Much has been said of Covid-19’s effect on businesses. Many organisations have had to adapt in order to work more flexibly and adhere to social distancing. In some cases, well-established, traditional industries have managed to maintain some degree of normality during lockdown. However, it cannot go unnoticed that many organisations – especially smaller businesses – have been hit hard by the pandemic, especially when it comes to accessing trade finance.
It’s no secret that small and medium-sized enterprises (SMEs) have always struggled to access trade finance due to their size and the regulatory landscape. Now, a global pandemic presents another obstacle for these businesses to overcome. There is no shortage of disruption caused by the crisis, and it will be SMEs that will bear the brunt of the economic slowdown even as lockdown measures begin to lift.
Major hubs such as China are a prime example of this. In Hubei, one of the worst-hit regions in the country, only 60% of businesses have reopened following the lift of lockdown measures. Additionally, 64% said they lacked the cash flow to survive for longer than three months. As a result, it’s expected that many companies in Hubei will be forced into insolvency.
A similar pattern is slowly emerging across the rest of the world, threatening the existence of many SMEs and the livelihoods they sustain. To prevent these businesses from closing, a macro change is needed – ideally at a governmental level.
One thing leads to another
SMEs cannot be left to weather this storm alone. With these organisations representing 90% of the world’s businesses, and more than 50% of employment worldwide, their stagnation would be felt in every region and across every industry. While the gradual lifting of lockdown will go some way towards helping these organisations, it still does not overcome the historic issues related to trade finance.
When lockdown lifts completely, traditional trade finance institutions will still struggle to identify the risk profile of these businesses due to their size or place in the supply chain. This inevitably prevents an otherwise reliable and successful SME from receiving finance. Even if a financial institution manages to establish a risk value on these businesses, Basel restrictions will limit the amount of finance that can actually be shared by banks. It’s here that the market needs to be opened and, with support from governmental bodies, can not only enable these SMEs to survive, but also thrive.
A win-win situation
Governments globally are already stepping in with various plans for emergency funding to keep businesses afloat. But this can only go so far. Very specific types of companies receive these emergency funds, which overlooks today’s complex and interconnected supply chains. Instead, assistance to SMEs should be focused on trade finance.
The distribution of trade finance assets to alternative investors is one of the best ways to help SMEs. Government change should encourage banks to open up this market, parcel trade finance loans into assets and give smaller investors the ability to engage with a low risk product that will not only close the $1.5tr. gap between what banks can loan and what businesses need, but allows for smaller organisations in the supply chain to obtain access to funds they would not had previously.
Naturally, technology needs to be at the forefront of this change. Artificial Intelligence (AI) and machine learning are already being applied in innovative ways to improve trade finance. These solutions have helped establish an accurate risk profile even for small businesses, streamline the letter of credit (LC) process and provide greater visibility on a transaction.
However, going further, this technology can help corporates through enabling banks to distribute their risk. Having distributed their trade finance exposure with the support of governments, banks will then be able to extend financing to more businesses, providing added liquidity to the market and benefitting corporates.
If this were to happen, SMEs would reap the benefits of distributed trade finance. Even after lockdown ends and economies regain some sense of normality, this shift in the industry will help grow many organisations around the world. In short, distributed trade finance can enable SMEs to survive the pandemic today and thrive in the years that follow.