The lengthy trade cycles and financial risks inherent in conducting international trade transactions mean that firms engaged in import and export continue to rely on trade finance as a key tool when managing their accounts and cashflow.
Historically, this been provided to MNCs by traditional commercial banks, with SMEs left to rely on conventional banking products or sporadic government finance initiatives.
However, with trade finance under supplied following the financial crisis, the number of non-bank lending platforms offering these products to both SMEs and larger clients has grown steadily in recent years.
Mainstream Commercial Finance
Whilst each firm in the market has its own unique trade finance product offering, the size, cost and terms of the finance offered by firms is broadly dictated by three things;
- where lenders source their capital;
- how they assess a borrower’s operational risk and;
- their thresholds regarding that risk
Based on these factors, the trade finance market divides into three groups.
First, mainstream commercial banks offer trade finance through specialised trade finance divisions which lend their organisation’s capital to firms. Lending bank capital earmarked for commercial lending creates several bureaucratic hurdles for established trade financiers.
Chiefly, banks’ appetite for risk in business to business lending is generally very low, which can often result in them requesting assets (such as property) as collateral against their loans.
This drastically diminishes one key benefit of trade finance, which is to free up finance for companies constrained by lengthy trade cycles without asking them to squeeze capital out of their accounts.
Moreover, mainstream banks also often assess trade finance applications in much the same way as they do other commercial loans; correspondingly, the risks of trade finance ventures supporting businesses constricted by their cashflow can often appear inflated against their metrics.
Finally, these larger organisations are constricted by company-wide processes aimed at fulfilling KYC regulations, which often set rigid pricing parameters in accordance with the bank’s primary market (for example, London) and therefore make profitable, safe investments in firms trading with overseas markets appear riskier to the bank and pricier to the potential lender.
As such, mainstream banks and large independent trade financiers can offer extensive investment, security through reputation, and deep contacts in markets – but these advantages are often only available to their existing corporate banking clients, and to established international firms with significant turnovers.
Disruption in the Market
As banks have scaled back their trade finance activity in the wake of these regulatory and risk considerations, non-bank lenders focused exclusively on trade financing are increasingly providing trade finance products to both large and small firms.
These emerging firms have been well placed to invest in recent fintech innovations, constructing an array of digital trade finance networks and industry platforms which are reducing many of the barriers barring firms and lenders from operating in the market for trade finance.
These firms are making their size and narrow strategic focus into a benefit for trade finance customers. Whereas commercial banks have diverse interests, investors are increasingly accepting that trade finance firms’ exclusive focus on international trade ventures leaves them better placed to judge what the appropriate trade finance product is for a company – and correspondingly, what operational risk a proposed venture truly poses to them as potential investors.
Moreover, in contrast to banks, these firms generally have limited capital to lend directly. Instead, they maintain a network of diverse funding sources (including direct private investors, investment houses, and crowdfunded capital) which they connect firms to.
The advantage of this approach is that firms have access to the full range of trade finance products available across the entire trade finance market, to full flexibility on the size and cost of their lending, and to bespoke repayment terms tailored to the nature of their venture.
Generally, trade finance sourced from a trade financier also requires less tangible securities (such as purchase orders or goods receivable) when lending.
As well as this surfeit of non-bank lenders, the public sector has been steadily increasing the number of trade financing options it offers firms.
These usually take the form of either government-backed export credit agencies, which support national businesses to develop trade links abroad, or internationally-backed development banks, which facilitate trade with developing world regions.
Whilst admittedly offering a limited product range, these agents can offer firms engaging with particular territories (usually, emerging markets) trade financing for longer-term investment partnerships between countries.
Trade finance is vital for firms looking to initiate or expand their international trade operations in order to meet demand, expand their consumer base and grow profits. With an increasingly broad range of providers offering trade finance products, there has never been a better time to seek advice from a trade financier and pursue international trade ventures.
For more information about trade finance, credit worthiness, and possible repayment terms, contact Trade Finance Global today.