April 15, 2024

Exporters and small and medium enterprises (SMEs) are encouraged to look at how they can utilize trade finance as a tool to boost their business, elevate their export activity, and increase their overseas market access.

Trade finance represents the financial instruments, services, and products that are used by companies to facilitate international trade and commerce. Trade finance, which consists of loans and guarantees, makes it possible and easier for importers and exporters to transact business through trade.

According to the Asian Development Bank (ADB), companies have identified access to financing as a major challenge for trade.

SMEs are more likely than larger firms to get rejected when they apply to banks for financing because they are usually considered a high risk.

The report published by ADB in September 2023 further noted SMEs’ applications were rejected due to a combination of factors that continue to make their survival and success challenging.

These include SMEs’ lack of collateral, lack of transaction history or long-term relationships with bankers, and insufficient credit or performance history.

The report said the global trade finance gap continues to balloon and was estimated at US$2.5 trillion in 2022, or 10 percent of global merchandise trade.

This marks an increase of 47 percent ($0.8 trillion) from $1.7T in 2020.

Trade finance is one way to reduce this gap, and SMEs can benefit from it as trade finance can help them overcome a variety of challenges associated with cross-border transactions.

Trade finance can help SMEs manage their cash flow, mitigate risks, gain access to working capital, earn higher revenues, expand their markets, improve their connection with suppliers, overcome financial hurdles, uncover growth potential, and add to economic growth by leveraging trade finance solutions, according to global financial institution Emerio Banque.

Trade finance involves introducing a third party, which is a trade finance company, into the transactions as a way to remove the payment risk and the supply risk. Trade finance provides the exporter with receivables or payment according to the agreement, while the importer might be extended credit to fulfill the trade order.

The trade finance company facilitates the issuance of bank guarantees and the standby letter of credit using the trade finance firm’s credit line with a bank. The trade finance company’s clients will be the buyers of the exporters, according to Trade Finance Company (TFC), a global financial firm providing businesses with unsecured financial instruments, especially when these companies lack collateral for bank transactions.

When an importer applies for a standby letter of credit, the bank will require collateral in cash or real estate of the same value as the loan or standby letter of credit.

The trade finance company can “guarantee” the loan, provided the client can convince the bank they can pay the loan. 

For the company, the benefits of availing itself of trade finance include affordable costs and many ways to pay, no need for collateral, quick service, and no upfront cash needed, the TFC said.

To narrow the trade finance gap, the ADB report called on policymakers to increase trade financing capacity through SME-targeted credit processes, integrate trade financing into crisis response programs, advance the digitalization of trade, and focus on standards harmonization, commercial adoption, legislation, and policy. – Press release