Social Trade Credit is a new solution that supply counter cyclical credit for SMEs. SMEs have recently gone through a difficult period and have been weakened significantly. The barriers in the current financial system often do not allow credit for (small) businesses, or the costs of credit expenses though interest is so high that is threatens the sustainability of many SMEs. Any lack of credit reinforces the downward trend of the economic cycle. In contradiction to this trend, the need for credit during a recession actually increases. Even more: the need for the purchasing power that the credit would introduce in the market, is stronger than ever. It can be said that the economic crisis has hit start-ups in two ways: obtaining credit is difficult and more expensive, and clientele has grown scarce.
In the Social Trade Credit approach guarantees are collected in the specific supply chain where the credit is going to be spent. In other words, (a part of) the costs of the credit are paid by the (group of) supplier(s) of the debtor that stand to gain from the access to the new credit. This starts with the direct supplier who would gain marginal sales if this credit is spent with him, but also includes other actors in the economy where the additional demand introduced by this credit leads to additional purchases. Together they finance a guarantee facility to deliver access to credit which would otherwise not have been possible.
In essence, Social Trade Credit is derived from a credit flow analysis that maps the ‘downstream’ financial stakeholders in the supply of credit (the places where the credit will be spent down the chain), who are asked to make their contribution to a guarantee fund.