With the help of trade finance, both international exporters and importers may better manage their working capital and mitigate the risks associated with international trade. Banks use trade finance transactions, including letters of credit and guarantees, to fund around 40% of international commerce worldwide. The same amount or more than 8% of global goods trade might be lost by the end of 2022, according to the latest study, which estimates that about $1.5 trillion in trade finance applications would be denied worldwide this year.
For small and medium-sized businesses in emerging markets, the inability to get necessary financial support is a major obstacle to expanding their trading activities. These companies are hit the hardest, as their rejection rates are higher than those of bigger companies. Small and medium-sized businesses account for over half of all declines. About half of the companies whose trade finance requests were turned down also couldn’t find another way to get the money they needed.
Three key obstacles stand in the way of filling the gap in trade financing, which are as follows:
Inefficient Paper-Based Processes
To this day, many trade finance deals still depend on time-consuming and error-prone paperwork. Many payment problems are the result of manual handling and processing, which may cause delays and perhaps even non-payment of invoices. For example, dealing with paper-based letters of credit could lead to delays, extra costs from human work, and even financial fraud.
Expectations for Adherence to Regulations
Banks and businesses alike must go through extensive procedures to ensure they are in compliance with KYC and anti-money laundering requirements. Although these regulations are essential to ensuring safe international financial transactions, most banks see them as a significant obstacle to the industry’s expansion. Also, the new Basel III rules require financial institutions to hold higher levels of statutory capital and liquidity.
Inadequate Access to Information
The third difficulty arises from the discrepancy in the quantity of data available to lenders and borrowers (also known as “information asymmetry”). Lenders often demand collateral or borrower information like a credit history to reduce their risk. Some small firms may not have the resources to meet such demands. Or, it can be too expensive for banks to acquire, particularly when working with SMBs, whose loan amounts and revenues are often low compared to those of larger corporations. Ironically, regulations intended to lessen the impact of information asymmetry on trade finance may actually make it more difficult to get such funds.
How can we use information and communication technologies to better assist small and medium-sized businesses in acquiring trade financing? It is critical to lay the groundwork for the widespread use of digital technology in trade finance over the medium to long term. Promoting global technical standards with technologies like a trade spend management system is important for making different systems work together smoothly. Last but not least, since many small and medium-sized businesses do not know about trade financing products and government assistance programs, it is important to close this knowledge gap.