Liquidity oils the wheels: Supply trade finance is essential to SMEs
Lack of trade finance for SMEs threatened to bring supply chains to a halt in 2020. Martin McCann from Trade Ledger and Barclays Bank’s James Binns consider how a more collaborative approach could keep them moving in future “You need to get out of the way of the juggernaut or you’re going to get flattened by it.” That’s how Martin McCann, CEO and founder of lendtech platform Trade Ledger, would suggest banks view the fast-approaching epoch of ‘non-linear banking models’: a collaborative ecosystem of organisations delivering financial and other related services in a variety of circumstances and using multiple digital mechanisms to do it. Follow the silk thread that binds this web together, and it leads back to banking. McCann therefore suggests banks exercise imagination in ‘thinking about what the next three years could look like’. And nowhere is creativity needed more than in re-imagining working capital flows for SMEs. Ponder this: SMEs play a critical role in trade – responsible for between 20 and 40 per cent of exports from OECD countries. And yet, when it comes to affordable trade finance, they face the biggest barriers, with europe.money2020.com
more than half of trade finance requests by SMEs rejected, compared with seven per cent of multinational corporations’, according to the WTO. The prejudices against extending credit to SMEs by less forward-thinking banks – the kind, perhaps, who aren’t actively looking at banking-as-a-service models as a way of correcting this imbalance – has been exposed by recent events. The OECD, reflecting on the experience of SMEs in the international supply chain during 2020, said short-term trade finance in all its forms (intra-firm financing, inter-firm financing, or more dedicated tools such as letters of credit, advance payment guarantees, performance bonds, and export credit insurance or guarantees) was critically hard to come by – but not because the cost to banks of providing that liquidity had increased. Rather, the International Chamber of Commerce reported a retrenchment of bank lending because they simply deemed
this segment ‘high risk’, even when the cash to oil the wheels of trade was never more desperately needed. That forced SMEs to fall back on government agencies to stay in business: the Export-Import Bank of the United States, one of the largest providers of short-term government export support, for example, reported a 112 per cent increase in working capital guarantees and a 12 per cent increase in short-term export credit insurance during 2020. According to an OECD survey, 64 per cent of export credit agencies took measures that year to increase working capital support because private liquidity simply wasn’t forthcoming. So, you can understand why McCann is excited by the prospect of open finance creating what he calls a ‘digital CFO’ for SMEs, which isn't an individual but rather a community of providers that exchange data on an SME and can work together to present the business with financing options that weren’t available to it in the past.
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