SMEs ie. Small & medium-sized enterprises play a vital role when it comes to strengthening the economy, especially in developing countries. They represent about 95% of the global economy and are considered an important contributor to job creation with a significant majority of the business worldwide. But thanks to the sudden outbreak of the global pandemic of Covid-19, businesses in all sectors are facing an economic crunch and are becoming risk-averse, especially for international trade finance.
SMEs have limited access to financial services and one of the biggest challenges they are facing when exporting is to secure affordable & flexible financing from banks. They need working capital to run their overseas transactions smoothly but traditional banks don’t often provide lending solutions to companies with smaller balance sheets. Here, one of the best & affordable ways to survive in the international market is to apply for trade finance from various international trade finance providers like Axios Credit Bank. They enable SMEs to not only fulfill their efficient cash flow requirements with an instant fund but also finance their overseas transactions across the world. Now SMEs can have several alternative financing solutions which are specially tailored as per their business needs.
In this blog, find out why trade finance is beneficial for small & medium-sized businesses. Let’s start:
Undoubtedly When two unknown parties across the borders having different rules & regulations enter into a contract, they are at risk of trust breach. The lack of surety in paying & performing the T&C of the agreement can turn down a business opportunity for parties-to-the-contract. Here, using trade finance instruments like Letters of Credit can help SMEs mitigate these risks as well as build trustworthy & strong global trade finance relationships. While operating in the global market, having a trade deal backed by an intermediary i.e. legal authority like a Bank or an FI provides SMEs peace of mind, establishes credibility and surety of payment on time.
Today, a plethora of trade finance alternatives are available for SMEs as per their individual needs including Letters of Credit (LCs), the most trusted & secure financial instrument available to reduce risks. Apart from this, there are other instruments also such as Bank Guarantee (BG), Cash Advances, Factory, Escrow services, etc. SMEs are required to find their preferences as per their business needs and choose a reputed financial institution.
Due to the smaller balance sheets, many banks often don’t provide finance to SMEs without security ie. lines of credit. Here, trade finance offers more flexible solutions by providing them with instant working capital to increase cash flow and reduce overseas risks. The most favorable part is that the funding is determined on the credit rating of an exporter’s customer instead of his/her financials. On the contrary, trade finance services don’t bring debt to the SMEs' balance sheet. Exporters can get their payment as soon as they submit their invoice.
Both importers & exporters are at higher risks of payments in international trade transactions compared to domestic trade. For exporters, the lack of surety lies in whether they receive on-time payment while for importers, it is regarding on-time delivery of ordered goods & services. International trade finance instruments like LCs, BGs, or Documentary Collections address these issues and provide safety of payment & performance as soon as the shipping documents are complete.
One of the biggest trade barriers SMEs face while trading globally is compliance with regulations. These regulatory requirements differ from country to country. It results in a high dependence on internal resources for banks, leading them to pose more complexities for SMEs when it comes to lending. Here, export financing & supply chain financing are great alternatives to these traditional loans.
Trade finance helps SMEs get their hands on instant funds to fulfill their day-to-day working capital requirements while executing an international trade transaction. On the contrary, bank loans show up as a debt on SMEs' balance sheets, leaving a negative impact on the company’s reputation, unlike trade financing. Trade finance helps SMEs streamline trade workflows as well as apply for trade finance services quicker than a bank loan.
To run a successful global trade deal, international trade finance is essential for SMEs. Payments can take time from foreign importers and make shipment difficult. Trade finance services solve short-term cash flow dilemmas for SMEs and ensure compliance with local regulations.