Gender-Smart Financing Needs in the Supply Chain
COVID has accentuated the importance of building resilient and sustainable supply chains - an aspiration which can only be achieved by diversifying and appropriately financing scalable diverse, local, women-owned, -led, and -impact businesses.
While women own only a fifth of exporting companies, accounting for less than 1% of total global procurement spend (IFC), there are a number of scalable gender-smart businesses already participating in corporate and public sector supply chains. In addition to non-financial needs - from access to technology and better market linkages, to improved internal systems and operations - they also have very specific and largely unmet financing requirements. And, in spite of local nuances and additional barriers in emerging markets, this is a universal challenge - making it a particularly powerful lever for gender finance.
There are a number of obstacles. In complex supply chains with multiple tiers, it’s particularly difficult to gather data beyond tier 2 on gender or race/ethnicity. However, emerging tech solutions like blockchain-powered Provenance have the potential to fill in the gaps. There are also other investable critical technologies that enable effective supply chains, from gender-smart, climate-smart packaging to analytics companies that deliver market pricing data.
In addition, the impact of COVID has led to purchasers consolidating suppliers, or signing bigger contracts with fewer companies - further restricting access to markets and capital for smaller, high potential businesses whose needs differ from the well-established players currently dominating corporate supply chains. The Asian Development Bank’s 2019 Trade Finance Survey found that access to trade finance was disproportionately skewed in favour of large firms, and in the past year, concentration has intensified.
Financing needs in supply chains and distribution
IFC’s Sourcing to Equal pilot in Kenya identified several needs faced by women-owned businesses, all potential areas of investment focus. Among them, the inability to meet certain procurement requirements designed for large suppliers, inadequate skills and capacity to meet industry, social, or environmental certifications, or limited access to affordable finance to bid on larger procurement contracts.
Equity is often the wrong flavour of finance for entrepreneurs in global supply chains. Other suitable financing solutions include:
purchase order financing
inventory financing - which could be in the form of straight short term debt, or more creatively in the form of revenue-based financing, royalty-based financing, or flexible debt tied to seasonality
growth capital (equity) to expand operations, talent, marketing and business development
Gender-smart supply chain finance
1863 Fund: Designed for scalable businesses in global supply chains, and structured as 60% revenue-based financing and 40% equity. 1863 Ventures also runs the Pipeline Project, which actively recruits and retains a pipeline of investment-ready gender-smart businesses who can scale through partnership and supply chain opportunities.
Supply Change Capital - A women of colour-led fund targeting historically excluded founders to transform global food supply chains, including investing in technology to make supply chains more robust and transparent
Advance Global Capital - Invoice discounting with an intentional gender lens. Advance has financed 14,000 SMEs to date, almost 40% of which are women-led.
In some instances entrepreneurs might not know what kind of financing they need, and this is where accelerators like 1863’s Acceler8 step in. Founder Melissa Bradley has spent years working with women and people of colour-owned businesses in corporate and public sector supply chains, and knows that capital needs range from equity to flexible structures tied to how they really do business. In response, the 1863 Fund is going out the door as 60% revenue-based financing and 40% equity. “Supply chain opportunities often require fast and flexible capital to support uneven cash flow at the onset due to ramp-up costs’, says Bradley. “This is not ideal for venture capital. Therefore we need to provide diverse funding sources.”
Defining ‘gender-smart’ suppliers and distributors
As corporates or public sector actors decide to increase supplier diversity, the first stop has tended to be setting targets around purchasing from women-owned businesses (and is increasingly moving into racial/ethnic and other forms of diversity). But the commonly accepted definition of ‘women-owned’ in the United States (not Europe) is 51% ownership. If an entrepreneur takes on significant outside equity capital, she might no longer own 51% - meaning that, on paper, she is no longer running a woman-owned business and could miss out on lucrative contracts. Similarly, a male-led business that is employing 2,000 women in good jobs arguably has greater impact than a woman-owned business employing far fewer men and women in low quality jobs. Or, especially in emerging markets, many businesses are family/male-owned on paper, but women-led in practise, for a variety of social, cultural and legal reasons. According to the World Bank’s Women, Business and the Law database, 115 out of 190 economies have at least one gender-based legal restriction on women’s employment and entrepreneurship. Procurers are missing accurate data about how much they're really buying from gender-smart businesses, and there’s a strong case for looking beyond existing definitions and ensuring local context-driven indicators along the investment process.
What corporates and public sector actors often do is have a target list of women-owned businesses they’d like to work with but can’t, or with whom they are doing a small amount of business that could expand, because those businesses are undercapitalised- creating a prospective pipeline for external investors. They can also testify to the reliability and quality of product from the suppliers already in their value chain, and commit to a certain spend so long as those businesses are adequately financed to deliver.
What’s Needed
Many global corporates now have diverse supplier policies in place; the next step is an understanding of the opportunity to invest in and build the capacity of these suppliers once they are in the system,or on the verge of entering the system, to give them the best chance of success.
There are several factors of risk consideration for potential supply chain financing solutions, including currency risk (solutions would ideally be local currency), and supply chain disruption from global events such as pandemics and ecological crises that impact logistics. Solid contracts with corporates or government decrease investment risk for everyone, and each actor in the ecosystem has something to gain from financing gender-smart businesses in the supply chain. Financial institutions want good businesses with solid contracts; DFIs often invest in partnership with a financial institution or with a corporate, and look for development and gender impact as well as financial return, impact investors with a focus on women’s economic empowerment want to see more women-led or women-impact businesses thrive, and corporates want to see sustainable, reliable, solid companies to work with and grow with, both to reduce reliance on too few suppliers and increase resilience in their supply chains - as well as for a diversity agenda.
What's missing right now is more and better intermediation between different actors in the ecosystem, all holding different pieces of the puzzle, but not working together to share best practices and scale solutions. What are the right structures and partnerships that will scale the deployment of capital to gender-smart suppliers? How can we make the case and build the evidence base for addressing the working capital gap? Solutions should start with the needs of all stakeholders -- the entrepreneurs, the intermediaries, and the investors and funders. And the type of capital made available needs to respond to those needs across sectors, specific contextual factors, geographies and markets.
What’s Next
Many traditional investors, who invest in either equity or debt vehicles, might not know what to make of more innovative approaches such as the 1863 Fund and others. The GenderSmart community is considering launching a working group to explore innovative finance structures and partnerships in this space, and make it clear that any solutions need the voices of the entrepreneurs, the intermediaries, the corporates, and the funders - from foundations to development finance - that could conceivably provide some risk capital and debt capital together. Our goal is to get to more resilient gender-smart supply chains - whether in healthcare, energy, or any other sector - through solving for the gender-specific issues and opportunities, and differentiated needs of product and service businesses through a gender lens (starting with needs of entrepreneurs, to get to a better result.)Solutions need to be repeatable, scalable, and clear for this to have the kind of impact we need.
Ultimately, we need to get a lot more women-owned, women-led, women impact businesses financed in the right way with the right kind of capital for their needs. This is a path to the social outcomes as well as the financial outcomes that we're aiming for. As the impetus to rebuild more resilient supply chains grows, financing diverse and scalable gender-smart businesses could have a transformative effect on the entire system. And we won’t get there without a diverse and representative constellation of actors in the room.
If you’re an investor interested in collaboratively identifying investment opportunities for scalable, women-impact businesses in supply chains please get in touch.