Digital Trade Finance: A Solution for SMBs’ Supply Chain Challenges

Digital trade finance gives access to financing, liquidity, cutting red tape in imports and exports and visibility with shipping.

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Supply chain disruptions have been a major part of the news cycle for longer than most executives had anticipated. When the world came to a halt due to the Coronavirus disease (COVID-19) in 2020 and factories in Asia and exporting nations were shut down, it created a domino effect that resulted in shortages of key manufacturing components, order backlogs, delivery delays and a spike in transportation costs and consumer prices. These issues continue to aggravate businesses large and small, and consumers are confronted with an experience once rare in modern times: no stock available and no idea when it will come in.

This summer, over 30% of small businesses reported that supply chain disruptions have had a significant impact on their business(es). The situation is expected to worsen as we approach the holiday shopping season, and there is a general consensus that supply chain disruptions could last months into 2022.

Adding insult to injury in shipping delays is the increase in freight costs. Over the past year, international shipping costs have skyrocketed and fierce competition for freight containers became the new standard. Average container shipping rates from China to the United States easily exceed $20,000 per 40-foot box and larger retailers are chartering their own ships to mitigate disruptions -- an unattainable and costly option for most companies.

One commonly overlooked aspect to supply chain disruptions is the financial consequences for businesses, specifically small and medium-sized businesses (SMBs), which in the best of times have difficulty competing with their larger counterparts. Access to financing, liquidity, cutting red tape in imports and exports and visibility with shipping has always been an issue for SMBs, and a digital trade finance solution could very well be the answer to their challenges. 

The financing and liquidity issue

In normal situations, small exporters invest upfront in raw materials, labor and manufacturing to produce their goods. Sometimes buyers pay upfront, and occasionally they pay when they receive the goods. In the best case, the timeframe between shipping and receiving can take several months, and exporters -- who are only paid once their buyers receive the goods -- could be waiting 30-150 days for payment.

During supply chain disruptions, whether with cargo ships sitting for weeks outside ports, goods waiting on carriers to take them across the ocean or when merchandise arrives in port, gets stuck in customs or has to wait for truckers to take products to buyers, the timeframe between the exporter and the buyer can increase exponentially – even upwards of 450 days. This increases payment delays and can cause serious financial problems for SMBs trying to compete with large retailers.

SMBs are crucial to global trade, contributing around 30% of volumes worldwide. Finance is usually required to facilitate these trades, but banks reject more than 50% of SMB trade finance requests. This has resulted in a devastating funding gap of $1.7 trillion, 15% higher than 2 years ago, due to COVID-19.

Having a financial support system can sometimes make or break an SMB’s business model. SMBs already have significant difficulty obtaining financing from banks. These challenges only intensified during the COVID-19 quarantine, when many banks closed their branches to reduce physical contact dangers. Over 55% of SMB business operations suffered harsh consequences following the COVID-19 outbreak, particularly in China, the EU, and the United States.

However, there are solutions available where invoices can be paid to help buyers and sellers outlast disruptions. Optimizing the inflow and outflow of cash year-round requires modern financing solutions to adjust to unique working capital cycles. Maximizing cash flow is one of the best ways to free up the working capital necessary to expedite business activities. Digital trade finance offers buyers and sellers flexible payment solutions that optimize balance sheets.

Cutting red tape and shipping visibility

Another issue for SMBs can be managing their trade documents – packing lists, warehouse receipts, certificates of origin, export licenses, etc., and knowing where their goods are in real-time in the shipping process. Effectively managing the shipping documentation process will save SMBs time in delivering cargo and eliminate potential delays in shipments – ultimately saving money as well.

Every country has unique policies, regulations, taxes, duties and shipping documentation requirements that can make international shipping complex and time-consuming. SMBs should take the time to conduct the proper research and seek out answers to shipping documentation requirements, but many do not have the resources to manage trade documents and track visibility. Digital trade solutions can help SMBs overcome these issues.

One of the most pressing problems digital trade solves is a dramatic decrease in paperwork through digital economy agreements (DEAs), which help SMBs gain access to digital trade opportunities such as electronic invoicing, cross-border data protection and digital IDs, ultimately connecting overseas business partners more efficiently and helping companies improve productivity and reduce expenses. They also offer more security since they are less susceptible to fraud.

Another important consideration for SMBs is supply chain visibility (SCV). It is essential to any business by providing near-real-time data about logistics and supply chain operations. That data helps companies understand where their goods are in the shipping process, alert partners, customers and manage liquidity.

Digital trade solutions

SMBs are critical players in the future of the global economy, but they face most of the challenges in securing financing. Unfortunately, many companies have already succumbed to bankruptcy due to pandemic-related system and supply chain financing failures.

One effective solution is digital trade finance, which facilitates international trade for SMBs by maximizing their working capital. Trade finance platforms can help a company secure additional financing in a matter of minutes, and more importantly, create a foundation for economic growth. Digital trade finance tools can help businesses reduce their credit risk, forecast cash flow and allocate working capital. In addition, having access to a digital trade finance solution can help SMBs explore a broader customer and supply base, possibly discovering new channels to buy or sell goods.

Now, business owners are strategically preparing for the new normal by turning to digital trade financing solutions. With these services, companies can minimize their risk exposures while supporting supply chain resilience.

Importers and exporters across the globe are beginning to recognize the advantages of adopting a technology-based infrastructure. Bridging this digital divide will support economic recovery after the pandemic and ensure that trade is less vulnerable to future black swan events.