Small and Mid-sized Enterprises (SMEs) represent about 95% of the global economy. However, these companies tend to have limited access to financial services and risk mitigation strategies that are essential to their growth. International trade finance enables overseas transactions for small, mid-sized, and large companies.
SMEs, in particular, require working capital that grants them access to new markets. However, these companies face the most challenges when it comes to obtaining the financing they need. Traditional bank loans often aren't an option and usually don't provide payment protection. As a result, an SME's working capital can be tied up in the shipment of goods for up to six weeks.
International trade finance companies offer alternative financing solutions, specifically tailored to meet the needs of SMEs. Find out below why international trade finance is essential for small and mid-sized businesses.
BANKS OFTEN DO NOT CATER TO SME NEEDS
Most banks won't finance SMEs without adequate security. An SME's line of credit often determines this security. In many cases, this process limits an SME's ability to maintain healthy cash flow and pursue growth objectives.
Trade financing offers more flexible solutions that can accelerate cash flow and reduce exposure to trade risks. Funding is based on the credit rating of an exporter's customer, instead of the exporter's financials. In contrast to bank loans, trade finance services don't show up as debt on an exporter's balance sheet. Exporters can typically expect to receive a payment within two days of submitting an invoice.
SMEs anticipating growth can benefit from scalable financing options that grow with their businesses. Additionally, longer payment terms leave buyers with more working capital to continue fulfilling orders.
TRADE FINANCE REDUCES PAYMENT RISKS
Both importers and exporters face higher payment risks with international transactions than with domestic trade. The importer doesn't know if they will receive the goods as expected. Similarly, the exporter doesn't know if they will receive their full payment on time. Following are some factors that can contribute to payment delays and losses.
The importer's credit rating and history of payment/non-payment.
Exchange rate risks due to currency fluctuations.
Political events that impact foreign economies.
The inability to meet changing market requirements.
Changes in transit costs.
International trade finance service providers address these payment risks by supplying a Letter of Credit. This document guarantees payment for goods as soon as all the required shipping documents are complete. A trade financing intermediary will also perform collections on behalf of the SME while monitoring the creditworthiness of their customers.
To know more: https://www.tradewindfinance.com/news-resources/why-is-international-trade-finance-important-to-smes