Amid a prolonged period of turbulence for global trade, many businesses face ongoing struggles to access the trade finance they need to support their trade operations and working capital requirements. However, a new industry survey suggests that a different approach could be key to addressing this issue. Jeanette Jones, Head of Corporates, Fineon Exchange, explains how digital networks could be a game changer in facilitating access to funding – with collaboration and the connecting of compatible parties at their core.
Struck by a convergence of disruptive factors in recent years, global trade continues to endure the consequences of the ongoing turbulence rippling through supply chains worldwide. From more familiar obstacles, such as low commodity prices and political instability, to trade finance frauds, infamous marooned container ships and protectionism – not to mention a global health crisis and now a war – this is a period of unparalleled uncertainty for trade.
To make matters worse, at a time when businesses are particularly in need of working capital support to navigate these challenges, accessing trade finance, the bedrock of international trade, has become increasingly difficult for many. Indeed, the global trade finance gap is at a record level, growing by 15% from $1.5trn to $1.7trn between 2018 and 2020, according to the Asian Development Bank (ADB).
With businesses needing finance more than ever, and the trade finance gap becoming more pronounced, urgent action is needed to reverse the trajectory of the gap, and set in motion a new era of more accessible trade finance for all.
To determine the most effective way to meet these needs, it is important to understand the specific barriers to funding that are currently being experienced. Fineon Exchange recently conducted a global survey of trade finance intermediaries to gain practical, first-hand insights into the trade finance landscape.
According to the findings, challenges in executing deals come equally from both sides of the transaction. For half of respondents, the biggest challenge is the shortage of “bankable deals” – those fulfilling the lending criteria of funders. Yet, the other 50% of respondents believe there is a lack of lenders looking to finance quality deals.
Given this split in opinion, the results indicate that both funder appetite and financeable deals do exist in the marketplace. The difficulties experienced by many importers and exporters in securing funding therefore seemingly lies with the unavailability of channels where compatible borrowers and funders can connect. Effectively, the right parties are unable to find each other.
The survey corroborated other industry findings that the struggle to access trade finance disproportionately affects SMEs, with business size the most commonly identified bias (see Figure 1).
Although not solely affecting SMEs, biases against a company’s size and geographical region in particular stood out in their effect on the success of deals.
Exacerbating this is the fact that, due to the ongoing volatility caused by the pandemic, many financial institutions (FIs) have engaged in de-risking strategies. This has left some companies in certain sectors and geographies that are deemed high risk, bereft of funding. Together, these factors make securing deals an even heftier task, especially for SMEs in emerging markets.
There is an increasing difficulty for borrowers to find the funding they need, especially in the context of sustained global trade disruptions. With a range of factors causing funding bias, implementing solutions that enhance companies’ ability to secure funding is an urgent requirement for the industry and the wider global economy.
But if the solution lies with enabling compatible borrowers and funders to be brought together, rather than overcoming the seemingly impossible issue of funders and SMEs simply being incompatible, the technology that can make this happen is already a reality, and could be transformational.
Platforms powered by AI are enabling the formation of global, digital networks that connect all stakeholders within trade finance, including corporate treasurers, trade finance brokers, funders and credit insurers. And their capabilities do not stop at providing a wider pool of contacts and an effective global communication channel. Through the rich, digital data available in these systems, it is possible to provide ‘matchmaking’ services, meaning that users are presented with counterparties that are compatible with their transaction needs or lending criteria.
For corporate treasurers, digital matchmaking cuts through the often bureaucratic and extended process of searching for suitable funders by effectively sifting financial information through an algorithm that identifies compatible counterparties from the global pool of funders.
This approach casts a far wider net and allows businesses to connect with the right funders at the right time. It also ensures a higher chance of transaction success for all stakeholders, and helps corporate treasurers to secure all-important funding to increase sales and optimise their working capital.
The value of such capabilities was widely acknowledged within Fineon’s survey. When asked if digitalisation and digital networks would be beneficial for their businesses, every single participant agreed that a digital network connecting them with corporates, funders and insurers could deliver benefits to trade finance.
Innovating and collaborating
We are already beginning to see a positive impact of digital ecosystems for trade finance, with networks providing fairer conditions for SMEs. But to ensure the success of digital ecosystems, the strength is in the numbers. These networks deliver the most effective results when comprised of a rich, diverse pool of funders and businesses. The greater the volume of participants, the greater the scale of opportunities and the likelihood of success. This translates into more support for individual businesses, and collectively over time means that the days of such an extensive trade finance gap could be numbered.
To achieve this, communication, co-operation and collaboration in global trade will be crucial. Whether via government initiatives or those of industry bodies like the International Chamber of Commerce (ICC) – such as with the recently launched standards toolkit for digital trade – by advocating digital capabilities and bringing various industry participants together, ecosystems that deliver end-to-end digital solutions can realise their true potential.
With global trade itself such an interconnected industry, digitally connecting key stakeholders to improve process efficiency, transparency, convenience and to maximise opportunities for its participants, is an opportunity that should be grasped firmly with both hands.
Read more about the survey in the industry whitepaper ‘Trade Finance Optimisation: Connecting the Right People at the Right Time’.