How supply chain finance can enhance global trade opportunities for SMBs

By Pushkar Mukewar, CEO/Founder, Drip Capital

In the dynamic world of global trade, one financial solution has emerged as a game-changer, revolutionizing supply chains and propelling business growth: supply chain finance (SCF). This innovative approach has captured the attention of industry leaders, offering a lifeline to small and medium businesses (SMBs) seeking to thrive in an ever-evolving marketplace.

According to the World Bank, SMBs account for 90% of businesses and over 50% of global employment, significantly contributing to economic growth. In the US alone, 99% of companies are SMBs.

Despite being the foundation of every economy, banks and other traditional financial institutions typically perceive SMBs as high-risk. Even if they agree to work with these businesses, SMBs are usually required to provide collateral to secure bank credit, which is often impractical. This continues to contribute to the global trade finance gap, which exceeded US$ 2Tn in 2022, as per The Asian Development Bank.

To address their working capital issues, SMBs may opt for various SCF options, such as supplier finance, buyer/payables finance, and inventory finance. For instance, in payables financing, the buyer initiates an arrangement that allows the supplier to receive an advance payment and favorable credit terms against their purchases.

The SCF market is projected to reach US$ 98.5Bn by 2029, exhibiting a compound annual growth rate (CAGR) of 13.69% between 2022 and 2029. With such significant growth potential, SCF, in collaboration with ecosystem players worldwide, can create numerous opportunities for SMBs engaged in cross-border trade.

Here are four primary global trade opportunities SCF can provide SMBs:

• Robust Trade Relations:

Increasing globalization and the growing complexity of supply chains have led buyers and sellers to negotiate payment terms that suit both parties. SCF allows buyers more time to pay for their imports while ensuring suppliers receive prompt payments with some delivery flexibility. As a result, trading partners can continue conducting frictionless operations through solid and reliable channels. 

Additionally, businesses can regularly reevaluate or modify existing contracts to implement price changes when there is a positive buyer-supplier relationship. This is a crucial factor for SMBs to capitalize on new opportunities. Working with a fintech partner simplifies processes like invoicing, documentation, cash flow management, etc., and provides mechanisms for resolving disputes related to goods delivery and replacement. When buyers and suppliers mutually benefit, the entire trade cycle becomes productive.

• Ease of Doing Business:

Fintech companies offering SCF typically have alliances with key ecosystem players across the supply chain. They also provide ancillary services beyond traditional financing, which can help SMBs scale. These additional facilities include assistance with forex, insurance, shipping, buyer-seller meets, etc., which are usually pain points for small businesses.

• Increased Global Visibility & Reach:

Opportunities previously out of reach for SMBs, such as experimenting with new markets, ramping up research and development (R&D) and marketing efforts, and diversifying the supplier base, have become more manageable with increased cash flow. These factors enable SMBs to build a global reputation, develop brand loyalty, and make their goods competitive in international and local markets. Additionally, investments in tools like container tracking services further enable complete supply chain visibility, risk mitigation, and improved traceability.

• Tech-led Processes:

Behind every alternative lending fintech company lies a robust technology-backed framework to eliminate redundant manual processes. With modern SCF solutions, SMBs have abundant working capital and can afford to invest in technologies and adopt digitization. 

For example, with sufficient cash flow, SMBs can use digital tools to create smart contracts, make faster payments to vendors, store important data, and ensure a smooth flow of goods across borders. Leveraging other modern technologies like artificial intelligence (AI) and the Internet of Things (IoT) allows SMBs to establish efficient work loops for the entire production-supply chain, saving costs and enabling seamless and transparent business operations.

In Conclusion

An ICC Global Survey on Trade Finance involving 251 banks in 91 countries revealed that 85% of bank activities occur in traditional trade finance, while only 15% are in SCF. This paves the way for fintech players to curate customized solutions and fund cash-starved SMBs in a short span of time and without seeking collateral.