The Asian Development Bank, which ramped up the trade finance industry’s focus on broadening access to small businesses after releasing a report that estimated the global trade finance gap now stands at $1.5 trillion, has released new analysis warning of the impact a lack of technology will have on companies struggling to access such financing products.
In a joint report released this week with the United Nations Economic and Social Commission for Asia and the Pacific (UN ESCAP), the ADP again urged world leaders to combine their efforts in addressing the trade finance gap.
“Amidst global trade tensions, regional cooperation to cut red tape and automate trade procedures is more important than ever,” said ESCAP United Nations Under-Secretary General and Executive Secretary Armida Salsiah Alisjahbana in remarks made this week to open the Asia Pacific Trade Facilitate Forum, held in India.
Her emphasis on automation is key, according to the ADP’s and UN ESCAP’s “Asia-Pacific Trace Facilitation Report 2019,” also released this week, which pointed to the role of technology in connecting businesses to trade finance products.
According to the ADB’s Vice President, Knowledge Management and Sustainable Development, Bambang Susantano, the risk of “digital poverty” looms large over SMBs.
“Digital poverty — unlike conventional poverty — will be a new form of poverty,” he said, according to The Hindu Business Line reports this week, referencing businesses’ lack of technological tools and resources that can facilitate trade finance. “We don’t want to see that. We want digital technology to be both efficient, sustainable, and also equitable.”
In another statement, Susantano pointed to the “enormous untapped potential in the rapidly evolving digital technologies” to address key barriers to trade finance, including “high transaction and processing costs.”
While the ADB and UN ESCAP’s analysis focused on the Asia Pacific region, the latest analysis by PYMNTS reveals that the trade finance struggle is not isolated to the region. Indeed, U.S. small and medium-sized businesses are feeling the trade finance crunch as corporate customers continue to drag out payment terms.
As PYMNTS and Fundbox find in the recently released “SMB Receivables Gap: The Business Impacts of Trade Credit Playbook,” young and low-margin small businesses are particularly affected by the B2B industry’s reliance on trade credit and, subsequently, have the need to seek financing to manage cash flow. Those early-stage, low-margin businesses seek short-term financing nearly twice as much as small businesses that are more established and higher-margin, PYMNTS research found, with nearly 31 percent of early-stage, low-margin SMBs routinely experiencing a cash shortfall.
What’s more, early-stage, low-margin SMBs — the ones that tend to have a greater need for financing — are also the ones that struggle most in search of that external capital.
“Financial institutions are more likely to extend favorable credit terms to [high-margin firms], given their healthy balance sheets, meaning these firms have greater access to credit and financing products but less need for them,” the report concluded, adding that more than 9 percent of established, high-margin companies don’t use any kind of financing product to manage cash flow at all. “Only a fraction of other types of companies are in this fortunate position,” the report noted.
Businesses of all types use a range of financing tools to manage cash flow while selling to their clients on credit and waiting for invoices to be paid, including credit cards and merchant cash advances. Nearly half of all businesses say they use a line of credit to cover cash flow gaps, the second-most popular financing product behind credit cards. The use of factoring — one kind of trade finance — is among the least popular.
According to the ADB and UN ESCAP, trade finance products including factoring, trade finance, reverse factoring, Export Import finance and more, are essential to not only ensuring the continuous flow of trade, but health flow of cash for businesses large and small. Technology, the organizations agree, is a critical component of trade finance access.