Accounts payable financing: This financing instrument is part of the broader category of supply chain financing that optimise cash flow by enabling suppliers, which can be small businesses, to receive early payment for their invoices, while allowing buyers to maintain or extend their payment terms through the involvement of a financial intermediary. This instrument is similar to reverse factoring in that it is buyer initiated and leverages the buyer’s liquidity for financing SME suppliers. The key difference is that the financing goes to the buyer who then uses it to pay suppliers promptly at the agreed payment dates even while benefitting from extended payment terms vis-à-vis the financing providers. This mechanism thus effectively helps SMEs avoid cash flow issues from late payments from buyers. Public financial institutions can facilitate this kind of funding by offering guarantees or concessional rates on AP financing tied to green supply chains.
Accounts receivable financing: This financing mechanism seeks to support SME supplier liquidity by leveraging upcoming payments from buyers (which are part of the SMEs’ accounts receivable), but unlike early payment programmes and reverse factoring, it is supplier-driven and relies on the supplier’s own creditworthiness to get the necessary financing. Public financial institutions can support SME adopters in obtaining AR financing by de-risking (e.g. through guarantees), or subsidising the financing provided by intermediaries.
Advance payment guarantee: Financing instrument which is issued by a bank or guarantor ensuring that advance payments made by a buyer will be refunded if the supplier fails to deliver the contracted goods or services.
Blended finance: It combines public, philanthropic, and private capital to support projects with environmental impact. Public funds or concessional funding (such as grants, subsidies, or first loss guarantees) are used to absorb risk, to lower investment risks and attract private capital.
Collaborative financing models: Larger buyers or public sector players in supply chains can collaborate with financial institutions, including public financial institutions, to offer supply chain financing solutions to SME suppliers with the objective of incentivising supplier adoption of green practices. Buyers can use their creditworthiness to secure favourable terms for their suppliers, reducing the cost of financing greening investments for SMEs.
Concessional loans: Loans provided at below-market interest rates, often with more favourable terms, such as longer repayment periods or grace periods. These loans are offered to support projects with environmental goals, making it easier for borrowers to access capital.
Convertible debt: A hybrid instrument, classified also under quasi equity instruments, that starts off as a loan but can be converted into equity when a specific milestone is reached. One advantage of such financing is that the conversion terms enable alignment between the interest of lenders and SMEs in that the latter get capital for their risky ventures and lenders get the potential upside of having a stake in a successful venture.
Early payment programmes: Programmes that enable SME adopters to receive funds earlier for their approved invoices, and this can be done through a financial intermediary or the buyer itself. This improves cash flow, helping them invest in sustainable upgrades. These programs also reduce reliance on expensive short-term loans. Public financial institutions can collaborate with larger buyers to subsidize or de-risk early payment programs specifically for SME adopters meeting green criteria.
Equity financing: It provides capital to businesses in exchange for ownership stakes or rights linked to financial performance. Commonly used for SME innovators and start-ups to fund innovation, growth, and expansion.
Green guarantees: Financing instruments that provide a guarantee to lenders or investors, for risk mitigation. These guarantees encourage investment in green initiatives by covering potential losses, enabling SMEs to access funding for green projects.
Green leasing: A financing option where SMEs lease environmentally sustainable assets, like energy-efficient equipment, to reduce high upfront costs and by spreading costs through periodic lease payments. Green leases often include favourable terms or incentives for green solutions and are often provided by private entities with public support in the form of risk sharing mechanisms.
Green letters of credit: They can support SME adopters importing eco-friendly inputs, such as energy-efficient machinery, renewable energy systems, or sustainable raw materials. These instruments provide payment guarantees to exporters, enabling SMEs to confidently source high-quality green products. PFIs can offer subsidized fees for green letters of credit, guaranteeing transactions where SME adopters import sustainable goods.
Green loans: Loans specifically designed to finance projects that have positive environmental impacts, such as renewable energy, energy efficiency, circular economy and sustainable agriculture. These often offer competitive or subsidised financing costs and flexible terms, such as longer repayment periods. They can vary in terms of duration and can be directly provided by public development banks or through intermediary financial institutions.
Green synthetic securitisation: A financial structure in which green assets, such as green loans, are pooled and securitised using credit derivatives, transferring risk to investors while retaining asset ownership. Alternatively, green securitisation can be achieved through use-of-proceeds, i.e. by freeing up capital for new green projects without selling the underlying assets.
Green trade finance: This includes financing instruments which reduce risks for importers and exporters involved in the trade of green goods, technologies, and services. It facilitates sustainable trade by offering tools such as green letters of credit, sustainability linked trade loans and supply chain financing, amongst others.
Incubator and accelerator programmes: Programmes designed to support early-stage start-ups and SMEs by providing resources, mentorship, funding, and networking opportunities to help them grow and scale.
Import financing for sustainable goods: Part of green trade finance, this financing can help SMEs to offset costs associated with importing sustainable materials or technologies, which can often be high. Import financing enables SME adopters to pay for these inputs over time, reducing the upfront financial burden.
Inventory financing for sustainable inputs: Inventory financing, part of the broader category of supply chain finance, allows SMEs to use these green inputs as collateral to access financing from financial institutions, enabling them to spread costs over time while maintaining production. Public financial institutions can create targeted inventory financing programs for SME adopters sourcing certified green inputs, offering concessional rates or guarantees to lower the financial burden.
Mezzanine financing: Financing that combines debt and equity often with flexible repayment and profit participation or warrants. It entails higher risk for investors which is compensated with equity like returns or profit sharing. It is commonly used for later-stage green start-ups that are looking to scale their operations.
Mini bonds: Issuance of debt by SMEs which are pooled together through a securitisation process to attract institutional and private investors. With lower regulatory requirements than traditional bonds, mini bonds are often backed by public financial institutions to enhance creditworthiness and reduce investment risk, enabling SMEs to access capital for green projects.
Performance-based instruments: Financial tools that provide funding or incentives contingent upon achieving specific environmental or sustainability outcomes, such as carbon reduction or energy efficiency. Repayments are based on verified emission reductions or energy savings, reducing financial risk.
Profit participation loans: Loans that link repayment with a certain percent of the SME’s profits instead of a fixed interest payment. This reduces the pressure on SMEs in the early stage of growth when the profits may be low or negative as well as during any times of downturn. Incentive alignment is another key benefit from this kind of a financing instrument.
Promissory note: A written commitment by a buyer to pay a specified amount of money to a seller, either when requested or at a predetermined date, in exchange for goods or services delivered.
Property-linked loans: Loans designed to finance environmentally friendly property improvements, where repayment is tied to the revenue or cost savings generated from energy-efficient upgrades or sustainable building features. These loans allow SMEs to invest in green building projects or energy-efficient retrofits, using the property’s future savings or increased value as collateral or a source of repayment. By linking repayment to the property’s performance, these loans reduce financial risk for SMEs, making it easier to access capital.
Purchase order financing: When SMEs secure large orders requiring them to use eco-friendly materials or processes, they may lack the upfront capital to fulfil these orders. Purchase order financing, which is part of the broader category of supply chain finance, bridges this gap by providing in advance the financing needed to fulfil green procurement contracts. Public financial institutions can offer purchase order financing tailored to SME adopters working on sustainability-focused orders, particularly those tied to public procurement or supply chains with green mandates.
Quasi-equity instruments: Flexible financing tools that provide capital to businesses in exchange for rights linked to financial performance, such as profit-sharing or the potential for conversion into equity through instruments like convertible debt.
Research and development (R&D) grants: Non-repayable funds provided to SMEs to support innovation and the development of new technologies, products, or processes. These grants help cover the costs of research and experimentation, enabling businesses to advance their solutions without the immediate pressure of repayment.
Revenue-based loans: A debt-financing mechanism where repayments are tied to a percentage of the revenue generated from green projects, rather than fixed installments. This structure allows for more flexibility, reducing the cash flow burden on SMEs.
Reverse factoring: In reverse factoring, the buyers (often large corporations) can initiate early payment to their SME suppliers by working with financial institutions and leveraging their own creditworthiness. This enables buyers to extend payment terms with their suppliers without negatively affecting the supplier's cash flow. For suppliers, this enables earlier access to payments obtained from the financial institution on the basis of the approved invoices from the buyers. Public financial institutions can encourage reverse factoring arrangements for SME adopters in green supply chains by acting as intermediaries or guarantors.
Subordinated loans: These loans rank below other types of debt in case of bankruptcy but typically offer more flexible repayment terms. As such they are higher risk financing for lenders and often entail higher financing costs, but they enable SMEs to retain full ownership and control of their company.
Supply chain financing: Financing that provides SME adopters with access to affordable and timely capital while encouraging sustainability adoption within supply chains. Supply chain financing can include a wide range of financing programmes that leverage to different degrees the buyers’ (often large corporations) credit worthiness or purchasing power to help SMEs get access to more timely financing to address working capital needs or free up finances for investment.
Sustainability linked loans: Loans tied to sustainability performance that serve to incentivise SME adopters to achieve green milestones, such as reducing emissions, improving energy efficiency, or sourcing certified sustainable materials.