Trade financing is not just a fundamental aspect of international commerce but also a driver of global development. In fact, an astonishing 80% of international trade relies on some form of financing to facilitate its flow. In the fast-paced world of international trade, financing plays a pivotal role in ensuring smooth transactions.
However, the global trade finance gap, as defined by the Asian Development Bank (ADB), has reached a staggering $2.5 trillion in 2022, up from $1.7 trillion just two years earlier. This alarming increase has been fueled by a combination of factors such as rising interest rates, economic uncertainty, inflation, and geopolitical tensions, making it increasingly challenging for businesses to secure the necessary financial support.
Despite the strong rebound in global goods exports in 2021 and 2022, reaching growth rates of 26.6% and 11.5%, respectively, businesses faced heightened economic risks and difficulties in obtaining financing, as indicated by the ADB's 2023 Trade Finance Gaps, Growth, and Jobs Survey.
Understanding the Trade Finance Gap
The trade finance gap, a term elucidated by the Asian Development Bank (ADB), signifies the divide between the funding sought by businesses to facilitate their international imports and exports and the actual approvals they secure. This predicament is underscored by the findings of the ADB's 2023 Trade Finance Gaps, Growth, and Jobs Survey.
The Challenges Faced by SMEs
For small and medium-sized enterprises (SMEs), obtaining trade financing has become even more challenging due to several key reasons reported by SMEs themselves:
- Insufficient collateral or guarantee: Many SMEs struggle to provide the necessary collateral or guarantees to secure trade financing, limiting their access to capital.
- No previous transactions or lack of business relationship with financial institutions: SMEs without a history of successful transactions or established relationships with financial institutions face difficulties in obtaining financing.
- Inability to fulfill documentation requirements: Complex documentation requirements can be a barrier for SMEs, hindering their ability to access trade financing.
- Bank’s anti-money laundering/know-your-customer requirements: Stringent compliance requirements can pose challenges for SMEs, particularly in adhering to anti-money laundering (AML) and know-your-customer (KYC) reporting and monitoring obligations.
- Economy's “high risk” rating: When a country's economy is labeled as "high risk," SMEs operating in that region may encounter increased scrutiny and challenges in securing trade finance.
Harbor's Innovative Solutions
Harbor is committed to addressing these issues and closing the trade finance gap through a range of innovative solutions:
- Digital Trading Solutions: We aim to provide digital trading solutions and interoperability within the trade ecosystem, allowing SMEs to access working capital as part of their routine workflows. This creates transparency, reducing information asymmetry between capital providers and SME counterparties.
- Global Perspective and Multi-Funder Model: Harbor's global perspective and multi-funder model allow for greater geographic reach, ensuring that SMEs have access to the financing they need for international trade.
- Trade Finance Distribution (HarborMRKT): We create additional capacity for the trade finance asset class through our Trade Finance Distribution platform, HarborMRKT. This enables a broader pool of funders to participate in trade finance, increasing accessibility for SMEs.
- Streamlined KYC, AML, and Compliance Checks: Transparency on our platform will facilitate easier, cheaper, and quicker KYC, AML, and compliance checks on SMEs, enabling better client profiling and risk assessment while reducing operational burdens.
At Harbor, we are dedicated to empowering businesses, fostering growth, and driving global economic development through trade. With our comprehensive solutions, we aim to bridge the trade finance gap and unlock a world of opportunities for SMEs.