Small and Mid-sized Enterprises (SMEs) represent about 95% of the global economy. However, these companies tend to have limited access to financial services and risk mitigation strategies that are essential to their growth. International trade finance enables overseas transactions for small, mid-sized, and large companies.
SMEs, in particular, require working capital that grants them access to new markets. However, these companies face the most challenges when it comes to obtaining the financing they need. Traditional bank loans often aren’t an option and usually don’t provide payment protection. As a result, an SME’s working capital can be tied up in the shipment of goods for up to six weeks.
International trade finance companies offer alternative financing solutions, specifically tailored to meet the needs of SMEs. Find out below why international trade finance is essential for small and mid-sized businesses.
Banks Often Do Not Cater to SME Needs
Most banks won’t finance SMEs without adequate security. An SME’s line of credit often determines this security. In many cases, this process limits an SME’s ability to maintain healthy cash flow and pursue growth objectives.
Trade financing offers more flexible solutions that can accelerate cash flow and reduce exposure to trade risks. Funding is based on the credit rating of an exporter’s customer, instead of the exporter’s financials. In contrast to bank loans, trade finance services don’t show up as debt on an exporter’s balance sheet. Exporters can typically expect to receive a payment within two days of submitting an invoice.
SMEs anticipating growth can benefit from scalable financing options that grow with their businesses. Additionally, longer payment terms leave buyers with more working capital to continue fulfilling orders.
Trade Finance Reduces Payment Risks
Both importers and exporters face higher payment risks with international transactions than with domestic trade. The importer doesn’t know if they will receive the goods as expected. Similarly, the exporter doesn’t know if they will receive their full payment on time. Following are some factors that can contribute to payment delays and losses.
- The importer’s credit rating and history of payment/non-payment.
- Exchange rate risks due to currency fluctuations.
- Political events that impact foreign economies.
- The inability to meet changing market requirements.
- Changes in transit costs.
International trade finance service providers address these payment risks by supplying a Letter of Credit. This document guarantees payment for goods as soon as all the required shipping documents are complete. A trade financing intermediary will also perform collections on behalf of the SME while monitoring the creditworthiness of their customers.
Working Capital is Essential for SME Growth
Self-financing can tie up valuable working capital that would be better spent investing in new business prospects. Similarly, bank loans show up as debt on balance sheets and impact a company’s bottom line negatively. Trade financing releases these monetary constraints so SMEs can allocate funds to more productive purposes.
Trade financing services can streamline workflows, such as collections and bookkeeping. Exporters can also set up and apply for trade finance services faster than it takes to apply for a bank loan. These automated protective services alleviate many international trade concerns of SMEs to free up time and working capital.
SMEs Face Challenges with International Regulations
One of the most significant barriers SMEs face with international trade is compliance with global regulations. Sanctions Countering the Financing of Terrorism (CFT) are especially challenging for SMEs.
Also, regulatory requirements can differ tremendously from country to country. For banks to remain up-to-date, they have to rely heavily on internal resources, which are costly and time-consuming. As a result, most lenders only offer these services to large companies and established enterprises.
Export factoring and supply chain financing are viable alternatives to traditional loan programs. Financial intermediaries that offer these types of financing have regional experts that ensure compliance with local regulations. SMEs will also find out about any suitable services, such as currency exchange control, for specific exports.
Global trade wouldn’t be possible without international trade financing. Payments take time to arrive from foreign importers, and exporters can’t afford to have their cash tied up in shipments. About 80% of trade worldwide relies on trade financing. These services solve short-term cash flow challenges, protect against importer insolvency, and ensure compliance with local regulations. An international trade finance company like Tradewind Finance offers export factoring and supply chain finance services to help cater to a business’s working capital needs and risk management when engaging in cross-border transactions.