AMTC

Financing for Smaller Firms

Financing for Smaller Firms

Many of the ICC recommendations involve updating antiquated processes. Trade finance transactions are unnecessarily complex with, as the report shows clearly, complicated shuffling of mostly paper documentation. Firms attempting to work in multiple markets also face regulatory disconnects with unclear processes. To add to the mix, there are three primary product categories for trade financing with different demands and requirements for each: documentary business, supplier-side financing, and buyer-led financing. While unraveling these complex processes would be helpful, with significant gains available, it does not go far enough in providing basic financing to the millions of MSMEs that are currently underserved by the market. What is needed is a new approach that leverages a range of new technologies to reconceptualize the way that small businesses are evaluated and pull in new financing providers. By starting with an MSME-first approach, it is possible to reimagine the provision of capital and start to unlock and unleash the potential trapped inside small firms. The ICC report (full disclaimer—I was part of the conceptual team to help develop recommendations) begins to sketch out some of the conditions for a new ecosystem to support financing for MSMEs in the near term.

Supporting the Small in a Pandemic

Supporting the Small in a Pandemic

The impact of COVID-19 continues to threaten the global economy, with the effects keenly felt in communities, businesses and homes. The challenges are disproportionately borne by smaller firms, as our survey of AMTC firms in Asia this week clearly indicates. Close to 50% of businesses have only a month or less than a month of cash reserves. Nearly 30% expect to have to lay-off more than 50% of workers. These figures are unlikely to be different from the experiences of smaller firms around the world. With both supply and demand crashing at the same time, companies are in a struggle for survival. The World Trade Organization (WTO) has just released an updated global trade forecast and the numbers are equally grim. Trade is expected to fall by 13-32% this year. This is the steepest contraction since 2008, with the strong possibility that COVID-19 results in worse outcomes than the Great Recession. But perhaps the most serious damage of collapsing trade flows to smaller firms can be found in the disruption to services.  Many small companies are engaged in services.  Some, of course, are obviously affected, such as restaurants, travel and tour companies. Others may be less clearly connected to global trade flows. For every box that is now stuck somewhere or not being filled in the first place, services can be 30-50% of the total value of the goods inside. These services can range from logistics and delivery; cleaning and maintenance of equipment; legal and HR services; graphic design and marketing; and the like. Many of the services of even giant multinationals are supplied by smaller firms. Services are affected not only by slumping demand for goods and their embedded services, but also by direct challenges like the inability of people to meet or travel. 

Data is the New Avocado?

Data is the New Avocado?

But as Søndergaard suggested, data is not like oil.  For one thing, oil doesn’t go anywhere.  It sits in the ground until it is brought up and used.  It can be used all at once or just some at a time while the rest remains waiting. Oil can be stored forever (or at least for a very long time) without significant problems.  Data, by contrast, is like an avocado.  It has a clearly defined shelf-life.  Data collected and used too early is pointless.  Data harvested too late is often of no use at all. Søndergaard’s company runs what is billed as the world’s largest online wine marketplace.  In his business, it does no good at all to rate a wine that does not exist as all the stock is gone or to recommend a wine to a customer that has already purchased something to drink for dinner.  What matters is knowing what is needed in the moment when the information is “ripe.”

Helping Smaller Firms Thrive and Grow with Trade Policies

Helping Smaller Firms Thrive and Grow with Trade Policies

Policymakers should not assume that MSME firms will always stay MSMEs.  Yet frameworks in many economies seem designed to trap smaller firms into a set category and entrench them into a “small” mindset. There will always be MSME firms.  They form the backbone of most economies, as much as 97 percent of companies across Asia, employing the overwhelming share of workers.  The goal of MSME policies should be enabling the current crop of smaller firms to grow, allowing firms in the “medium” category to reach large scale in relatively short order, while encouraging new entrants to the MSME ranks. Trade policy is one tool to help MSMEs grow.  In most economies, the domestic market alone can be too small or even too competitive for success.  E-commerce and digital technology, however, have allowed MSMEs to reach regional or global audiences. 

Flipping the E-Commerce Cart

E-commerce and digital trade are certainly upending retail patterns globally.  It is important to note that these changes are not a random act handed down from the heavens.  Instead, these changes flow from millions or even billions of companies and consumers increasingly demanding goods and services to be delivered digitally. The plan in India is to stop firms like Flipkart from selling goods in the market.  This—it must be assumed—will help keep small, largely inefficient shops in business for longer and keep consumers spending more on products than they clearly would like.  After all, if consumers did not want e-commerce goods, they would not be buying off Flipkart in the first place and would not be driving demand for more goods. Customers have clearly expressed their preferences.  They are unlikely to completely abandon the corner shop, but their purchases are becoming increasingly diversified and digital orders play a key role. While India represents the more extreme end of regulations on e-commerce, other governments are starting to take actions to increasingly constrain the actions of players.  Most are still aimed at large firms with limited understanding of the collateral damage to small firms and consumers.