Alexandra Donnelly of C2FO: Fintech Professional Comments on the Importance of Working Capital to MSMEs

We recently spoke with Alexandra Donnelly, COO for the Americas at C2FO, a US-based global Fintech whose mission is to ensure all businesses have the capital needed to thrive.

C2FO’s platform was recently cited in a policy paper presented at the G20 conference as a way to encourage economic growth and fund sustainability efforts in developing countries.

According to C2FO, making working capital more accessible is key because it can give smaller companies the resources necessary to keep growing and creating new jobs — which could ultimately have a critical impact on the world’s economy.

Our conversation with Alexanda is shared below.

Crowdfund Insider: How does business growth in developing countries impact the global economy, and why is this a global problem today?

Alexandra Donnelly: Experts say the world needs to create significantly more jobs over the next few years. The World Bank’s working estimate is that, by 2030, we’ll need an additional 600 million jobs to employ the global workforce and support a decent standard of living, sustainability and other positive effects. The need is especially urgent in developing economies, where 84% of the world’s working-age population lives.

The best way to raise employment is to encourage business growth, especially among smaller companies, which create 7 out of 10 formal jobs in emerging markets.

Or perhaps an enterprise needs to make progress on environmental sustainability. Because they’re integral to so many economies, the world’s micro, small and medium enterprises (MSMEs) have to be partners in this work, but it can be difficult or impossible for them to invest in solar, renewables and other green technologies if they’re perpetually cash-strapped.

Unfortunately, it takes money — working capital — to fund that kind of investment and support the creation of new jobs. And our traditional financing system isn’t structured to make that a reality.

Crowdfund Insider: What makes working capital so important to MSMEs, and how does accessibility impact a business’s growth potential?

Alexandra Donnelly: Working capital is the money that a business has available to fund operations, so if an MSME doesn’t have enough cash — and if it doesn’t have a way of accessing more funding — then the business’s existence may be at risk. Without capital, it can’t meet payroll. It can’t purchase new inventory and materials. It literally can’t keep the lights on.

A lack of ready capital can also force businesses to make suboptimal choices and pass up opportunities for growth. They might refuse larger orders from their customers because they can’t afford to hire more people or pay for more materials, even though, ultimately, those larger orders would have allowed the businesses to keep growing. They don’t grow, so they remain cash-strapped.

Unfortunately, it can be very difficult for smaller businesses to find working capital, especially in developing countries. About 40% of MSMEs in these nations need — but can’t access — $5.2 trillion in working capital every year, the International Finance Corporation reports.

According to the World Bank, 41% of small and medium enterprises (SMEs) in the least developed countries said accessing finance was a “major constraint” on their development.

Conditions weren’t much better in middle-income countries, where 30% of SMEs listed funding access as a problem, the World Bank found. In high-income nations, about 15% of SMEs — or nearly 1 in 6 — complained of access issues.

Crowdfund Insider: Supply chain finance (SCF) isn’t a new concept. Why does the current system not support up-and-coming businesses with the funding they need?

Alexandra Donnelly: If you’re talking specifically about supply chain finance, the corporate-run programs historically did not invite most SMEs to participate. It has typically been an offering available only to larger suppliers. Because the corporate-run programs had a limited amount of bandwidth, they targeted their most valuable suppliers, which tended to be larger. The good news is that a new generation of platforms, like C2FO’s, is democratizing access to SCF by automating processes and expanding funding sources, so that suppliers of all sizes can tap into these programs.

But SCF is only one part of the problem. If you pull back and take a look at the bigger picture, today’s financial system simply wasn’t designed to serve small businesses, even ones that are growing and have a proven track record. Many lenders’ standards are just too strict. They’ll ask a 1- or 2-year-old company for documentation going back several years.

Crowdfund Insider: What role, if any, does the traditional financial system have in solving this problem?

Alexandra Donnelly: Today’s bankers, financiers and funders are essential. They’re as aware as anyone of the challenges facing smaller businesses, and they want to help those companies find the funding they require to succeed. These professionals just need a new system, a new framework, for connecting to the MSMEs that need their help.

We regularly partner with traditional players on working capital solutions for smaller companies. Traditional financial institutions, both banks and non-banks, provide the raw funding, while our solution helps qualify companies and deliver funds to their accounts. And because our solution is designed for multiple funding sources, it’s ultimately more flexible.

We end up complementing each other quite nicely. Which is good, because this problem is so big that we need everyone’s best efforts if we’re going to resolve it.

Crowdfund Insider: C2FO was mentioned as a potential model for solving the working capital problem. How does the C2FO Early Pay platform solve a problem that’s been around for decades?

Alexandra Donnelly: Early Pay is just one of C2FO’s working capital solutions, but it’s been at the heart of what we do since the company launched back in 2008.

It’s all based on a simple idea: Suppliers, which tend to be smaller businesses, offer to give their buyers a customized discount in exchange for being paid early — sometimes months early. C2FO uses patented Name Your Rate® technology that allows even the smallest businesses to determine a discount rate that works for their business.

The aggregate of the discount offers from suppliers usually yields more than what a buyer could make by investing its cash in some other vehicle. Early payment puts money into small businesses’ accounts faster, so they have the cash flow to meet their operational expenses and, in many cases, invest in new growth, too.

Those early payments — that’s all money the suppliers would have been paid eventually. We just help deliver it to them faster. Essentially, we’re helping suppliers improve their cash flow and receive payment early, which improves their supply of working capital without taking on new debt.

As we’ve created Early Pay and other products, we designed them to work for suppliers first, and that’s been a very effective way to build financial products. What’s good for suppliers tends to be good for everyone. We’ve been able to promote inclusiveness, flexibility and choice in a way that most solutions don’t.

We’re starting to see national governments adopt our approach, which is especially exciting. India, for example, has set up a system to help MSMEs finance or discount their invoices, so those businesses can continue to thrive and, in doing so, benefit their people by creating jobs. If more policymakers come around to this way of thinking, it’s going to have exponentially greater benefits for people around the world.

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