The Deep dive: Trade Finance

By Puja Sharma

The deep dive’ is our bi-weekly exploration of a relevant topic, hot trend, or new product. For Prime subscribers only.

How does it work?

The role of Trade Finance is to facilitate imports, exports, and international trade transactions. The company offers a wide range of financial products to corporates and small and medium-sized enterprises. Companies of all sizes use trade finance products to access working capital. Hence, obtaining liquidity to make investments, pay suppliers or pay salaries.

Smaller suppliers, however, find it difficult to sustain the payment terms. They have a brief monetary lifetime. Money enters and exits the system swiftly. Therefore, having access to credit terms would aid in stabilising the cash flow. The manual, paper-based process of trade finance has become a popular target for FinTech innovators looking to disrupt it.

Unsurprisingly, traditional banks do not always invest in modernising their trade finance operations. Considering the number of small and medium-sized businesses (SMBs) that require funding for lower-value transactions, the costs associated with acquiring, underwriting, and managing a trade financing facility are high and rarely warrant the expense.

FinTechs are entering the market to connect SMBs to alternative sources of finance or to digitise and automate many of those workflows for banks. However, according to Desmond Loh, CEO of GUUD, the market “continues to ignore key pain points for financiers.”, as reported by PYMNTS.

Who is under the radar?

Domestic and international trade commonly involves payment terms. Therefore, allowing the debtor (the buyer) to delay payment of the invoice. Consequently, generating revenue before settling the supplying invoice. It is beneficial to have access to trade finance to mitigate cash flow imbalances.

Shipments of goods can take several weeks to reach the purchaser’s warehouse, for example. Consequently, this is a perfect opportunity to ask for a payment delay. A buyer with a well-established business relationship may request longer installments.

Large suppliers, in general, do not experience issues with waiting. They get liquidity from different sources and have streamlined cash flow. However, no matter how large the business is, most companies engaged in international trade, try to access trade finance solutions.

Why does it matter now?

There is an estimated $9 trillion in global trade finance each year, but only $250 billion is provided by non-banks and institutions. The provision of liquidity to trading SMEs is often a challenge for banks due to a lack of resources.

In addition, the regulatory landscape around Basel iii and iv capital requirements have hindered banks’ ability to finance and service smaller companies. A FinTech company helps banks deal with lower-value ticket deals by extending payment terms and reducing paperwork for SMEs, as well as managing exposures and documenting deals.

This also makes the pooling of trade finance books, securitisation, and bringing in non-bank investors easier and more feasible for investors. It is often difficult for banks to onboard SMEs due to the high opportunity cost (relative to reward size) so FinTechs are tending to focus on agile customer onboarding and the automation of KYC compliance checks.

FinTechs in the cross-border trade finance space are addressing three opportunities for banks, corporates, and businesses: KYC and the provision of quality information about the customer, onboarding journey time, and integration with bank systems.