Building financial solutions for small businesses in public procurement: Lessons from Bogota

This post was originally published on the Strive Community blog. 

Imagine you run a small business. A government agency advertises a big contract that could be a major opportunity for you to grow. But the buyer also has a reputation for paying contractors late—six months even. You have bills to pay. You do not qualify for credit from any bank, and payment delays could put you out of business. You decide the risk is too great.

Entrepreneurs often encounter this problem when trying to secure government contracts. The public procurement marketplace has an estimated annual spend of 13 trillion USD globally. Across OECD countries, public procurement expenditure as a percentage of GDP averages 12.6%, making governments major buyers of goods and services in most countries. Yet this market remains impenetrable to many small businesses that would face liquidity issues if asked to put up guarantees or be paid late, as is frequently the case with government buyers. Women-led small businesses, in particular, struggle to access financial support that would allow them to confidently compete for and deliver government contracts.

In Colombia, the city of Bogota is committed to counting more small businesses and women-led businesses among its suppliers. Over the past few years and as part of a national initiative, the city government has been working to improve the efficiency and transparency of its procurement system to encourage such businesses to bid for tenders, while also monitoring their participation. The city publishes open data about its contract opportunities and awards, including whether participating companies are micro, small, or women-led. Colombia’s national procurement system uses a schema called the Open Contracting Data Standard (OCDS), pioneered by our organization. OCDS helps governments disclose the most important data about their contracts—such as the bidders, the price, or when the deal was signed—so it can be analyzed and used for decision-making.

Designing a solution for small businesses

As part of our Strive Community project, we at Open Contracting Partnership set out to work with the city of Bogota, financial institutions, and small businesses to design a solution to make it easier for small businesses to access the financial services they need to confidently bid on and deliver government contracts. Our goal was to use open contracting data to connect small businesses with financial institutions as soon as they were awarded a contract. In this way, the tool can help mitigate the risk that small businesses face when applying for loans by providing banks with more information about the businesses and their public contracts.

The first step for developing any solution is solid user research. We needed to work with small businesses, financial institutions, and government agencies to answer the following:

• What data do financial institutions need to process small business applications for credit? How do they decide what to offer small businesses? 
• What are the hurdles small businesses have experienced when trying to access credit (i.e., key blockers, pain points in the user journey, inability to persuade banks they are not high risk)? How do they feel about accessing credit when participating in public tenders through a digital tool? How do they think it could work for them?
• What does the city of Bogota think are the causes of the lack of participation of small businesses in public sector contracting and the inability to access credit? What has the government been doing to improve this, and how well is it working?

To answer these questions, we conducted semi-structured interviews with five financial institutions, six small businesses, five government agencies, and several experts. We documented the entities responsible for enabling small businesses in Colombia to thrive, their current activities in pursuit of those goals, and the pain points they are experiencing in improving their access to credit. We mapped the current user journey for micro- and small enterprises (MSEs) to obtain access to credit from financial institutions and their frustrations (summarized in the graphic below):

The current user journey for small businesses when applying for credit seems straightforward at the high level, but it is fraught with issues. There is a lack of trust across the board: MSEs distrust the government and traditional banks, while banks view MSEs as high-risk and government entities as unreliable payers. Furthermore, government entities perceive MSEs as tax avoiders, creating a significant trust deficit in the credit application process. These insights underscore the need for our solution to bridge the trust gap between MSEs, banks, and government entities to facilitate access to credit and foster a more transparent and equitable credit ecosystem in Colombia.

We also documented the universe of challenges experienced by small businesses in accessing public procurement markets and had to be realistic about which challenges we could tackle with this solution:

Our solution will focus on facilitating access to credit for MSEs in Colombia by addressing the specific challenges related to credit application and approval while acknowledging that hurdles related to company registration, financial history, experience, supplier registration, and enhancements to the public tendering system are beyond our direct control.

Armed with these insights, we have determined that our solution must include the following to respond to our users’ needs.

1. Minimum viable product (MVP): The MVP will focus on the critical features required for the product to be usable for the main purpose of small businesses requesting credit from a financial institution once they are awarded a contract. The tool will provide award data to financial institutions before they offer small businesses a loan amount and interest rate. 
2. Eligibility notification and credit application submission: Once a small business wins a public sector contract, they will be immediately notified they are eligible for the credit scheme. Once the business accepts the terms and conditions and inputs additional information unavailable in open data, financial institutions will receive their applications for review and processing. 
3. Separate tool for financial institutions: We will develop a tool that financial institutions can log into separately from their own systems to avoid a lengthy and bureaucratic integration process. Instead, banks can upload documents from their own systems and download a report on a small business application that they can upload to their own systems.
4. Secure login for financial institutions: Financial institutions can log into the system securely. They will be able to verify all of the information for the small business, the data for the public sector award, and the requested amount and preferred loan terms. 
5. Simple user experience: Make the process short and simple by minimizing the number of steps, only asking for information that cannot be accessed from open contracting data, and enabling users to select repayment terms for maximum flexibility.
6. Tracking and key performance indicators (KPIs): Small business applications should be processed in a timely manner. We also need to know who is verifying or updating data that might be missing in case any issues arise. Therefore, the tool will track user actions and provide KPIs to help ensure that applications are not missed or taking too long to approve.
7. Long-term plan for integration with banks’ systems: The tool will offer an application programming interface (API) solution for banks that prefer integration with their own tools beyond the MVP.
8. Building trust: We will be open and transparent about the guaranteed credit scheme (including rates, fees, and terms) and not leave anything vague. We will manage user expectations and avoid overpromising anything to small businesses in particular.
9. Testing and iteration: Test and iterate our prototype with feedback from our stakeholders. 

What’s next for our project? In the coming months, we will build and pilot an MVP of the tool with financial institutions in Bogota. If successful, this tool will dramatically improve access to finance for small businesses in the public procurement market. 

For the first time, small businesses will be automatically presented with a variety of financial products that can support them to deliver public contracts and grow their business. The tool will also help financial institutions to foster connections with small businesses. Ultimately, we will see an increase in the number of small businesses receiving finance, the number of small businesses participating in public procurement, and the value of public contracts awarded to them. We’re looking forward to sharing those stories in our next project update!