Trade Finance & SMEs - Reasons Why SMEs Opt For Trade Finance
Small & medium-sized enterprises ie. SMEs have long been considered one of the key drivers for economic growth along with an exceptional ability to fuel employment in a country. The importance of SMEs in the global economy lies in the report issued by the World Trade Organization according to which SMEs represent over 90 percent of the business population, creating 60-70% of job opportunities and 55% of GDP in the developed economies.
But unfortunately, despite their remarkable contributions to global trade development, the struggle of SMEs in securing affordable & flexible financing is not showing any positive signs, especially in international trade transactions. Many SMEs are unable to borrow from the traditional banks & have limited access to financial services leading to low productivity & exports. But why? The reason behind this lack of working capital is caused by imposed complexities by banks while applying for a loan. These institutions have become extremely risk-averse and are not willing to provide funding to companies with smaller balance sheets.
Here, applying for international trade finance enables small & medium-sized enterprises to execute overseas transactions with sufficient cash flow. In this blog, we are explaining why SMEs opt for international trade finance. Let’s find out:
1. Flexible & Scalable Funding -
SMEs provide their greatest contribution to a country’s economy yet are facing a lack of sufficient working capital that can accelerate their scalable growth in the global market. Here international trade finance providers like Emerio Banque understand their requirements by thoroughly evaluating the transactions they are executing and provide them with suitable, flexible & secure trade finance solutions to fulfill their business goals. By eliminating financial hurdles, SMEs can uninterruptedly ship the ordered goods on time and thereby kickstart productivity & trustworthy relationships with foreign importers. Invoice factoring provides credit protection, working capital & peace of mind regarding payment from the importers.
2. Cut Backs Banks’ Increased Complexities While Lending To SMEs -
Most banks are not willing to finance a trade transaction being executed by an SME in the global market due to their smaller balance sheet and an inability to provide any security which is commonly determined by their line of credit. Plus, they conduct a thorough check on the exporter’s financial stability that takes a lot of time and results in late loan approval. This limits SMEs' opportunities to maintain cash flow & enter into global transactions. Trade finance Services like Bank Guarantee provide them instant working capital, and accelerate cash flow by financing shipment. Also, the favorable part is that the funding is determined by the credibility of an exporter’s client, instead of the exporter’s, unlike traditional banking loans. Plus, trade finance services don’t show up as debt in SMEs’ balance sheets. They can receive payment as soon as they submit an invoice.
3. Assured On-Time Payment -Entering into a global transaction brings a series of risks for both importers & exporters such as non-payment & non-performance due to different rules & regulations as well as unfamiliarity towards one another, etc. The importers are at risk whether they will receive the goods on time while exporters doubt whether they will be paid or not. International trade finance instruments like Letters of Credit address these issues as the issuing bank guarantees on-time payment to the exporters in case the importer defaults.
4. Accelerate Cash Flow -An export business requires a smooth & sufficient cash flow to operate its day-to-day business activities. But generally, it takes months to get the payment for delivered goods that further roadblocks SMEs’ upcoming business opportunities during that period. Trade financing options like Documentary Collections resolve these cash flow issues by enabling them to get the payment as soon as the banks of both parties exchange shipment documents.
5. Get International Market Insights -Most of the SMEs lack experience with international markets but under the assistance of professional trade finance experts, they get knowledge about the compliance requirements of particular foreign markets and can develop advanced market knowledge with access to currency regulation control and other area-specific services to promote their growth. Furthermore, banks often evaluate many details when SMEs apply for loans and lack flexible funding options depending on their business needs. Trade finance providers offer customized solutions that meet their specific needs.
Increased cash flow & sufficient working capital are the primary requirements for SMEs when it comes to trading in the international market. Since the complex paperwork & processes of banks in lending money make it difficult for SMEs to get necessary funds on time, international trade finance can help them overcome economic crunch and boost their global business.