Collaborative Value Chain Financing: The Case of Working Capital Management for SMEs

The purpose of this paper is to propose a collaborative value chain financing (CVCF) approach whereby the manufacturer/supplier, bank, and SME/buyer collaborate for their mutual benefit. Under the CVCF approach, all parties involved in the transaction engage in risk-taking. The supplier provides the necessary materials to the SME for sale or further value addition while the bank evaluates and monitors credit risk. The trilateral risk-sharing aids in better working capital management, higher turnover for suppliers, and lower default risk for the bank. Currently, a lack of trust between those involved in the value chain results in high financing costs to SMEs due to expected default risk and lower turnover for suppliers in the value chain. We present a CVCF model with a zero percent financing/mark-up rate based on the practice of a steel company listed on the Saudi Arabian stock exchange.