The COVID-19 pandemic left every corporation with immense challenges. The worst-hit sector is the small businesses. They are facing decreased revenues and liquidity. On the supply side, there is less labor force and disrupted shortages.
Studies have found that one of the best ways to get rid of these challenges is with the help of trade finance. Wish to know how? Then read on as we discuss how trade finance can help small businesses in the global economy and how it is essential. But first, let us elaborate on the various challenges small businesses face.
Small businesses face severe challenges in their supply chain cash flow and cargo delays. Many have already established reasonable demands for their products but have immense issues with their extended payment terms, mostly in getting bank loans.
In such a scenario, every business requires more working capital to extend payment terms, get better inventory levels, and increase production. However, it becomes challenging to get any bank loan for this kind of working capital as bank loans require a substantial amount of security against loans that most cannot provide. Under these circumstances, the only way is to increase annual turnover, increase sales, and grow business globally. And this can be done with the help of trade finances!
Let’s see how trade finances can help out. But first, let us explain what trade finance is.
Trade finances refer to financial instruments and products companies use. It is a loan used by importers and exporters to facilitate its international trade. It also helps exporters reduce payments on the importer’s behalf before the goods are delivered.
The loan institution will give the money to the import house to pay for the exports once the goods are shipped for delivery. The main function of trade finance is to introduce a third party in the export-import transaction to rectify any payment and supply risk. It pays the exporter through an extended credit facility when the importer is fulfilling the trade order.
Trade finance acts like a protective umbrella for feasible trade transactions. It protects your small business in the global market from unique financial risks like currency fluctuations, non-payment conflicts, political instability, and other such issues.
Now that you know what trade finance is, let’s see how it can help out a small business in the market.
Since small businesses cannot get ready loans and do not have payment protection, working capital for small businesses can get delayed with the shipment of goods. Trade finances offer an alternate financial solution in these situations. Here’s why it is essential for small businesses in the global market.
International trade exposes both importers and exporters to greater payment risks than local trade. The importer is unsure whether they will receive the items on time. Similarly, the exporter has no idea if they will be paid in full on schedule. Some of the variables that can cause payment delays and losses are listed below.
1. The credit rating and payment/non-payment history of the importer.
2. Currency swings pose a danger of exchange rate volatility.
3. Political events have an impact on the economies of other countries.
4. Inability to adapt to shifting market demands.
5. Costs of transportation have changed.
International trade finance providers issue Letters of Credit to alleviate these payment concerns. When all of the relevant shipping documentation is completed, this document guarantees payment for the goods. A trade finance company will also collect on behalf of the business while keeping track of their customers' creditworthiness.
Self-financing can eat up valuable working capital that could be better spent on new company opportunities. Similarly, bank loans appear on balance sheets as debt and negatively influence a company's bottom line. Trade financing relieves these financial constraints, allowing small businesses to redirect capital to more productive uses.
Workflows can be streamlined with trade financing services. Exporters can also set up and apply for trade finance services in a fraction of the time it takes to get a bank loan. These automated protective services can alleviate these foreign trade problems, freeing up time and working capital.
Compliance with worldwide regulations is one of the most significant challenges small businesses confront in international trading. Counter-Terrorism Financing (CFT) Sanctions are especially difficult for small businesses.
Furthermore, regulatory requirements can vary from country to country. To stay current, banks must rely significantly on internal resources, both costly and time-consuming. As a result, most lenders limit their offerings to corporations and well-established businesses.
Traditional loan programs can be replaced with export factoring and supply chain financing. Financial intermediaries who provide this form of financing have regional experts on staff who ensure that local requirements are followed. Small businesses will also learn about appropriate services for specific exports, such as currency exchange control.
Trade financing provides more flexible options for accelerating cash flow and reducing trade risk exposure. The funding is based on the credit rating of the customer. Trade finance services, unlike bank loans, do not appear on an exporter's balance sheet as debt. Within two days of submitting an invoice, exporters will receive the money.
Small businesses are the pillar of global markets. Thus, they must keep working smoothly. And the only way to do it is to provide trade finances. It gives short-term cash flow, protects the business, and helps local regulatory compliance. We hope this article helps you understand how trade finances are the savior for small businesses in the global economy.