By Christoph Gugelmann, CEO of Tradeteq
The recovery put in place following the impact of Covid has been huge. Whether it is the furlough scheme, loans to businesses or the increasingly popular ‘Eat Out To Help Out’ programme. However, these practices have not helped everyone, and there are still challenges that businesses – especially SMEs – face in the coming months. While many of the efforts of governments have looked to reduce the financial impact felt by smaller businesses, there is still a need for a more surgical approach that helps entire supply chains rather than individual organisations.
Addressing the bigger picture
Even with governmental support, supply chains for small businesses continue to suffer. This is, in part, to the longstanding barriers that have limited SMEs from receiving the finance needed to support these international trade. Covid and lockdown have only exacerbated an ongoing issue and increased the strain on these companies.
Traditional methods of trade finance are harder to access for these businesses – often due to the lack of historical financial records that provide a clear view of the company’s risk. Even when risk can be established, Basel restrictions limit the amount of capital financial institutions can provide. As such, SMEs often fail to receive funding through these traditional avenues. Under normal circumstances, they would simply be limited in their options, but with the fallout of lockdown still being felt, entire companies can be at risk.
While the efforts put in place to help SMEs are admirable, they are mainly addressing the day-to-day concerns of businesses, rather than provide a more permanent solution. SMEs are still struggling to receive the funding they need to trade and if they have international operations, this can be a hugely concerning factor in their future.
Increasing government support
SMEs cannot be left to weather this storm alone. With these organisations representing 90% of the world’s businesses, and more than 50% of employment worldwide, their stagnation would be felt in every region and across every industry. While the continual easing of lockdown is helping these businesses return to some sense of normality, it still does not overcome these historic issues related to trade finance.
It’s here that governments need to take increased action on their efforts to support SMEs. The market needs to be opened and, with support from governmental bodies, can not only allow SMEs to survive but also thrive. The distribution of trade finance assets to alternative investors is one of the best ways to help these businesses.
Government change should encourage banks to open up this market, parcel trade finance loans into assets and give smaller investors the ability to engage with a low-risk product that will not only close the $1.5 trillion gap between what banks can loan and what businesses need but allow smaller organisations in the supply chain to get access to funds they would not have previously had.
Solving the bigger problem
In many respects, this approach is similar to the Eat Out To Help Out scheme as the government would be encouraging increased investment into these smaller businesses – only from a more macro level. However, instead of looking to support businesses by eating, we’re helping businesses by trading. Through using a method that addresses an entire supply chain, the positive impact of this investment will be felt for far longer and help many more businesses.
Naturally, technology needs to be at the forefront of this change. Artificial Intelligence (AI) and machine learning are already being applied in innovative ways to improve trade finance. These solutions can help establish an accurate risk profile even for small businesses, matching similar organisations and current market trends to accurately identify the risk profile. This gives both large banks and smaller investors a clearer picture of the risk of the company that was not there before.
However, going further, this technology can be used to accurately profile risk requirements, package up the loan and allow smaller investors to trade effectively. As an added advantage, this streamlined process will be completely electronic, helping maintain social distancing requirements that have now become the norm.
If this were to happen, SMEs would reap the benefits of distributed trade finance, going beyond the current pandemic. In short, this approach is a lifeline that can enable SMEs to survive the pandemic today and thrive in the years that follow.
Even with the support the government is providing, it’s important to look at the other options available that solve the bigger issues at play. While Eat Out To Help Out is a fantastic incentive for the day-to-day challenges of a small business, solving bigger supply chain issues will address more engrained barriers these companies have been facing for years.