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With supply chain costs soaring, cash-strapped SMEs can gain easier access to trade finance and do more business “if they use digital forwarders”.
According to Allianz Global Investors, demand for trade finance has been accelerating since the Covid-crisis triggered widespread supply chain delays and disruption, noting “a higher level of working capital is required to operate in today’s environment”.
Allianz added: “Broad-based inflation has increased input costs and the capital required to purchase and carry inventory. The bottlenecks in global shipping and warehousing are extending the cash conversion cycle for companies.”
These cashflow bottlenecks have a disproportionate impact on SMEs in developing economies, according to the Asian Development Bank, which estimated the trade finance gap grew to an all-time high of $1.7 trillion in 2020.
Tom James, CEO of TradeFlow Capital Management, said the financing options available to SMEs “began to dry up” when Covid hit, particularly in Asia Pacific.
“Some banks estimate the trade finance gap is now $3.4trn, which is a problem, but also an opportunity,” he said at the Digital Freight Alliance conference in Bangkok yesterday.
“But there’s one critical point, the opportunity hinges on the digitalisation of trade and the removal of inefficient and paper based processes. Without that we cannot then move on to the next step,” Mr James added.
He explained that due to new regulations it had become “very hard” for banks to lend to SMEs. Therefore, instead of providing credit or finance, TradeFlow Capital operates funds which take temporary ownership and control of the cargo.
“That enables us to help very new companies which may not have enough track record to talk to banks yet,” Mr James explained.
“We prefer to work with SME importers and exporters that use a digitalised freight forwarder. And we have already started discounting our cost of financing those trades if they use a fully digitalised process, because it brings transparency and allows us to monitor where goods are and their condition, and control the security of our investment.”
Supply chain data is key to mitigating risk, Mr James noted, and a lack of data is why most SMEs cannot get finance for their cargo, due concerns with transparency.
“There are ‘know your customer’ concerns; for example, did the cargo really come from that country? Is it really going to that destination? Is it really cocoa, or is it bullets?”
Data also provides forwarders with an opportunity, he said, because they could offer customers additional services, such as cargo tracking and automating customs clearance.
“It also allows SMEs to do more trades. If the process is more efficient, and money can then be moved around more effectively and efficiently, then that money can be put to use faster.
“But we can only help more SMEs and fund more trade if freight forwarders digitalise,” Mr James added.