Despite its uneven distribution, the Africa Policy Research Institute states that about 80% of world trade depends on trade finance. With trade finance perceived as the backbone of global commerce, developing markets seeking financial sustainability strengthen the need to bridge trade finance gaps.
An International Asian Development Bank report states that the global trade finance gap made a quantum leap in 2020, increasing to $1.7 trillion from $1.5 trillion in 2018. These unmet needs are due to the need for more regulation, limited access to trade finance, and problems with compliance.
Importance of Trade Finance in Global Business
Trade finance exists to help suppliers, purchasers, and financiers establish a healthy and steady cash flow for the global supply chain to thrive.
Increases Revenue
Trade finance enables companies to request suppliers for larger orders. They will have access to dynamic discounts that suppliers offer for large bulk orders.
Mitigates Risk
Lending payments to exports entails risks, and trade finance reduces this risk by guaranteeing that goods will be shipped out to importers. If the buyer defaults, trade financing companies provide non-recourse financing to pay the exporter.
Optimises Operation Efficiency
Trade finance addresses delays to shipments and payments by ensuring the payment is primarily guaranteed, mitigating the risk of non-payment and non-receipt.
Ensures Business Growth
Trade finance provides a large amount of money to companies considered unbankable so they can seal financial deals.
The Impact of Trade Finance Gaps on Businesses
Hindered Growth Opportunities
Every business's goal is to grow and expand, but with trade finance gaps acting as stumbling blocks, these aspirations need to take a backseat. Inadequate financial support prevents businesses from accessing new market opportunities or venturing into collaborative partnerships with key players. This challenge impedes growth and curtails economic development.
Increased Transaction Costs
Another reason to address trade finance gaps is its effect on transaction costs. Gaps cause transaction costs to increase, affecting the entire supply chain. With favourable financing terms, businesses can resort to more expensive funding options. Higher costs deny businesses the chance to stay competitive in the global marketplace. Increased transaction costs create a ripple effect as suppliers and purchasers are not the only ones affected; consumers are also affected.
Risks of Supply Chain Disruption
Businesses need to have a well-functioning supply chain to participate in international trade. Unfortunately, trade finance gaps prevent businesses from entering the intricate market. Having adequate financial resources is critical to having a steady flow of goods and payments. Without funding, there will be disruptions in the supply chain, jeopardising supplier relationships.
Competitive Disadvantages
The competitive environment of the global market poses a challenge to businesses to become innovative, but innovation would mean investing in technologies to ensure sustainability. The transformation needs a vast amount of money, but the gaps use a significant competitive disadvantage. The lack of innovation renders businesses irrelevant, making it hard for them to keep up with a fast-evolving industry.
Narrowing the Gap
Facilitating International Trade
When facilitating international trade, it is essential to address trade finance gaps to unlock the full potential of a business. Once businesses have the necessary financial tools and resources, it is not only enterprises that can benefit from the solution but the global economy through growth and stability.
Opening New Market Opportunities
Exploring new market opportunities is essential for economic growth, but with trade finance acting as a barrier, businesses need more capacity to expand. If financial means can help companies tap into uncharted territories, there will be diversified revenue streams, creating a resilient global economy.
Mitigating Risks and Uncertainties
Ensuring Financial Stability
Navigating the complexities of international trade is inevitable for businesses, but with trade finance as their safety net, embarking on such a journey will be less challenging. However, gaps can worsen the situation, gradually destroying this safety net. With financial instability waiting to strike, it can be difficult for businesses to bounce back. Without adequate financial support, economic downturns, disruptions and other financial challenges impact businesses.
Ensuring financial stability involves mitigating trade finance gaps. When businesses have the financial tools needed to acquire a more resilient financial ecosystem, achieving sustained economic growth is not far from happening.
Minimising Exposure to Market Fluctuations
In an inherently volatile global market where numerous factors influence fluctuations; trade finance slows down the impact of market volatility. When minimising exposure to market fluctuations, businesses must make strategic decisions to navigate market uncertainties.
Banks and critical stakeholders can narrow the trade finance gap by targeting several areas. With this approach, businesses can derive development impact and prosperity from international trade.
Taking the Next Steps
Addressing trade finance gaps starts with advancing the development of trade finance, so it becomes an investable asset class, helping investors engage while improving industry practices. When trade financing has additional capacity, nonbanks and alternative financiers can also participate in international trade.
Another solution to trade finance gaps is to increase the deployment of deep-tier supply chain finance. A standardised process, including legal frameworks, should create a seamless operation from developing accounting norms to providing appropriate technology solutions for this strategy to move forward.
Those unmet financing needs can take a serious toll on key markets' overall operations. With several factors identified as the root cause of the problem, having limited access to trade finance can have long-term effects.
The affected markets are considered at higher risk because they do not have the credit history, resources, and collateral to access trade financing.
Another problem that limits access to financial services is the weak regulatory environment. When there are adequate enforcement mechanisms and legal frameworks, gaining the financial sector's confidence will be challenging, as there is a need for more trust and transparency.
Conclusion
There are diverse challenges associated with trade finance gaps. It revolves around more than one issue, as many aspects require deep-dive analysis. Financial institutions help these markets grow and develop. Whether it is a lack of regulation or compliance issues, employing measures to mitigate risks will increase the chance of building trust and strengthening relationships.
POINTRADE helps these markets take on the challenge of innovating and exploring new avenues for business growth. You are one step away from fulfilling a journey towards growth. Call POINTRADE, and we will show you the transformative potential of our digital trade finance platform.