Ankit Goel is the Middle East and North Africa head of MODIFI, a a global fintech company that helps small and medium-sized businesses finance and manage their international trades
The pandemic’s impact on trade and supply chains was significant and in turn, also impacted economic growth and well-being. At the same time, the crisis led to an acceleration in the digitisation of business models, including cross-border business-to-business (B2B) e-commerce as a response to disruptions in supply chains.
From the onset of Covid-19, fintech startups emerged to help businesses fund global partnerships and secure digital trade financing through game-changing non-recourse factoring. In this article, I will discuss how digital finance tools can work as springboards for post-pandemic businesses.
The $1.7 trillion trade finance gap
According to an Asian Development Bank (ADB) study, rejection rates for trade finance reached record highs in 2020, with the gap between demand and supply currently at $1.7 trillion – a 15 per cent rise compared to the previous estimate of $1.5 trillion in 2018. The impact on supply and demand gap is particularly pronounced as the nature of the crisis continues to cause a negative ripple from downstream customer firms to upstream supplier firms.
The ADB’s latest research reiterates findings from previous studies that the trade finance gap disproportionately affects smaller enterprises, which are also strongly affected by supply chain disruptions. Approximately 40 per cent of rejected trade finance requests were from startups and small and medium-sized enterprises (SMEs) compared to a rejection of 17 per cent for multinationals. The survey covers more than 300 firms in almost 70 countries, beyond 112 banks, 50 export credit agencies, and 39 forfeiters around the globe. The lack of creditworthiness and lack of ability to provide financial statements are among the most prominent reasons to reject requests from businesses seeking trade finance.
There are significant obstacles for startups and SMEs worldwide regarding securing financing, especially in the United Arab Emirates (UAE), which the European Commission has been closely monitoring to guarantee compliance with the EU's anti-money laundering and counter-terrorist funding rules.
UAE banks are currently adopting cautious tendencies, closing accounts connected to free-zone firms and avoiding lesser-known prospective customers. Many lenders have also adopted a risk-averse approach to trade financing that’s likely to continue in the future - especially towards startups and SMEs that are inclined to trade internationally.
Startups are often unable to secure access to trade finance because they cannot provide collateral. In addition to that, they lack detailed information on market trends, Know Your Customer (KYC) requirements, or risk-management strategies that appeal to lenders.
Fintech companies are uniquely positioned to fill the gap and help startups access flexible injections of liquidity exactly when they need it, as well as set up digital processes that allow them to successfully trade internationally. Many fintech companies are able to offer cheaper, and better trade finance and other export solutions to startups. Since their due diligence is primarily technology-driven, they are usually less persistent on collaterals and more reliant on technology solutions to identify credit-worthy borrowers.
Big data has the potential to even the playing field while assessing cross-border SME and startup financing risks. Since every company has its unique risk profile, fintechs adopt a more customised approach to making lending decisions over a one-size-fits-all process.
Digital trade finance leverages data to assess the risks of a growing pool of underserved merchants. For example, digital trade financing can present a holistic view of a seller's risk profile by analysing multiple operational data points from credit insurance companies and additional, underused sources.
Understanding the actual risk of each transaction, as opposed to the perceived risk, streamlines trade workflows. Another advantage of a data-based infrastructure is that the system continually gets better at identifying what types of information are most helpful in determining the risks involved with any particular buyer or seller.
More visibility across supply chain
One of the most significant impacts that digitisation brings in for trade finance is the ease with which visibility and transparency is established for all parties. Accessing near-real-time data about logistics and supply chain operations is a crucial component for all businesses. The more information an organisation has before a critical occurrence, the faster it can remedy the problem. This enables them to not only track where their goods are in the shipping process, but also alert partners, or customers about potential risks to initiate quick resolutions for disruptions across the whole supply chain.
Another prevalent issue for startups has been about managing their trade documents – packing lists, warehouse receipts, certificates of origin, export licenses, etc. This whole process is manual and paper-intensive. Digitising this entire shipping documentation process can save startups and SMEs time in delivering cargo, and eliminate potential delays in shipments – ultimately saving money as well.
One of the most pressing problems digital trade solves is a dramatic decrease in paperwork through digital economy agreements (DEAs), which help businesses gain access to digital trade opportunities such as electronic invoicing, e-signatures, cross-border data protection and digital IDs, ultimately connecting overseas business partners more efficiently and helping companies improve productivity and reduce expenses. This also reduces fraud risk through greater control of the original, and the eliminated possibility of losing documents.
How it works
By leveraging digital trade financing, small and mid-sized traders can get invoices paid early, rather than having to wait up to 120 days or even longer. Moreover, by leveraging numerous data sources, digital trade financiers have a better understanding of risk for startups and SMEs and can therefore not only vet and confirm the legitimacy of the buyer, but also ensure the payment of the invoice, even if the buyers were to go bankrupt. This eliminates credit risks that often prevent sellers from offering more favourable contract terms to buyers.
With fintech solutions, startups can optimise their cash flow without the need for collateral or a Letter of Credit. They can:
Apply for finance in five minutes and have the cash in their account 48 hours later
Remove credit risk and trade confidently
Reduce payment disputes
Make their cash flow more predictable
Free up current lines of credit for investing in growth producing initiatives like purchasing equipment
Seamlessly track their shipments
Traditionally, supply chain management has been about sourcing, making, and delivering. Now, it’s about “funding”. Startups and SMEs finance more than 90 per cent of exports, but most have difficulty accessing credit from banks because their businesses are too new and lack collateral. Fintech companies can make supply chains more efficient by providing alternative solutions to startups and SMEs that can’t get traditional financing. Digital trade finance tools can help businesses reduce their credit risk, forecast cash flow and allocate working capital. In addition, having access to a digital trade finance solution can help startups SMEs explore a broader customer and supply base, possibly discovering new channels to buy or sell goods.