Problems of Financing International Trade

The Asian Development Bank (ADB) estimates a global gap in trade finance of about $1.5 trillion, while the World Trade Organization (WTO) suggests this amount could grow to $2.5 trillion by 2025. According to the WTO, 50% of trade finance requests by SMEs were rejected in 2018. This gap is a significant roadblock to international trade, and it affects especially SMEs and companies in developing countries. 

These numbers show that financing international trade transactions can be cumbersome and expensive, especially for SMEs. They usually don’t run their own trade finance departments, don’t have negotiating power with international banks, and they benefit less from economies of scale. So what are their challenges, and what are some possible solutions? 

High Financing Costs

International transactions are expensive. It’s not only the banking fees that cut into margins but exchange rate fluctuations and the banks’ exchange rate deductions as well. Costs of international transactions can quickly add up and make the entire transaction less profitable for the seller or more expensive for the buyer, depending on who ultimately pays for the transaction fees. 

One way to reduce these costs is to escape the traditional banking system by working with companies like TransferWise, which have significantly cheaper transaction costs. You can even use blockchain-based cryptocurrencies, which are not subject to the enormous volatility that Bitcoin faces. The challenge with cryptocurrencies, however, is that most trading partners won’t accept them as a means of payment yet, but that could change soon as the technology progresses. 

Complexity and Bureaucracy

International trade comes at risk since the buyer may default and not pay, or the seller may not deliver the product after payment. Trade finance solutions have been designed to mitigate such risks. Letters of credit, for example, include a guarantee from the buyer’s bank that the amount of the purchase price is being held in escrow. Once the seller can provide proof of shipment, the buyer’s bank will release the payment.

The issue with this kind of trade finance is that it involves several entities and a vast amount of documentation. Bureaucracy significantly slows down such trade deals and causes delays. One solution is to use trade platforms like Export Portal. On Export Portal, money is being held in escrow until the seller proves shipment. Since all the data is directly recorded in a safe blockchain-database, it can be updated in real-time and requires little bureaucratic effort. But the result will be faster transaction speed and higher security.

Export Portal is Here to Help!

If you have any questions about international trade or are looking for a trustworthy space to complete global trade transactions, make sure to check out our site!