Why Trade Finance Is A Crucial Tool For SMEs Capitalizing On A Major Sports Event?

With Argentina’s historic win last night, Ankit Goel, Senior Vice President For Global Accounts at MODIFI, shares his perspective on using major sporting events as an incentive in Trade Finance.

The FIFA World Cup brought new opportunities to Qatar and the GCC nations, thus enabling economic growth across a range of critical sectors such as travel and tourism, hospitality, and infrastructure. This World Cup will pave the way for Qatar to enjoy potential near-term economic gains but also highlights the logistical challenges of managing the event, which will likely lead to positive spill over effects for the rest of the region. This trend is expected to continue as these economies are looking to capitalise on the attention that a global event like captures.

Opportunities

Ever since Qatar was picked to host the Football World Cup, companies in GCC countries have sensed the opportunities which are suddenly presented in front of them, and they are all set to reap the rewards as the mega event kicks in November 2022. Over the past few years, Qatar, along with the countries expected to benefit from this mega event (such as UAE), has been working with regional and global entrepreneurs and innovators to provide solutions which will directly support them in managing the logistical challenges expected to manage a sporting event of such large scale.

These entrepreneurs and innovators are mostly SMEs (Small and Medium Enterprises) and MSMEs (Micro, Small and Medium Enterprises) who rely on trade finance to increase the volumes of goods and services they trade, fulfil large contracts and scale operations internationally.
Challenges for the SMEs

However, opportunities come with challenges as SMEs usually face funding gaps as long credit periods can drain their finance. These companies typically have more difficulty obtaining credit from formal financial institutions. This is mainly due to information asymmetry, lack of previous credit history, legal documentation and many more., leading to the unwillingness of traditional lenders to provide financing. Even if they get funding, it typically involves lengthy approval processes, requiring hard collateral such as movable property and other onerous documentation. These lenders adopt a risk-averse approach to trade financing that’s likely to continue in the future, especially regarding SMEs who want to trade internationally.

Another prevalent issue for SMEs has been managing their trade documents – packing lists, warehouse receipts, certificates of origin, and export licenses. This whole process is manual and paper-intensive. Digitising this entire shipping documentation process can save SMEs time in delivering cargo and eliminate potential shipment delays – ultimately saving money.

Role of Digital Trade Finance Firms

FinTech trade finance firms such as MODIFI have emerged to help businesses fund global partnerships and secure digital trade financing through game-changing non-recourse factoring. These companies use technology solutions to identify credit-worthy borrowers and are usually less insistent on borrowers providing collateral. Equally, because their due diligence is technology-driven, it is faster and more accurate than the traditional people-driven approach.

How MODIFI manages its Risks?

MODIFI generally adopt a more customised approach to making lending decisions over a one-size-fits-all process. It leverages data to assess the risks of a growing pool of underserved merchants. For example, digital trade financing can present a holistic view of a seller’s risk profile by analysing multiple operational data points from credit insurance companies and additional, underused sources. Another advantage of a data-based infrastructure is that the system continually gets better at identifying the types of information most helpful in determining the risks involved with any particular buyer or seller.

Paperless Transactions

Fintech firms digitise the entire shipping documentation process, saving SMEs time in delivering cargo and eliminating potential shipment delays – ultimately saving money. One of the most pressing problems digital trades solves is a dramatic decrease in paperwork through digital economy agreements (DEAs), which help SMEs gain access to digital trade opportunities, electronic invoicing, e-signatures, cross-border data protection and digital IDs—ultimately connecting overseas business partners more efficiently and assisting companies to improve productivity and reduce expenses. This also reduces fraud risk through greater control of the original and eliminating the possibility of losing documents.

How Does It Work?

By leveraging digital trade financing, small and mid-sized traders can get invoices paid early rather than wait up to 120 days or even longer. Moreover, by leveraging numerous data sources, digital trade financiers have a better understanding of risk for SMEs and can, therefore, not only vet and confirm the buyer’s legitimacy but also ensure the payment of the invoice, even if the buyers were to go bankrupt. This eliminates credit risks that often prevent sellers from offering more favourable contract terms to buyers.

With Fintech solutions SMEs can optimise their cash flow without needing collateral or a Letter of Credit. They can: Apply for finance in 5 minutes and have the cash in their account 48 hours later; remove credit risk and trade confidently; reduce payment disputes; make their cash flow more predictable; free up current lines of credit for investing in growth-producing initiatives like purchasing equipment; seamlessly track their shipments.

In conclusion, the renewed collaboration between Qatar and GCC nations will encourage reciprocal trade and foster economic stability for the GCC region. This will provide further opportunities for businesses within this region to grow. FinTech companies can make the supply chain more efficient for these businesses by providing alternative solutions that cannot get traditional financing. Digital trade finance tools can help these businesses reduce their credit risk, forecast cash flow, and allocate working capital. In addition, having access to a digital trade finance solution can help companies to explore a broader customer and supply base, possibly discovering new channels to buy or sell goods.

From Logistics News ME December 2022 Issue.