TradeBacker App for MSME Factor Finance

MSMEs are 90% of worldwide businesses, providing more than 50% of worldwide employment.  Yet, access to finance is the second biggest obstacle to their growth (World Bank).  Over 57,000 credit unions operate in 105 countries, serving 217 million members worldwide (WOCCU).  In developing economies, credit unions provide retail credit to low-income households, micro enterprises, and small farmers, all lacking access to formal banking systems.

Emerging market micro-enterprises usually self-fund operations, or use money lenders and savings clubs vs. credit unions because informal finance is unstructured, relationship-based, and has low transaction costs (ILO).

TradeBacker bridges the gap by enabling credit unions to provide working capital through factoring MSME receivables, eliminating credit union membership requirements, while creating fair and reliable informal relationships with MSME, laying foundations for formalization.  TradeBacker creates new revenue streams for credit units and provides MSMEs with working capital to grow and provide jobs.

More than half of MSMEs worldwide don’t have access to formal credit (World Bank). Lack of access to financing limits growth, job creation, and global economic development. Credit access in emerging economies is particularly low because banks serve corporate clients almost exclusively to minimize risk.  Further, the majority of enterprises in developing economies operate in the informal sector, resulting in a reliance on informal finance (money lenders, SOUSOUs).  MSMEs themselves tend to engage in trading, small-scale manufacturing and small-holder farming.  They need working capital for inventory and inputs such as raw materials and supplies.

Specifically, traders buy and sell goods for a margin, so need to turn over inventory quickly.  Agriculturists operate seasonally, so need to pay fixed costs while awaiting harvests.  Manufacturers need to secure inputs for their processed or assembled goods for sale.  Given their un-banked status, emerging marketing MSMEs operate, grow and employ persons based only on their capacity to self-fund operations or secure often usurious and insufficient amounts of capital informal financing.  The MSME financing cycle—covering inputs until sales are realized—usually runs 12 months. It is this short-term working capital cycle that TradeBacker will address in frontier and emerging markets.

The TradeBacker app would help credit unions engage in factoring--purchasing sales receipts/promises to pay from MSMEs at a discount, enabling credit unions to earn revenue on the spread between the amount paid for receivables (to MSMEs) and the funds collected for the receivables (from vendors).  

TradeBacker would represent new non-interest income for credit unions, which would incentivize credit unions to utilize the product.  MSMEs would operationalize management of receivables through the app, for example, which would contain the contracts/legal commitments for payment.  Vendors would also use the app passively to sign agreements that would convert their orders to payables.  TradeBacker would also enable the legal transfer of MSMEs' receivables to credit unions and give the credit unions the legal right to collect payments.  Finally, the app will collect the funds from vendors using P2P payments, enabling the credit unions to track and receive reports on receivables payments and revenue earned on the transactions.

TradeBacker makes money through transaction fees.

The TradeBacker App targets MSMEs and credit unions in developing economies.  MSMEs tend to be informal/small-scale operations. They do not have formal banking relationships.  

While credit unions do serve this market, they require membership, are not conveniently located where MSMEs operate (rural areas, farms).  Credit unions are also run by members who do not have deep management and technology skills.  So, services tend to be savings accounts and collateralized loans.

There is considerable data about MSMEs from local governments, NGOs, and international development organizations.  Similarly, organizations such as the World Council of Credit Unions and others hold extensive public information about credit unions' needs. This data has been/continues to be reviewed.

The TradeBacker app would expedite and provide convenient access to working capital through formal financial services providers, avoiding the potentially usurious rates and fees of money lenders.  And, because the service is not location dependent, credit unions can benefit from a new base of prospective members as well as a new stream of revenue from factor financing. 

TradeBacker will enable MSMEs in frontier and emerging economies to grow and create jobs by providing an app that facilitates access to trade finance/working capital through local microfinance institutions (credit unions).   TradeBacker, unlike other fintech solutions, encourages emerging economy MSMEs to formalize operations and participate in the formal financial sector by providing benefits to doing so—access to capital without committing to credit union membership and without taking loans.  Ultimately, MSMEs will establish financial services relationships with credit unions that can, eventually, enable access to public and other resources for increased growth and job creation.  

While many fintech solutions focus on the un-banked, they tend to focus on consumers and their ability to make purchases or transfer funds on a P2P basis. TradeBacker focuses on businesses, and it includes micro-finance institutions. It provides a new source of income for understaffed credit unions with limited management and technology experience, while also providing an invaluable services to MSMEs in developing economies--access to capital and the ability to grow their businesses and provide jobs.

The solution will rely on existing contract approval applications, person-to-person payments, as well as an embedded financial reporting tool.

All of the technologies referenced are already on the market.

Simply, we will increase access to working capital for MSMEs, increase revenue for credit unions, ultimately providing more jobs.

There are 40 million persons in the Caribbean

Develop a prototype.

None.