Abstract
We study the role of technology in providing working capital finance to small and medium-sized enterprises. Our analysis discusses the variety of forms of working capital and the range of ways that it can be provided. It also examines some prominent case studies, including: Ant financial services; OnDeck; Kabbage; Biz2credit; Amazon Lending; Market Invoice and Funding Circle. Some of these firms are successfully tapping niche market serving the demands of firms too small to obtain credit from conventional banks. However, the magnitude of this type of lending remains small compared to the overall working capital finance market which continues to be bank dominated. Our main conclusion is that, while technology has the potential to significantly lower costs and improve the access of smaller firms to short-term finance, there is still a long way to go for these benefits to be fully realised and doing so requires a range of supporting policy measures.
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Notes
- 1.
Chor and Manova (2012).
- 2.
The motive for these FSB reports is monitoring the potential for destabilising ‘runs’ on non-bank institutions employing money-market funding to hold loans or other illiquid assets. This is a concern because these institutions typically are unable to access lender of last resort facilities from central banks. Their data collection is however broader, covering all non-bank investment in loans and other illiquid assets. Until October 2018 the FSB described such intermediation as ‘shadow banking’. Recognising that such alternative forms of intermediation are not necessarily a source of systemic risk, they now simply refer to non-bank intermediation.
- 3.
In FSB (2019a).
- 4.
This $14.3Â trillion is our calculation based on Graph 7 in Appendix A of FSB (2019a) (graphing ratios to GDP from the FSB survey of SME lending for advance, emerging and developing countries) and figures for nominal GDP from the IMF datamapper. https://www.imf.org/external/datamapper/NGDPD@WEO/OEMDC/ADVEC/WEOWORLD.
- 5.
This Chinese figure of $7.4Â trillion is computed in the same way as the figure in the previous footnote.
- 6.
There are various institutional differences explaining this small US figure, inter alia: an important role for credit unions in lending to small business; widespread use of credit cards for funding business debt which may not be classified as bank SME lending; borrowing from finance companies for purchases of vehicles and other equipment; and securitisation of loans issued under the government SBA guarantee programme (Federal Reserve Board 2017).
- 7.
We note that the Fianancial Stability Board reports a ratio of FinTech credit to bank SME credit of 25% for the US (FSB 2019a). They use the same sources as we use in our analysis from which we obtain an upper value of 5.6%. We are unable to make sense of their figure.
- 8.
For the source of this figure see notes to our Table 1.
- 9.
The assumptions behind this ratio of 1.5 are that the flow of loans has doubled every year for the past five years, that SME lending is evenly divided between maturities of 2, 3, 4 and 5Â years with all loans are amortised on a straight-line basis. This yields the following tabulation of flows and stocks and the 1.5 stock-flow ratio. For the US, where growth in alternative lending has been slower in recent years, similar calculation yields a stock-flow ratio of about 2.
Total loan flow
100
200
400
800
160
3200
2Â year loans flow
25
50
100
200
400
800
3Â year loans flow
25
50
100
200
400
800
4Â year loans flow
25
50
100
200
400
800
5Â year loans flow
25
50
100
200
400
800
2Â year loans stock
25
63
131
266
533
1066
3Â year loans stock
25
67
144
296
598
1198
4Â year loans stock
25
69
152
314
635
1276
5Â year loans stock
25
70
156
325
660
1328
Total loan stock
     4869
- 10.
See Gawrych (2019), a recent webpage reviewing more than a dozen leading providers.
- 11.
In Ziegler et al. (2018).
- 12.
Reported in Zhang et al. (2018).
- 13.
See Ziegler et al. (2018).
- 14.
See FSB (2019a, section 2.1, p 7).
- 15.
See Rhodes (2018).
- 16.
Of the 5.7 million businesses in the UK in 2018 only one quarter had any employees at all, down from one-third in 2002. This shift to self-employment has driven in part by response tax and administrative burden of formal employment, with employees of larger firms switching to self-employment to provide flexible service.
- 17.
We have selected these case studies to illustrate the range of different approaches to technology-supported provision of working capital finance. There are many other examples that we could have used. In Argentina, Brazil, Mexico, Mercado Crédito provides working capital loans to entrepreneurs on Mercado Libre (Claessens et al. 2018). PayPal Working Capital has provided over $2 billion loans as of 2017 since launching in 2013 in the US, UK and Australia (Dean 2017).
- 18.
We are grateful to Chusu He for her help in writing this case study.
- 19.
For discussion of the potential benefits of UK Open Banking, see The Open Data Institute and Fingleton (2019).
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Kavuri, A.S., Milne, A. (2021). Technology and Working Capital Finance. In: Rau, R., Wardrop, R., Zingales, L. (eds) The Palgrave Handbook of Technological Finance. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-65117-6_25
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