By Christoph Gugelmann, Founder & CEO of Tradeteq
As the challenge of addressing the MSME financing gap continues, improving access to private debt and working capital through technology may offer a solution in this evolving landscape. According to the International Finance Corporation (IFC), globally, 40% or 65 million MSMEs encounter unmet financing amounting to $5.2 trillion, highlighting the need for innovation and change.
At the core of every MSME lies a central idea around which a business is formed. Recent technological developments are increasing access to funding that will help these fundamental concepts from being under resourced. To draw interest from institutional investors, traditionally illiquid financial assets can now be more easily securitised in new securitisation-as-a-service processes, with automation reducing the operational costs for such approaches. As well as this, tech-driven lending is also becoming important for funding, as time-consuming processes, such as verification, have become streamlined through automation.
These developments, in conjunction with specialised marketplaces that can effectively connect sellers of MSME finance with potential investors, can begin to reshape the world into a place where every great idea is funded.
Funding issues in MSME space
The importance of securing funding for MSMEs cannot be overstated – on a global scale some estimates suggest MSMEs make up over 90% of all businesses, contributing to 50% of GDP. In the developing world they represent around 45% of employment, and around 33% of GDP, not taking into account informal entities.
There are numerous documented reasons for the financing gap, with some attributed to financiers and others linked to the inherent diversity among MSMEs, whose needs lack homogeneity due to their varied nature.
The increasing digitisation of finance will contribute to narrowing the funding gap by offering access to alternative sources of funding, as well as improving access to traditional sources through innovative platforms and automation.
Embedded lending
Tech-driven lending is another approach becoming essential in the meeting the needs of modern SMEs. By integrating lending procedures with modern data networks, platforms can access up-to-date financial data and eliminate the time-consuming process of verifying statements and securing funding. The benefits are recognised by the industry, with a recent studying finding 86% of trade finance professionals believe financing will move away from banks and alternative lenders and be integrated into business-to-business platforms. One example would be YouLend’s collaboration with Plaid which offers an embedded financing platform that streamlines the funding process, being 3 times faster than traditional methods.
As this sector continues to grow, integrating financing directly into the trade transaction process and systems will make transactions more efficient, eliminating separate engagements with banks and lenders. In doing so, credit and financing can be seamlessly offered to buyers, ensuring that MSMEs underpinned by great ideas can secure access to funding.
Tech-driven securitisation
As new technologies continue to reshape the landscape of private debt and lending, MSME funding is also undergoing a transformation. For example, Tradeteq’s platform facilitates the connection between asset sellers and institutional investors, providing users with unprecedented transparency. The comprehensive platform provides a complete market overview, displaying all available offers of MSME financing instruments from sellers to investors, along with transaction details and originators. This approach enables both parties to conducts thorough assessments and make more informed decisions.
In addition, Tradeteq’s advanced workflow automation, encompassing analytics, a rules engine, reconciliation, and reporting, illustrates the increasing technological aspect of securitisation. The reporting tool generates automated reports customised for investors, covering regulatory compliance, performance metrics, and NAV calculations. This offers asset sellers, such as banks, factoring companies, and alternative lending platforms, immediate insights into instrument eligibility and streamlined pipeline management.
Crucially for MSME funding, Tradeteq’s platform repackages financing instruments into tradable securities through their securitisation-as-a-Service offering. In doing so, the asset classes are also assigned a CUSIP or ISIN number, making them accessible to a wider group of investors, and therefore, to MSMEs.
The convergence of technological advancements, innovative financing platforms, and increased transparency in the MSME funding landscape offers promising solutions to address the persistent challenges of financing gaps. With the digitisation of finance, coupled with embedded lending and tech-driven securitisation, every great idea has the potential to be funded, paving the way for greater economic empowerment and growth in the MSME sector.
