Trade Finance for Small and Medium-Sized Enterprises in today's economy

Trade finance is an umbrella term for financial instruments that aim at reducing the risks of international trade. It allows small businesses to compete in a global marketplace, fulfill orders to large multinationals, and focus on the company or services they provide instead of dealing with financial challenges. 

The most common trade finance tools for small and medium-sized enterprises (SMEs) are: 

   • Letter of Credit: The importer's bank guarantees the payment to the exporter, saying that once the exporter presents all the shipping documents as per the purchase agreement, the bank will release the payment to the exporter.

   • Bank Guarantee: If the importer or the exporter fails to make the payment as agreed, the bank will pay a pre-defined sum of money to the beneficiary. 

   • Factoring: The exporter sells his outstanding invoices to a "factor" at a discount. The factor then takes the risk of non-payment, and the exporter receives his cashflow earlier. Factoring is thus a way to reduce default risks and to increase working capital to keep trading.

   • Forfaiting: The exporter sells his accounts receivables to a forfaiter at a discount. The significant difference to factoring is that factoring can be with or without recourse, but forfaiting is always without recourse. 

SMEs access to trade finance tools is limited

Big corporations often have entire treasury departments that deal, amongst other things, with trade finance. SMEs mostly do not have that level of specialization and are thus at a disadvantage. As a result, their access to trade finance tools is often limited. They don't have the resources and knowledge to produce bankable proposals, get support from banks and national institutions, and establish the necessary banking relationships.

Additionally, it is more expensive for banks to provide trade finance to SMEs than to larger corporations, because the lower transaction volumes often don't justify the banks' compliance costs. 

According to the World Trade Organization, globally, more than 50 percent of all trade finance requests by SMEs are rejected, leading to a funding gap of US$ 2 trillion. The lack of liquidity hinders global trade and increases the risks for SMEs. 

How Export Portal reduces trade risks for buyers and sellers

As the access to liquidity is a significant challenge for SMEs, Export Portal has made accessible trade finance part of our mission. EP's international trade hub has adopted a blockchain-platform to the entire transaction cycle, including financing and holding funds in escrow. 

Buyers pay money into a blockchain-based escrow wallet where it stays until they receive their products. Once the product has arrived, the funds are automatically released to the seller. This way, both the buyer and the seller can have full confidence in the transaction. Among many other features, our secure escrow solutions are why importers and exporters prefer to trade with Export Portal.