How fintech solutions can support small exporters

In today’s world, reaching new markets by developing unique products and expanding operations, is critical. But funding these goals requires access to the most suitable financing options – at the right time.

Fintech startups have emerged to help businesses fund global partnerships and secure digital trade financing through game-changing non-recourse factoring. According to an Asian Development Bank (ADB) study, rejection rates for trade finance reached record highs in 2020, with the gap between demand and supply currently at $1.7tn – a 15 per cent rise compared to the previous estimate of $1.5tn in 2018.

The bank’s latest research reiterates findings from previous studies that the trade finance gap disproportionately affects smaller enterprises, which are also strongly affected by supply chain disruptions. Approximately 40 per cent of rejected trade finance requests were from small and medium-sized enterprises (SMEs).

There are significant obstacles for SMEs regarding securing financing. UAE banks are currently adopting cautious tendencies and avoiding lesser-known prospective customers. Many lenders have also adopted a risk-averse approach to trade financing – and that’s likely to continue in the future, especially for SMEs who want to trade internationally. SMEs are also often unable to secure access to trade finance because they cannot provide collateral. In addition to that, they lack detailed information on market trends, know-your-customer (KYC), or risk-management strategies that appeal to lenders.

Fintech companies are uniquely positioned to fill the gap and help SMEs get access to flexible injections of liquidity exactly when they need it, as well as set up digital processes that allow them to successfully trade internationally.

Big data
Big data has the potential to even the playing field when assessing cross-border SME financing risks. Because every company has its unique risk profile, fintechs adopt a more customised approach to making lending decisions over a one-size-fits-all process. Digital trade finance leverages data to assess the risks of a growing pool of underserved merchants. For example, digital trade financing can present a holistic view of a seller’s risk profile by analysing multiple operational data points from credit insurance companies and additional, underused sources. Understanding the actual risk of each transaction, as opposed to the perceived risk, streamlines trade workflows. Another advantage of a data-based infrastructure is that the system continually gets better at identifying what type of information is most helpful in determining the risks involved with any particular buyer or seller.

How it works
By leveraging digital trade financing, small and mid-sized traders can get invoices paid early, rather than having to wait up to 120 days or even longer. Moreover, by leveraging numerous data sources, digital trade financiers have a better understanding of risk for SMEs and can therefore not only vet and confirm the legitimacy of the buyer, but also insure the payment of the invoice. With fintech solutions, SMEs can optimise their cash flow without the need for collateral or a letter of credit. They can apply for finance in five minutes and have the cash in their account 48 hours later, remove credit risk and trade confidently, reduce payment disputes, make their cash flow more predictable, free up current lines of credit for investing in growth producing initiatives, including purchasing equipment and seamlessly track their shipments.

In a nutshell
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 SMEs explore a broader customer and supply base, possibly discovering new channels to buy or sell goods.

Ankit Goel is the regional head at Modifi