- Trade within emerging markets is now rising at a considerably quicker rate than trade between EM countries and the rest of the globe.
- Access to trade finance has been a major impediment for SMEs seeking to enter emerging international markets.
- A variety of institutions that provide trade finance solutions have been established to facilitate commerce between small and medium-sized firms on the one hand and huge worldwide corporations on the other.
- Trade financing offers the best opportunity for emerging market businesses to grow.
Emerging markets have grown at a lightning speed. Over the last 20 years, it has resulted in transforming international trading practices. Emerging economies now play a larger role in international trade than ever before. Twenty years ago, emerging economies accounted for about 30 percent of the world’s trade. Today, the figure stands at nearly 50 percent.
As supply and demand grow, emerging markets enterprises require ongoing working capital to maximize distribution, operational efficiency, and inventory turnover. International trade financing companies can assist emerging market businesses in improving their cash flow position and reducing their risk exposure.
Emerging markets have dramatically increased their economic footprint in international trade during the last several decades. Previously, the majority of commerce occurred between advanced economies. However, now, trade within emerging markets is growing much faster than trade between EM countries and the more-developed world.
International trade finance companies typically extend working capital to businesses in emerging markets by providing them with trade finance facilities such as documentary collections, letters of credit, standby letters of credit, factoring facilities, and export credit.
Currently, one of the most significant impediments to corporate expansion in emerging economies is a lack of access to trade finance.
Problems with access to trade finance have been a serious stumbling block for SMEs that want to tap into emerging international markets. However, a number of solutions have been developed in the past decade, and a growing number of traditional banks have been using trade finance.
As a result of capital constraints, some local banks cannot provide trade finance. In other cases, funding needs are too large for bank resources to cover. With a view to facilitating trade between small and medium-sized businesses on the one hand and large international companies on the other, a number of institutions have been set up that provide trade finance solutions.
Trade financing provides the best chance for emerging market enterprises to optimize their earnings from international trade. Because the credit of the entire supply chain is leveraged, even enterprises that may not qualify for regular bank financing might benefit from trade financing. Trade financing is essentially a line of credit that is extended to suppliers in the exporting country, who in turn extend credit to their trading partners in the importing country.
International trade financing can assist businesses in growing by:
- Providing an assessment of a proposed venture’s profitability and operational risks
- Providing flexible loan access via direct credit lines between the financier and the importer/exporter Assisting in the negotiation of better terms with suppliers
If you want to know more about Trade and Trade Finance, listen to the latest episode of the EMT podcast:
Main photo By Berket Mengesha – Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=100246536