Alleviating Financing Constraints of SMEs through Supply Chain

Small and medium-sized enterprises play a crucial role in sustaining economic development in both developed economies and developing economies, however, many of them suffer from chronic and structural difficulties in accessing external financing. In this paper, we develop a theoretical framework to illustrate how information structures work in the strategic interactions between banks and firms in a supply chain, and why the transaction information in a supply chain may serve to reduce information asymmetry and improve SMEs' access to external financing. We find that under incomplete information, the transactions between SMEs and suppliers can serve as signals for banks, which may help banks access the private information of SMEs, thus reducing information asymmetry between them. To maximize profit, banks should dynamically adjust both their interest rate policies and risk management strategies when providing financing services to SMEs, according to the structure of the financial market. The improvement of the external financial environment for SMEs may benefit the entire supply chain, thus facilitating its sustainable development and the growth of SMEs. Our framework sheds light on how SMEs in a supply chain may enhance their survivability and facilitate their development through appropriate strategies to improve business performances and manage credit risks.