It's a problem that has long existed for smaller entities, but has become more acute since the Great Recession of 2007-2008. In the wake of that economic crisis, a number of banks backed away from trade and supply-chain financing for all but the largest customers. In other words, the ones that didn't really need it.
An estimated $74tr of global business is done today on credit terms. Yet small and medium-sized enterprises (SMEs) are finding it harder than ever to secure trade credit. They’re on the lookout for solutions that can replace traditional bank financing, while helping to manage the details of complex global supply chains.
There are two main reasons for the difficulties that SMEs are having in accessing credit today, according to Chris Hale, chief executive officer of global trade-financing specialist Kountable. One concerns the nature of modern-day trade. “The balance sheets of small businesses relative to the opportunities they can originate have a significant mismatch,” Hale says. Often a cross-border transaction will be conducted in the context of a larger contract — say, the procurement of goods for installation within a computer lab. In such a situation banks are reluctant to undertake a credit profile on the small business, “even though it doesn’t intend to own those goods for a second longer than it has do,” he says.
The second stumbling block for SMEs today is structural in nature. A trading company offering financing can use assets in the trade itself as collateral. But banks want cash or facilities to back up the transaction — the kind of resources that a smaller entity might not possess upfront.
Add to that the difficulties that smaller traders have today in meeting identity-management requirements, ensuring that they’re not enabling countries on various watch lists or involved in illegal activities such as money laundering. “Being able to buy from a reputable supplier becomes a challenge for many overseas small businesses,” says Hale. “There’s no standardized way to assess buyers.”
The identity issue is becoming more solvable, however, with the proliferation of mobile devices and a flood of available data on prospective trading partners around the world. Armed with the right tools, SMEs are finding it easier to scale operations in this regard, Hale says. The same technology can also help to provide real-time visibility of goods in transit, as they move through the supply chain to the qualified end customer.
Big data is combining with the distributed nature of high-quality mobile equipment to address the problem, says Hale. In the process, SME’s can stitch together the equivalent of a global supply chain, without the massive investment in hardware and technology, such as point-of-sale machines, barcode scanners and trackers, that would otherwise be required. “Now,” he says, “they’re all apps.”
Companies like Kountable are offering non-traditional approaches to trade financing by structuring themselves like trading companies and engaging in what amounts to “micro joint ventures.” They take title to goods while in transit, and share the margin in their deals.
Not a finance expert by training, Hale was motivated to address the problems of SMEs following the financial crisis. “In evaluating some of those system failures,” he says, “I thought there would be an opportunity to serve a group of human beings who were going to be most desperately impacted by the fallout and structural changes that were coming.”
Hale recently returned from a trip in East Africa, during which he met with governments and ministries to stitch together local ecosystems that could strengthen the position of SMEs in the region. He says the same kind of services can be of equal value to smaller entities in the developed world as well, even in the U.S. domestic economy.
Banks, of course, remain major players in the trade-financing game, albeit in a more restricted role. “Most people still prefer transactions with a bank,” says Hale. But their reluctance to do supply-chain financing deals with many SMEs has opened the door to a number of creative solutions, both in enabling the transactions and ensuring timely payment when they happen.
Look for new technologies such as blockchain, which distributes an accurate and secure transactional record across multiple partners, to provide further options for traders of all sizes. “The way you do business will change dramatically,” says Hale. “Technology kills cost.”