attention we can close that funding gap and drive transparency through supply chains to make them more resilient, green, and socially responsible; deep-tier supply chain finance offers us a promising way forward,” he said.