The partnership between MDF and Kosem Coffee was signed recently in Port Moresby.
MDF is an Australian government funded multi-country initiative which promotes sustainable economic development, through higher incomes for women and men, in its partner countries.
It connects individuals, businesses, governments and non-governmental organisations with each other, and with markets in Australia and abroad, The National newspaper reports.
MDF, in a statement, said the partnership would help Kosem Coffee buy more coffee during the harvest season, increasing income for smallholder farmers.
"Close to 90 per cent of coffee in the country is sourced from smallholder farmers," MDF said.
"The supply of coffee from these farmers to exporters comes with many challenges, including the remoteness of the farms, deteriorating road infrastructure and the increasing cost of logistics.
"One of the biggest challenges is the lack of liquidity in the market. Coffee is a cash intensive crop.
"Coffee exporters pay cash to farmers for their crop, which they cannot recoup until the coffee reaches the end buyer.
The partnership between MDF and Kosem Coffee is working to tackle this challenge in the Jiwaka and Western Highlands.
"MDF will support Kosem establish a credit system, called a ‘revolving fund' which will provide Kosem with cash to buy coffee from smallholders.
"When Kosem Coffee receives payment, they will replenish the revolving fund. This cycle is repeated several times during the season, making it possible for Kosem to buy and export significantly more coffee during the harvest season, increasing farmer incomes.
"This new partnership will provide a stable income to the smallholders and enable Kosem to export high-quality coffee, which is currently in high demand on the global market."
Kosem Coffee chief executive officer Mark Munnul said the credit model would benefit small exporters such as Kosem, as well as local farmers.
"This is a big help to national exporters. The coffee price has increased, and for small exporters like me, access to banks is expensive, and its maximum returns are limited.
"This partnership will support local exporters and farmers now and, in the future," he said.