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Enabling small businesses to reach their potential by increasing their access to finance

A few weeks ago, we hosted a panel discussion during the 2022 Financial Inclusion Week on enabling small businesses to reach their potential by increasing their access to finance. The panel featured four organizations from different parts of the world working on digital and data-first solutions that break down barriers to accessing finance for micro and small businesses. They shared insights into their approaches to alternative credit scoring, open data, and embedded finance. They included three winners of Strive Community’s inaugural Innovation FundBoost Technology, Boost Capital, Open Contracting Partnership — and Dinie. In this post, we share some key takeaways from that discussion on increasing access to finance for micro- and small businesses. We also invite you to watch our panel discussion in full below.

1. Meet small businesses where they are, and deliver credit at point of need.

Dinie is a pioneer in embedded lending, enabling digital platforms to offer business-to-business credit and payment products in Latin America. Suzy Ferreira, Dinie’s founder and CEO, described the impact of embedding a credit offering into the digital channels that small businesses already use, such as e-commerce platforms. This approach, she said, enables providers to optimize the design and delivery of their credit products by offering them at a point of need based on the data generated from the platforms.

[Small businesses] need to sell their products in the marketplace, so we ask ourselves, how can we build a product that will help with that sale? How can we optimize the way they sell? How can we make it more digital? How can we make it faster, how can we enable them to pay in installments, increase affordability, potentially reduce costs for them or give them some savings?”Suzy Ferreira, founder and CEO of Dinie

For Boost Nigeria — a platform digitizing the retail space — carefully segmenting and focusing on the nuanced financial needs of women-owned small businesses has proven to be an efficient approach. Koye Oyeyinka, co-founder and chief commercial officer, said that this has helped Boost Nigeria match the right digital products and services to a specific segment at the appropriate time. For example, he explained that some women-owned small businesses might be at a stage where they don’t need stock credit. Instead, reminders that they are out of stock are more useful to them.

2. Account for informality in product design.

“You really have to design your products in a way that incorporates the informality of many small businesses. It’s our role as the technology creator to bridge the divide between how the entrepreneur operates and what the bank needs.” — Lucinda Revell, co-founder of Boost Capital

Ninety percent of small businesses across the world still operate informally. Lucinda Revell, co-founder of Boost Capital — a platform enabling loans and financial services through smartphones in Cambodia — spoke about how digital credit providers should not expect small businesses to keep perfect accounting or be able to provide a balance sheet. To better serve informal small businesses, Boost Capital has recreated a microfinance loan application in a chatbot that asks small businesses a wide range of questions about their businesses. This method allows Boost Capital to act as an intermediary between small businesses and formal financial institutions, who can use the data from the chatbot to establish whether or not they qualify for a loan.

In Nigeria, Oyeyinka shared how Boost Technology has tailored their digital credit solution for women-led small businesses. Many women in Nigeria are involved in traditional saving and lending circles, where social interaction and trust play an important role. To mimic this experience, rather than develop a fully digital offering, Boost uses a tech-and-touch approach. Alongside their digital channel, Boost employs a field team from the same communities as their target audience to build trust. The women, Oyeyinka said, have a lot more confidence trying out their digital product because it is introduced by people they already trust. This strategy has also resulted in improved financial performance with a 96% repayment rate among their women-led small business customers.

3. Follow the data and empower MSEs to use it.

Many small businesses use digital tools to manage their day-to-day activities, generating a lot of data that providers can use. Ferreira shared how embedding their credit offering into marketplace platforms that small businesses already use offers Dinie access to relevant credit risk data, such as revenue and customer ratings. Using this data, Ferreira said, helps Dinie predict small business performance and adjust their credit products to the small business sales cycles.

Data also plays an important role in public procurement markets. Open Contracting Partnership’s Director for Data and Engagement Lindsey Marchessault explained how participating in public procurement markets is challenging for small businesses due to access to finance barriers. Small businesses often cannot afford to take on a government contract, usually because governments are notoriously late payers. If a small business fulfills a large contract and does not receive payment for more than six months, it could put them out of business. This presents a significant barrier for small businesses as they struggle to access the credit that could alleviate this risk. To address these barriers, Open Contracting Partnership has developed software that uses open data to seamlessly connect small businesses that have been awarded contracts to financial institutions that can offer them credit.

To empower small businesses to use the data generated by providers and various actors in the supply chain, Boost Nigeria has partnered with Strive Community to develop and test a new service that combines data analysis, behavioral science, and conversational commerce to empower small businesses with insights to increase their digital confidence and business resilience. Dinie also provides small businesses with access to their credit data through a dashboard so they can keep track of their borrowing.

4. Donors can support digital providers to enable small businesses reach their potential.

Our panelists also shared their challenges with scaling and reaching more small businesses. They referenced the high costs of launching and testing new products, navigating regulatory challenges, and taking on a huge burden of risk by giving unsecured loans. They shared their thoughts on how donors can address some of these challenges:

Fund product testing.

Ferreira shared that startups face huge upfront costs when bringing new products and solutions to market, especially for small business segments where there is very little data available. She added that there is a lot of product testing that takes place, especially in the first two to three years. She suggested that donors could help digital providers offer direct investments to enable providers to build test portfolios.

Offer credit-risk sharing.

Providers often have to commit their own equity to offer unsecured loans, which comes at a high cost. Revell suggested that donors could offer guarantorships for lenders and share some of the credit-risk burden. This would ensure that a lack of collateral doesn’t inhibit the growth of small businesses that seek credit. She added that this would unlock funding from banks, which would be more confident in offering loans. Boost Capital, with funding from USAID, is currently trialing uncollateralized loans for 350 MSEs in Cambodia.

Raise awareness and advocate.

With their influential roles, Marchessault from Open Contracting Partnership said donors can help raise awareness of the role of public procurement as a potentially transformational instrument to empower small businesses. She added that donors can call attention to reforms to make procurement processes more fair and transparent. Donors can also use their convening power to support innovative collaboration by bringing ideas, people and institutions together.

Strive Community thanks our panelists for their insightful conversation during this session. For those who weren’t able to attend live, we encourage you to watch the conversation below. We also invite you to explore our insights pages to find out what Strive Community is learning about promoting the meaningful use of relevant financial services.

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Grace Natabaalo

Grace Natabaalo

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Grace is Caribou Digital’s research lead. She conducts research, creates content and collates insights for various projects.