PODCAST | How alternative lenders are changing trade finance

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Alternative lenders – non-bank entities that provide financing outside traditional banking channels – are no longer peripheral to the trade finance ecosystem. Their increased presence reflects a structural failure: banks’ declining ability to lend to small and medium-sized enterprises (SMEs). 

Trade Finance Global’s (TFG) Charles Osborne spoke with Saurabh Goyal, Founder and CEO of Phlo Systems, to explore why alternative lenders are stepping into the SME financing gap, how their operations differ from banks, and what this shift means for the future of trade finance.

Why banks are pulling back

Risk appetite is often at the centre of conversations on SME financing. According to Goyal, however, the main constraint is actually cost structure. Trade finance remains low-risk, but it has become operationally expensive for banks, particularly when it comes to SMEs.

“Banks are not able to service that market because of the high cost of compliance and regulations such as Basel, which requires heavy collateralisation of trade finance in terms of assets kept with the bank,” explained Goyal. “Alternative lenders are seeing an opportunity to fill this gap.”

The Basel III Endgame framework, established by the Basel Committee on Banking Supervision (BCBS) in response to the 2008 financial crisis, assigns risk weights for loans that determine how much capital banks must hold against potential losses. SMEs often receive less favourable treatment than large corporates due to limited credit data and higher perceived operational risk.

To reduce risk-weighting, banks are pushed to demand more collateral, requiring SMEs to pledge assets such as cash, inventory, or receivables. Many smaller firms lack sufficient collateral, so they’re excluded from financing. 

Beyond capital and collateral, compliance obligations such as know your customer (KYC), anti-money laundering (AML), and sanctions screening impose largely fixed costs regardless of transaction size.

These combined costs make SME financing increasingly unattractive for banks, creating space for alternative lenders. 

Speed and flexibility over price

For SMEs, access to finance is often less about securing the cheapest capital and more about whether financing can be arranged quickly enough to execute a trade. 

“All borrowers – and particularly SMEs – want financing that is easier, faster, and cheaper. Alternative lenders certainly score on the first two,” said Goyal. “Their processes are easier, and they can close deals faster than banks.” 

According to the European Banking Authority (EBA), “non-bank lending remains largely unharmonised across the EU,” meaning regulatory requirements are often entity-specific, with authorisations and registrations applied on a case-by-case basis. 

As a result, while banks may reject transactions based on geography, company size, or commodity exposure, non-bank lenders tend to have a broader risk appetite. 

Alternative lenders also tend to adopt a more relationship-driven model. “The trade financer considers the trader as a friend and a partner in many cases,” Goyal noted, pointing to cases where funds provide services alongside capital. 

These can include helping traders hedge currency or commodity exposures, or facilitating introductions to suppliers and buyers through their networks – areas where many SMEs lack expertise or scale.

The fund space: growing but unstable

Alongside banks and direct lenders, a significant share of trade finance is now provided by investment funds that deploy pooled capital. While this has expanded rapidly, it’s still unsettled, Goyal cautioned. 

“The fund space is in a bit of a flux,” he said. “We started in 2016 – the top funds from that time do not exist anymore, but we see many new funds coming into the market.” This instability reflects what he described as a “still-evolving” approach towards risk management. 

Many funds are moving from manual spreadsheets to digital fund administration platforms. While they were previously more concerned about how they mitigate risks on the borrower side, they are now also concerned about regulations, performance, underlying assets, and real-time reporting to their investors. 

According to Goyal, funds operating in specific jurisdictions must also comply with local regulations, including AML, audit, and transparency requirements. This encourages a shift toward proper fund management systems rather than basic collateral and trade monitoring tools.

But despite operational upgrades, the fund-based trade finance markets still face a perception problem, being widely seen as riskier and more volatile than other areas of finance. For Goyal, however, this view conflates weaknesses in fund-level practices with the risk profile of trade finance. 

“Trade finance as an asset class has default rates that are many times lower than other forms of credit,” he said. Default rates – the proportion of loans that fail to be repaid – are a standard indicator of credit risk. Although operational complexity and some high-profile failures create a perception of risk, the problem isn’t trade finance but rather the way some funds have entered the market. 

Certain funds have taken on transactions that have been rejected by banks due to weak credit quality. “If your pool of incoming prospects is made up of bank rejects,” Goyal noted, “and you don’t have the same infrastructure controls and verification that banks have, it’s quite natural that default rates will be higher.”

Technology as an enabler of liquidity

The ability of alternative lenders to expand financing is also reliant on new technologies. 

“Alternative lenders can adopt technology much earlier than others,” said Goyal, pointing to Phlo Systems’ own early experimentation with blockchain-based trade finance in 2017. That initial attempt failed, he noted, not because the idea was flawed, but because the infrastructure was not there yet.

This has since changed. The emergence of stablecoins has created a viable use case for blockchain, enabling the flow of information and the flow of value across the trade finance chain. 

With both contractual terms and payments now capable of being automated, blockchain-based systems are beginning to support real economic activity. They are also being used for fund management, automating operational work and cash flows.

According to Goyal, capital from crypto-native investors is increasingly flowing into real-world assets. While adoption is likely to be gradual, it presents a potentially important new source of liquidity for the market.

Making SMEs financeable through visibility and data

But the long-term expansion of SME financing ultimately depends on visibility rather than capital alone. For Goyal, although alternative lenders believe they can manage SME risk more effectively because they understand trade flows, that understanding depends on access to real-time data.

Digitalisation plays a crucial role at both the onboarding and post-financing stages. Visibility into a trader’s historical performance allows financiers to assess risk and price financing more accurately, while real-time updates on trade execution ensure that funds are deployed in line with agreed terms. 

Goyal pointed to modern Enterprise Resource Planning (ERP) systems as a key enabler, allowing trade data, from procurement and storage to shipping and delivery, to be shared automatically with financiers. 

“If that information is communicated in real time,” he said, “it improves both access to finance and the pricing of that finance,” offering a pathway to making SME trade finance scalable and sustainable.