International trade has been highly affected since the global pandemic of Covid-19 hit the world economy. The trade finance gap has extended and it has adversely affected Small & Medium-sized enterprises i.e. SMEs as they are lacking a proper cash flow to get their imports & exports funded. Plus, it is difficult for SMEs to borrow & get funds from banks as these banking institutions either have become extremely cautious about risk management in case of loan payment default or are reluctant to finance companies that have smaller balance sheets.
In such a scenario, when SMEs don’t have access to bank borrowings and find it hard to get necessary funding to ensure uninterrupted business operations, considering alternative finance providers ie. international import-export banks such as Axios Credit Bank Ltd or other trade financing companies is the only solution. Several reasons make trade finance a better choice than loans from legacy banks. What are they? Let’s find out:
The very first & foremost reason for availing of international trade finance services is that it doesn’t invite too much effort in getting a trade finance product sanctioned for SMEs that usually banks do. Take this for an example, applying for funding from legacy banks generally involves ample amounts of complex documentation that requires a significant period to determine & structure a loan depending on a business’s credit scores & financial stability. It means a little financial history of financial default could damage chances of sanctioning a loan, resulting in late approval of a loan for SMEs.
While if SMEs need quicker access to capital, trade finance solutions are better as provided funds are based on the nature of transactions being executed currently by SMEs & their customer’s credit, instead of their business’s credit scores. It decreases the verifying process, so does the time, and ensures prompt funds. Also, since the funds are against invoices & purchase orders, the SMEs receive can grow without a requirement of showing years of financial soundness to banks.
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Another reason that makes banks less considerable for SMEs is their rigid & inflexible terms. Banks are now extremely risk-averse and thereby preferring to provide funding to only those companies that have a sufficient amount of assets with them so that they can have a lower risk of non-payment. Additionally, the most common drawback of availing these loans is when you get them. The line will be limited and is rigid to be used with alternate financing as banks view other lending arrangements as a potential threat to their existence.
Since trade finance products are tailored to SMEs’ individual needs, not only it eliminates the requirement of applying for another line of credit for applicants but they can also get quicker & advance payments from their importers by getting Letters of Credit discounted immediately after the shipment. SMEs can ensure proper cash flow to set off their cost of goods, shipping & freight, etc.
Another reason for shifting to trade finance providers is that trade finance products are their main focused area. Unlike legacy banks, they are not looking to only cross-sell their other finance-related products to customers. Trade finance is not only just a part of their business line, rather it is their main business bringing an increased, personalized & better source of focused service for SMEs when it comes to borrowing.
Understand this way, when you apply for a loan from a legacy bank, you get instant cash in hand with increased short-term borrowings. It doesn’t have to do anything with the balance sheet. Even in case of a default, the bank seeks a dual recourse recovery mechanism that brings more debt burden on your shoulders.
On the other hand, if SMEs consider alternate trade finance providers for short-term funds through factoring arrangements, they get instant cash-in-hand with removed receivables from the balance sheet. In the event of any default by the buyer, the banks seek an insurance claim against the buyer, leaving sellers completely unaffected from this. Undoubtedly, this is the best way for SMEs to manage risks.
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International Support & Reduced Focus On Collateral
Furthermore, trade finance providers cover cross-border transactions, unlike legacy banks that usually provide products for domestic markets, resulting in blocked ways for SMEs to access global markets. Additionally, SMEs are unable to secure funds from banks due to their inability to provide additional assets & collateral to be claimed in case of default.
This is where trade finance providers are beneficial for SMEs, empowering them to enter & cover the global market by providing them funds without submitting any collateral securities. This brings an increased global exposure for SMEs.
Now you know different reasons making trade finance a better choice than legacy banks. Unlike banks, trade finance companies provide a degree of flexibility as per the client’s needs & nature of transactions. Plus they save client’s time & ensure prompt delivery of funds through less paperwork involved.