Bridging the SME trade finance gap

By Eyal Moldovan, Co-founder and CEO, 40Seas

For SMEs (Small and Medium-sized Enterprises) operating in today’s fairly unstable and fragmented supply chain landscape, having rapid, reliable access to financing is a prerequisite for survival and longevity. However, old-school, antiquated payment technology and legacy trade financing offerings are making life unnecessarily difficult for SME importers and exporters, exacerbating global supply chain fragmentation. Despite accounting for 43% of global cross-border trade volume, SMEs are 7 times more likely to be denied trade financing than multinational companies, according to the WTO. For a key business segment which already faces a steep uphill battle to make it to the two year mark, this imbalance can’t persist.

The limited access to financing for SMEs has contributed to the growing trade finance deficit – which now stands at $2.5 trillion – having risen substantially from $1.7 trillion in 2020. The widening trade finance deficit is particularly concerning for smaller businesses in emerging economies who require sufficient levels of trade financing to establish a foothold in highly competitive markets. SMEs typically struggle to secure funding from traditional financial institutions due to their size, lack of collateral, and perceived higher risk. Additionally, rising interest rates, inflation, negative economic forecasts, and sustained geopolitical uncertainty are hampering banks’ ability and willingness to provide essential trade financing. Market volatility and ongoing uncertainty is also suppressing banks’ appetite for issuing credit, as evidenced by a report from the CEPR which examined levels of banks’ credit issuance in the context of trade fragmentation and increased uncertainty. The report noted how for large US banks, those exposed to trade uncertainty reduce credit originations by 0.5 percentage points.

The SME trade finance disadvantage

Right now there’s a perfect storm of challenges for SMEs to contend with. They already have to grapple with a minefield of fluctuating demand patterns, evolving consumer preferences, rising shipping costs and nuanced regulatory frameworks, making it increasingly difficult for them to maintain competitiveness in the current market.

Moreover, by their very nature, SMEs often lack the established credit histories, making them ‘riskier’ propositions in the eyes of traditional banks and financial institutions – whose stringent criteria generally require reams of documentation, demonstrable collateral, and a bonafide track record before extending credit to new clients. As a result, SMEs are often denied access to essential financing, or face long delays that undercut their ability to compete on the global stage. The financing constraints are even more severe for SMEs who rely on Letters of Credit (L/Cs) to address cash flow issues. As I’m sure many SMEs can attest to, legacy trade financing processes can be slow and bureaucratic, and SMEs often find themselves navigating endless red tape, leading to delays in securing funds and getting their goods to market.

As a snapshot example of this financing glass ceiling, a recent report examined the high rejection rates for Bangladesh SMEs when seeking finance for foreign trade. The research found that 36% of applications were rejected due to a lack of collateral, 18% were rejected due to high interest rates, 17% for lack of previous transaction information, 11% due to their ‘high risk’ and 10% due to a lack of sufficient documents to support the application. For SMEs starting out, many of these factors are outside of their control – giving expression to the list of issues stacking the odds against SMEs.

Solutions at the intersection of Fintech & AI

Against a backdrop of macroeconomic uncertainties and the rising cost of capital, data-driven innovations can provide a timely lifeline for SMEs who are often unfairly overlooked by traditional financial institutions for the reasons listed above. Unlike conventional banks, fintech platforms can operate with a high degree of agility, employing innovative risk assessment methods and utilizing big data analytics to accurately evaluate SMEs’ creditworthiness – increasing SMEs’ chances of obtaining financing to fuel their international trade pursuits. By swiftly analyzing various data points like transaction history, AI-powered data analytics can be harnessed to plug the shortcomings of large institutions, offering tailored financing solutions, even to newer and smaller SMEs without the extensive credit histories that institutions get hung up on.

Fintech-led automated underwriting can deliver financing within hours, empowering SMEs to seize time-sensitive opportunities in the global market – a stark contrast to the slow and cumbersome processes of traditional trade financing, which forces SMEs endure lengthy delays for application reviews and approvals, and miss out on revenue generating opportunities. This new era of trade financing can help provide much needed clarity regarding capital availability for SMEs operating in today’s highly unpredictable supply chain landscape, enabling them to make informed decisions around inventory management and plan for the future with a real sense of confidence.