How Can Emerging Markets Benefit from International Trade Financing?
As supply and demand increase, emerging market businesses need continuous working capital to optimize distribution, operational efficiency, and inventory turnover. International trade finance companies can help businesses in emerging markets improve their cash flow position and reduce their risk exposure.
Over the past several decades, emerging markets (EM) have significantly increased their economic footprint in international trade. Previously, most trade took place between advanced economies. Today, the majority of international trade deals takes place between emerging and developed markets. Populations of emerging countries are becoming increasingly well-educated, and their growing middle classes are driving consumption.
Defining Emerging Markets
Currently, twenty-four countries count as emerging markets; they include: United Arab Emirates, Turkey, Thailand, Taiwan, South Africa, Russia, Qatar, Poland, Philippines, Peru, Pakistan, Mexico, Malaysia, Korea, Indonesia, India, Hungary, Greece, Egypt, Czech Republic, Colombia, China, Chile, and Brazil.
Emerging markets are countries that are progressing to develop more advanced economies by expanding their presence in global trade. EM countries typically have lower per capita income than developed economies. However, EMs striving to catch up with industrialized nations tend to have higher annual growth rates. Emerging markets often face volatility and instability caused by natural disasters or sociopolitical factors. Additionally, developing economies are vulnerable to shifts in currency rates and commodity prices.
Improving Cash Flow
International trade financing can help emerging market companies improve their cash flow. Presently, one of the most substantial obstacles impeding business growth in emerging markets is a lack of access to trade finance. Trade finance solutions can benefit EM businesses in the following ways:
- Increasing working capital capacity
- Improving inventory turnover and revenue
- Enabling the employment of additional workers
With the help of supply chain financing companies, small and medium enterprises (SME) in emerging markets can access the cash they need for international and domestic trade operation. Additionally, automatic tracking and processing of invoices, scalable funding, and risk mitigation are some ways trade financing can improve an EM company's cash flow.
Reducing Risk Exposure
In addition to increasing a company's working capital, international trade financing also assists in eliminating risks in the following ways:
- Ensuring timely payment for sold merchandise
- Receiving cash earlier from invoiced sales
- Bridging the liquidity gap for distributors
- Suppliers receive earlier payment.
By taking advantage of trade financing, businesses can significantly reduce or eliminate their payment risks. Trade finance enables companies to offer their suppliers a guaranteed and secure payment that helps to establish a reliable trade cycle and enhance negotiations. Payments to the supplier are made in local currency, eliminating currency risks to business owners and improving the chances of receiving supplier discounts.
Trade finance offers expanding markets the opportunity to leverage technology for improved operational functions. Effective supply chain financing technology can automate and simplify processes while creating space to scale up the transactional volume. Emerging markets can benefit from innovative trade finance tools in the following ways:
- Real-time transaction reports – enhance productivity
- Data collection and overview from supply chain flows – enable multi-party visibility
- Integrated banking systems – increase the timeliness of invoice delivery
- Flexible connectivity between core systems – make workflows accessible to both parties
- Intuitive interfaces – require minimal employee training
Trade financing systems are driven by technology that enables SMEs to expand their portfolios sustainably while minimizing the risks. Additionally, business owners benefit from customizable solutions that meet the specific challenges of their industry.
Achieving Business Growth
Trade finance offers emerging market businesses the best opportunities to maximize their profits from international trade. Even companies that don't qualify for traditional bank financing can benefit from trade financing because the credit of the entire supply chain is leveraged. International trade financing can help companies achieve business growth by:
- Providing an assessment of the profitability and operational risks of a proposed venture
- Offering flexible access to credit through direct credit lines between the financier and importer/exporter
- Assisting in negotiations for more favorable terms with suppliers
Emerging markets that take advantage of trade financing can significantly improve their opportunities to achieve profitable international trade expansion. Conventional financing typically restricts emerging market companies from realizing prospective ventures that could help their businesses grow. Trade finance enables firms to pursue ventures that can generate higher profits. With the help of industry-specific expertise, expanding markets can overcome the typical challenges of international trade.
Emerging markets have developed at an unprecedented pace. It has resulted in shifting international trade practices over the past 20 years. Now, emerging economies play a more significant role in international trade than ever before. By taking advantage of the benefits of working with an international trade finance company like Tradewind, businesses can gain the working capital they need to realize potential revenue opportunities.