Why SME Finance Remains Unsolved

Why Anchor-Based Finance Is a Critical Solution

By Ali Ansari

SMEs are essential drivers of employment, innovation, and supply-chain resilience. Yet the global SME financing gap remains persistently large. The World Bank estimates this gap at $5.2 trillion, affecting 65 million firms, with 40 percent of formal MSMEs in developing markets facing unmet credit needs.

The problem is not a shortage of capital. Instead, financial institutions struggle to underwrite and monitor SME credit efficiently, safely, and at scale.

Despite decades of effort, three structural challenges continue to constrain lending. Understanding these constraints clarifies why anchor-based financing models are emerging as one of the most viable and commercially sustainable working-capital solutions.

---

The Three Structural Barriers to SME Finance

1. Weak SME Systems Drive Operational Fraud and Information-Risk Costs

The central challenge in SME lending is information integrity. Many SMEs operate with limited controls, informal processes, and concentrated authority, exposing lenders to operational-fraud risks such as double financing, manipulated documents, and undisclosed liabilities.

To compensate, lenders rely on manual verification, site visits, audits, and physical documentation checks. Research from the IFC shows that the cost of serving SMEs can be 5–7 times higher per dollar lent than for large corporates. These verification methods are costly, inconsistent, and unscalable.

This forces lenders to impose heavy documentation and collateral requirements. For SMEs the process appears burdensome; for lenders it is unavoidable.

2. Onboarding and Compliance Costs Do Not Scale Down

KYC, AML, and beneficial-ownership checks apply equally to SMEs and large corporates. As a result, onboarding an SME costs nearly the same as onboarding a corporate client, even though the SME generates far less revenue. Without the ability to onboard and manage SMEs at high volume with minimal incremental effort, traditional lenders face an uneconomic cost-to-serve profile.

3. The Absence of Scalable Portfolio-Based Underwriting

Banks generally assess SMEs on a standalone basis, requiring deep analysis of each firm’s financials, risk position, and collateral. This individualized approach limits diversification, scale, and cost efficiency, as each SME requires the same rigorous treatment as a large corporate while producing only a fraction of the economic return.

Consequently, SME finance remains trapped in high-cost, low-volume models that cannot close the global financing gap.

---

Why Anchor-Based Finance Works

Anchor-based financing shifts reliance from SME systems to the stronger, auditable systems of large corporates. Instead of underwriting SMEs in isolation, lenders underwrite the broader business ecosystem. This structural shift directly addresses the three core barriers.

1. SME Dependence on Anchors Becomes a Credit Strength

Many SMEs rely on a small number of large customers; a factor traditionally viewed as concentration risk. In anchor-based financing, this dependence becomes an asset.

When an SME’s cash flow is tied to a large, well-governed corporate, lenders gain:

• Predictable and validated cash receipts
• System-generated POs, GRNs, and invoices
• Stable, auditable payment cycles
• The ability to automate repayment from anchor disbursements

Large corporates already conduct rigorous commercial validation before granting credit terms to SMEs. Lenders can leverage this embedded assessment, materially reducing diligence effort and information asymmetry.

2. Anchor Systems Reduce Fraud Risk and Enable Scalable Cash-Flow Control

Anchors typically operate enterprise-grade systems with governed workflows, digitized documentation, and traceable transactions. These systems provide lenders with reliable information on supplier authenticity, business volumes, and historical performance.

Key benefits include:

• Verified transaction documents that eliminate document-fraud risk
• Standardized validation logic applied across hundreds of SMEs
• AML comfort derived from proven commercial flows between anchor and SME
• Reliable mapping of the SME’s bank account used for anchor-related transactions

This infrastructure enables scale without proportionate increases in operational cost or risk exposure.

3. Portfolio-Level Underwriting Unlocks Scale and Economics

By underwriting entire SME ecosystems through anchor relationships, lenders can build diversified, high-volume portfolios with consistent onboarding, automated monitoring, and predictable repayment structures.

Instead of evaluating each SME individually, lenders assess aggregated ecosystem characteristics such as:

• Transaction volume and velocity
• Payment-cycle behaviour
• Concentration metrics
• Historical default or dispute rates

This approach introduces genuine portfolio-level economics, something conventional SME lending cannot achieve.

---

Scope Limitations and Complementary Models

Anchor-based finance works best where commercial activity between anchor and SME is frequent, observable, and well-documented. It requires sufficient transaction history, predictable order and payment cycles, and established trading behaviour.

It is not suited for:

• Early-stage SMEs lacking transactional history
• SME needs unrelated to anchor-linked cash flows (e.g., capex, expansion, diversification)
• SMEs not yet validated or not transacting at scale with the anchor

Anchor-based finance covers working capital in transaction-intensive B2B supply chains. Other needs require different models:

• Expansion and diversification: Requires evaluation of strategy, business sustainability, and long-term cash flow, often via term-lending or structured solutions.
• Early-stage SMEs and start-ups: Depend more on founder capability, business-model viability, and equity or quasi-equity structures.
• Digitally active SMEs: Can be served through real-time transaction-data lending based on e-commerce, card-payment, or digital-banking flows.

---

Implementation Requirements for Success

Minimize Anchor Operational Burden

Financing programs must integrate seamlessly into the anchor’s natural processes: procurement, sales, vendor management, logistics workflows, and payment cycles. The solution should feel native, not additive.

Deliver Strategic and Financial Value to Anchors

Anchors must see tangible benefits, such as:

• Increased sales or improved supply reliability
• Lower cost of goods through improved SME liquidity
• Reduced operational disruption
• Achievement of ESG objectives
• Revenue participation or cost savings

Without anchor-side incentives, adoption stalls.

---

Conclusion: A Critical Component of SME Finance

Anchor-based SME finance effectively addresses the three constraints that have historically prevented scalable working-capital lending: unreliable SME systems, high compliance and onboarding costs, and the absence of scalable portfolio underwriting.

By leveraging the systems and governance of large corporates, anchor-client models provide a commercially viable foundation for expanding SME finance across transaction-intensive supply chains at meaningful scale.