To finance the estimated $27 trillion worth of cross-border B2B trade flowing through the globe’s supply chains, some businesses have plenty of options — from traditional bank loans to invoice factoring and other trade financing products.
But not all businesses are created equal. Often, small- and medium-sized businesses are trading with lower invoice values than mid-market and larger corporates, resulting in these SMBs getting squeezed out of the market for trade finance offerings from providers that don’t find smaller firms valuable enough to work with.
According to Shirish Jain, program director at Proxtera, this creates a significant barrier to growth for smaller firms.
“SMEs [small and medium-sized enterprises] have many options for finance only when they have a track record, when their trades are with ‘known’ buyers, and where ticket sizes are in the sweet spot for lenders — [about] $30,000,” he recently told PYMNTS. “This has created a higher barrier to entry, and often results in lack of choice, no choice or choice with extreme needs, such as personal security or collateral.”
When invoice and order sizes are under that $30,000 threshold, awareness of alternative sources of capital can be lacking among the small business community. As Jain explained, however, this is far from the only roadblock firms face when looking to grow and trade internationally.
Lack Of B2b Trust
Trade finance products like supply chain and purchase order financing act as vital sources of capital to fuel cross-border trade. But providers of these financing products also serve another purpose: to operate as the middle-man that can mitigate risk and ensure that funds land in the appropriate hands.
When smaller companies lack access to trade finance, they’re also missing that risk mitigation component that can make B2B trade so cumbersome.
“With regards to cross-border trade, the biggest barrier SMEs face is trust,” said Jain, noting that this lack of trust manifests in several ways.
On the supplier side, a lack of trust means a lack of certainty of payment, while for buyers, it means a lack of certainty that the right goods will be delivered on time. This point of friction can also cause challenges in the dispute resolution process in the case that contract terms are not met.
According to Jain, the pain point of a lack of payment certainty for vendors, and a lack of cost efficiency for buyers, is particularly acute in less mature trade corridors in which financing options are even more limited.
Before — And After — The Trade
Mediating these points of friction can be complex, going beyond merely injecting cash and offering escrow services from the point of sale.
Indeed, said Jain, streamlining the flow of cash in cross-border B2B trade involves addressing the biggest points of friction both before and after a deal is struck.
On the pre-trade side of the lifecycle, there is an opportunity to offer support in buyer-supplier discovery, as well as in facilitating import/export licensing requirements. During trade, he said, small businesses face plenty of logistical and shipping hurdles, particularly in newer trade corridors. And finally, in the post-trade workflow, businesses are tasked with managing payments and working capital.
Proxtera’s strategy to combat these trading roadblocks is to integrate directly into B2B eCommerce platforms and introduce add-on services like financing, payments and fulfillment. This requires strategic collaboration and coordination between Proxtera, eCommerce platforms, FinTechs and the trading partners involved, but results in a workflow that can address small businesses’ challenges at the point of need, regardless of where they are in the global trade lifecycle.
With the coronavirus crisis adding even greater friction to global trade operations thanks to business closures, supply chain disruptions and working capital constraints, SMBs will be tasked with finding the right tools to overcome these hurdles. Diversifying supply chains and implementing a working capital cushion will be critical for smaller firms as they wade through the disruption.
“By diversifying their supply chain, SMEs will be able to expand their revenue sources from a single market to multiple markets rapidly, improving the odds of thriving in the ‘new normal,’” said Jain.