The Promise of Chain Loans

The “chain loan model” is increasingly viewed as a solution to the financial difficulties faced by many small and medium-sized enterprises (SMEs), offering significant opportunities for both lenders and borrowers. this approach aims to minimize credit risks and enhance business efficiency by supporting production, consumption, and the creation of robust economic ecosystems. The core concept revolves around lending to businesses within a supply chain collectively, rather than individually, leveraging the strength of the entire chain. Mr. Nguyen Van Than, president of the Association of Small and Medium Vietnam companies, aptly stated that SMEs have “no choice but to join together,” highlighting the collaborative nature of this financing model.

For U.S. businesses, especially those in agriculture and manufacturing, the chain loan model presents a compelling alternative to conventional lending. Imagine a scenario where a local farm,a food processor,and a distributor all work together.A chain loan could provide the necessary capital for each entity to upgrade equipment, expand operations, and ultimately, strengthen the entire supply chain. This is particularly relevant given the current governance’s focus on bolstering domestic supply chains and supporting local economies.

Benefits in the Agricultural Sector

In agriculture,the chain loan model offers unique advantages. As THS. Tran Van tan, a member of the Vietbank Board of Directors, explained, research across five countries revealed that value chain loans enhance “clarity, the management of cash flow, while developing banking products and promotes the role of communities and cooperatives in rural areas.” This is echoed by findings within the U.S. Department of Agriculture (USDA), according to the Food Supply Chain Guaranteed Loan Program which “provides financial support to qualified lenders whose loan applicants want to start or expand.” The chain loan model can facilitate easier access to credit for SMEs through guarantees or loans from larger, more established companies within the chain.

For example, consider a cooperative of dairy farms in Wisconsin. A chain loan could enable the cooperative to invest in new technologies, such as robotic milking systems, while simultaneously providing financing to a local cheese factory to expand its production capacity. The loan is structured to benefit the entire chain, ensuring that each member has the resources needed to contribute to the overall success.

Challenges and Past Failures

Despite its potential, the widespread adoption of chain loans faces significant hurdles. The primary challenge lies in effectively linking the various components of the chain. Dao minh Tu,the permanent vice governor of the State Bank of Vietnam,pointedly noted that a previous attempt to implement 21 value chain linking models failed due to a lack of guaranteed benefits for all participants.The Vice Governor’s analysis emphasizes “Bank loans throughout the chain without demanding guarantees can bring many benefits to the parties involved in the chain, companies, economics and commercial banking. Tho, the success of this model depends largely on the close coordination between the components of the chain.”

The failure of past initiatives underscores the importance of careful planning and execution. A prosperous chain loan requires a strong foundation of trust and cooperation among all participants.If the connection is weak, the entire structure can collapse. In the U.S. context, this means that lenders need to conduct thorough due diligence to ensure that all members of the chain are financially stable and committed to the project’s success.

A potential counterargument to chain loans is that they can create dependencies within the supply chain. if one member of the chain fails, it could have a ripple affect on the others, jeopardizing the entire loan. This risk can be mitigated through diversification, insurance, and robust risk management strategies.

A Pilot Program Success

There have been successes. A two-year pilot program focusing on high-quality rice production in the Mekong Delta demonstrated that chain loans can be highly effective when all parties are fully engaged. The positive results from this program highlight the potential for replicating this model in other sectors. The banking sector is eager to continue developing this approach, recognizing its potential to benefit a wide range of companies.

This success can be mirrored in the U.S.. Imagine a community-supported agriculture (CSA) program receiving a chain loan to improve farming practices and expand its membership base. The loan could be structured to support the farmers, the delivery service, and the marketing efforts, creating a sustainable and thriving local food system.

Bank Initiatives and Strategies

Several banks are already proactively implementing chain loan models, with Agribank leading the way with its focus on key agricultural products. According to Mrs.Phung Thi Binh, deputy general director of Agribank, the bank is “ready to lend in chain, becuase this is an effective loan model, especially for small -scale SMEs whose management capacity is not yet adequate and that they must be linked and supported by each other to develop and expand productive and commercial activities.”

In the U.S., several regional and community banks are exploring similar strategies. These banks recognize the importance of supporting local businesses and strengthening supply chains. By offering chain loans, they can play a critical role in fostering economic growth and creating jobs in their communities.

For example, the Bank of America offers specialized lending programs to small businesses, and other banks may follow suit. These programs could be adapted to incorporate the chain loan model, providing targeted financial assistance to businesses within specific industries or regions. In addition, the Small Business Administration (SBA) offers loan guarantee programs that could be used to support chain loans, reducing the risk for lenders and making it easier for SMEs to access capital.

Improving Access to Capital

A key element in the successful growth of chain loans is improving customer access to capital. This includes reducing stringent mortgage conditions and increasing credit availability. One bank leader has stated that their institution is actively examining the links within chains and is “willing to reduce the guarantee conditions for the chain participants.”

In the U.S.,this could involve streamlining the loan request process,reducing collateral requirements,and offering more flexible repayment terms. Banks could also partner with community development financial institutions (CDFIs) to provide technical assistance and financial education to SMEs, helping them to become more creditworthy.

The Role of Associations

Associations play a crucial role in bridging the gap between companies and banks. Mr. Nguyen Van Than suggests that associations should act as “a representative role, both presentation and bridge, connecting companies with banks.” He also emphasizes that “through good reputation associations, banks also have more security when lending in chain.”

For U.S. businesses, organizations such as the National Federation of Self-reliant Business (NFIB) and the U.S. Chamber of Commerce could play a similar role. These groups could work with banks to develop standardized loan products, provide training and resources to SMEs, and advocate for policies that support chain lending. Moreover, industry-specific associations, such as the National Restaurant Association or the National Association of Manufacturers, could tailor chain loan programs to meet the unique needs of their members.

Conclusion: A Promising Path Forward

The chain loan model holds significant promise for U.S. small businesses. While challenges remain, the potential benefits—increased access to capital, stronger supply chains, and enhanced economic development—are undeniable. By learning from past failures, embracing collaboration, and fostering innovation, the U.S.can unlock the full potential of chain loans and create a more vibrant and resilient economy. The association is willing to cooperate with organizations such as accounting associations and banks to promote this loan modality and ensure its efficient,equitable implementation.