SMEs in trade finance: flying under the radar
For cross-border trading small and medium-sized enterprises (SMEs) operating in most countries, 2021 proved challenging to say the least.
2022 has been no exception.
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Goods and services trade have largely plateaued to pre-pandemic levels, but the new normal has come with a fresh set of challenges, especially for SMEs.
Today’s trade challenges lie around grappling with global inflation rates, which have soared to 2008 levels, causing the economic outlook to be “overwhelmingly tilted to the downside” according to the IMF.
For governments, central banks and policymakers, reining in inflation has been the number one priority.
Businesses are suffering from inflationary pressures in three ways: a demand-side dip in goods and services, an increase in debt servicing costs, and the spiralling price of goods and overheads.
The inflationary direction is continuing only one way: up.
Picture this: a small-sized polymer trading company will spend 4.2x more in container shipment costs and 3.1x more in purchasing plastic compared to pre-pandemic levels*. That’s before inflation and energy costs come in.
Port congestion, closures and inefficient freight routes continue to exacerbate the issue–even months after the closure of China’s Ningbo-Zhoushan port, the Suez Canal blockage, and port delays in the West Coast of the US–as investigated in this issue of Trade Finance Talks.
ESG or not to be
Elsewhere in this issue, we address calls for innovation in environmental, social and governance (ESG) in trade and supply chains.
With 80% of the world’s total carbon emissions linked to supply chains, climate change and sustainability is ever increasingly upon the industry’s lips.
Attention has shifted to how companies can effectively incorporate better sustainability measures into business practices.
But caution must be taken to avoid greenwashing, and given the ambiguity and lack of clarity over best practices, definitions and standards, reputational damage stands as a business risk.
For SMEs, there is an interesting question on how liable they should be in terms of ESG compliance.
Considering $50 trillion is needed to finance the transition of SMEs to net-zero, the challenge is significant.
Small businesses, big problems
The landscape for SME trade finance continues to be a tricky affair, from both a lender and a borrower perspective.
In this issue, TFG summarises the key findings from its recent research paper ‘SME Trade Finance: A Europe Outlook’.
Historically, banks have overlooked ‘riskier’ smaller businesses in favour of larger corporations with higher return rates and economies of scale.
Yet TFG research showed an appetite for higher margins and propensity to pay, especially for those SMEs who already use borrowing base facilities, documentary collections and letters of credit to finance their cross-border trade transactions.
A hop, skip and several time zones over, China has barely managed to keep its head above water, with poor stock market performance, property scandals, and factory closures.
Volatility continues to be a trend echoed in the digital world–if not in a significantly more positive context.
Navigating the ever-changing dynamics of the tradetech space may seem a daunting task, especially as digitisation trends are not slowing down in pace.
Digital trade reform for electronic trade documents continues to shine through, with the UK set to take centre stage. The Electronic Trade Document Bill, if passed, could pave the way for widespread acceptance of digital bills of exchange, promissory notes, bills of lading, and warehouse receipts under English law.
Headwinds are also being made in secondary markets too. There have been all sorts of advances, from the conceptualisation of receivables exchanges (think NYSE for receivables assets), to trade finance-backed fungible security tokens, which would allow further liquidity into the trade finance market.
As Patrick deVilbiss said, “It is often tempting to be a follower rather than a leader, but technology investment and strategic planning lag years behind actual implementation no matter how agile the organisation.”
It’s not all sunshine and rainbows, however.
TFG’s 2018 Gartner-Hype cycle for blockchain in trade and trade finance demonstrated the industry’s evolution as two significant trade networks, we.trade and HSBC’s Serai, moved into the ‘trough of disillusionment’.
This abrupt shift has catalysed the debate over the durability of digital islands and networks, leaving question marks looming over their futures. It seems that partnerships, viable business models, and a focus on revenue generation is key for the entire fintech ecosystem.
But the future, at least in this respect, seems hopeful.
For a more detailed overview of these topics, look no further than our latest edition of Trade Finance Talks!
Deepesh Patel, Editor and Annie Kovacevic, Junior Editor, TFG
*Container shipment costs based on the Freightos-Baltic Index and the Polymer costs based on European Polymer Price Index Plastixx ST, January 2020 versus June 2022.