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The Missed Opportunity of Foreign Trade Financing for SMEs: Catch Up and Increase Sales!

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The Missed Opportunity of Foreign Trade Financing for SMEs: Catch Up and Increase Sales!

Foreign trade financing comes with many challenges – both for the bank and the client applying for a letter of credit, guarantee, or trade credit. The complicated path of application processing and tons of paperwork significantly decrease the potential effectivity and profitability of export and import financing. Additionally, international transactions introduce complexities such as navigating exchange rates and tariffs, which can further complicate the process.

This article will prove to you that:

  • SMEs are no longer a risk, but an opportunity for banks
  • Five thousand fields to fill in are prone to error
  • Fewer processes that exhaust resources mean better profit

Foreign trade tools are dedicated financial solutions that help take up industry challenges. For example, a letter of credit allows to reduce the risk connected to the solvency of a client, and a guarantee helps to secure against the failure or unwillingness of a partner to pay. Huge corporations have at their disposal a number of solutions aiding in tackling such problems. Smaller enterprises are usually left to their own devices, which inhibits their growth. Export finance programs, particularly those backed by the government, can assist SMEs by offering guarantees of repayment, encouraging commercial lenders to extend financing, and helping SMEs start exporting or expand their export sales.

According to the World Trade Organization, the main obstacle in the development of this branch of the economy is the gap in trade financing, which is experienced mainly by exporters and importers from the SME segment. Predictions say that by 2025, the demand for such capital on the market might increase up to 2.5 trillion dollars. Already a few years ago, WTO has pointed out that as much as 60% of applications of small and medium businesses are met with denial from the bank.

Small businesses are no longer a risk, but an opportunity for banks

The main obstacle inhibiting banks from approving SME applications for letters of credit or guarantees is the difficulty of evaluation and verification. Financial institutions must obey restrictive requirements which aim at anti-money laundering (AML), verification of transaction parties (KYC), and evaluation of their financial health. SME subjects are harder to verify this way, and crediting comes with greater risk and transaction costs. That is why such transactions are usually less profitable for banks.

Of course, a bank is not a charity, and projected profit is the determining factor of whether it should engage in a given initiative. Bigger companies with well-established and less shaky commercial relations are more likely to make open-account settlements in international trade than use solutions such as letter of credit, so it is smaller enterprises that are potentially a better match for trade finance products and financial instruments.

Trade finance helps SMEs secure favorable payment terms, enabling them to access larger markets and take on more complex projects in international trade.

How to resolve this? Technology is the way to better verify nontransparent small companies and reduce transaction costs. Digitalization helps to increase process efficiency and solve the problem of costly verification of financing beneficiaries, taking into account transaction risk and compliance with regulations. Technological solutions facilitate the work of not only banks, but also their clients.

Choosing the right payment method is crucial for international trade transactions. For instance, while the cash-in-advance payment method eliminates credit risk for exporters, it may create cash flow problems for importers and potentially cause exporters to lose out to competitors offering more attractive payment terms.

The digitization of internal systems that handle foreign trade allows for applications to be sent and processed in an electronical form; in addition, they do not require handwritten signature.

Banking experience shows that in only two years, a well-prepared guarantee-granting platform accessible to bank clients and employees can increase profits from a product by 23%.

Five thousand fields to fill in are prone to payment risk

Getting a loan is only a few smartphone taps away. To buy the perfect shoe size, you simply need to scan your foot. To find something online, all you have to do is say it out loud. Unfortunately, foreign trade financing procedures don’t keep up with customer needs nor 21st century technological advancements. The things that entrepreneurs use privately every day are inapplicable in their business. So the problem is that the comfort of modern life is not translated into the business environment. It is not easy to do because of abovementioned formal restrictions, including the handling of accounts receivable in trade finance.

Improving trade financing processes can facilitate secure and efficient trade transactions for SMEs.

The Boston Consulting Group calculated that in order to finalize one such transaction in the traditional way, five thousand fields need to be filled in! This means the necessity to engage a lot of human resources, and increases the risk of error, delays, not to mention planned overuse.

Improving trade financing processes can significantly enhance cash flow for SMEs, ensuring they have the liquidity needed to operate efficiently.

Companies expect the process of obtaining trade finance products to be simple, quick, and paperless. It is not easy to implement, though, when in order to go to the next step of a transaction, one has to tackle a highly formalized process, international standards, and the necessity to inform clients about application status. In this case, time is money, and the way to save it is to optimize operational costs and improve the communication with the bank.

The gap in SME trade financing continues to be a barrier that restrains the development of the global market. However, the experience of banks in managing the trade market, the investment potential of SMEs, and the technologically advanced sales channel allowing acceleration and simplification of trade finance product offering are the recipe for filling this gap.

Electronic support for foreign trade financing products is already a standard and it’s something that clients expect. Hence, banks that haven’t introduced it yet are far away from what companies are used to. It is worth it to get acquainted with the Trade Finance Platform, which solves the problem of task overload, the necessity to fill in complicated paper forms, and the lack of communication with clients about what is going on with their products. There is a solution that has helped banking giants such as BNP Paribas and ING.

Fewer exhausting processes mean better cash flow

Trade Finance Platform is a complex solution that allows banks to expand their services with products connected to foreign trade, and to save the time of bank employees and better respond to the current needs of their clients, especially the ones from the SME sector, who expect a comfortable and fully digital process.

The modular architecture of the platform allows to adjust it to specific needs and introduce particular products step by step, starting with the ones that bring the most profit. The system enables the clients to apply for a guarantee, letter of credit, or online collections, and learn about how these products work, in order to be able to check the application status in real time. And all of this will be set in a safe, digital environment that complies with SWIFT standards and ICC laws. Additionally, the platform provides an extra layer of protection by securing funds from banks to guarantee payment if all conditions are met, ensuring that exporters still get paid even if the importer does not pay for the goods.

The importer’s bank plays a crucial role in facilitating trade transactions by handling payment collections, issuing letters of credit, and reducing risk in global trade.

What’s in it for the bank? Trade Finance Platform helps to reduce operational costs thanks to getting rid of paperwork archives, handwritten signatures, and visiting client branches in person. The functionality of sending marketing messages within the system gives the opportunity to promote products more efficiently and support the client every step of the way through modern communication channels (chat, video).

Trade Finance Platform allows to offer corporate clients trade financing products in a way that answers their needs. The creator of the platform, Comarch, has experience in working with banks to make all this possible while avoiding unnecessary costs and reducing risk to the minimum.

Source article has been created created with money.pl – read the original content. 

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