One of the driving forces behind the Globe Merchant Exchange, was to understand the need for cross-border financing. Are the returns great enough for investors to expand their cross-border finance operations, is there a need for finance among active companies that primarily operate and run the global supply chain, is there still room for small companies in the global supply chain sector and how do they acquire finance. The research takes aim at whether companies could obtain better finance solutions and even finance in the first place, and whether financiers could receive better returns, by centralizing the finance seekers and finance counterparts in one global exchange.

Findings

Multinational companies run over half of the global trade and supply chain companies around the world. Multinational companies enjoy good relations with their finance counterparts, and the financiers receive a medium to low returns on financing these projects. Multinational companies have a rejection rate on finance requests of 17% while on the other hand, SMEs have a rejection rate of 45% globally. This is a very clear difference and one of the biggest issues to the inefficiency remaining in the global supply chain. SMEs today account for about 37% of global trade finance demand, and while a lot of SMEs eventually find alternative finance, as 18% find informal finance and 16% find formal financing alternatives, there is still a lot of companies that fail to even access finance and therefore miss out on business. The biggest obstacles for increasing cross-border finance are KYC, AML, failure to show financial statements, failure to provide collateral, and lastly, there is the cost of international transfers and currency exchange. Finance providers often don’t have the capacity or interest in financing SMEs either, due to the high operational cost that is the due diligence process of SMEs and new clients. There is reason to believe that digitalization will work in SMEs favour, by helping to provide more accessible data for financiers and could eventually generate savings of up to USD 2.5 – 6 billion due to increased accuracy of credit risk assessments.  

Would a centralized terminal, containing pre-filed documentation, increased visibility, and risk-adjusted functionalities improve the financing available for SMEs? The variable to consider is whether eliminating much of the operational cost from the financier will increase the available finance for SMEs.

From the previously discussed data that is retrieved from a survey by the Asian Development Bank, including over 300 firms, in 70 countries, including 112 banks, 50 export credit agencies, and more, we have established figures such as the rejection rate for multinational companies of 17%. The hypothesis will consider the 17% rejection rate as a base rate. 

Removing the operational cost of preparing due diligence papers for the financier, will increase their capacity for investing in SMEs, but still leaving other issues behind, such as the creditworthiness of the SMEs. Up to 16% SMEs considered in the survey, was able to find formal financing alternatives in the end. While other factors will have taken part in the first rejection of the trade finance, it could be considered that these SMEs would have been acceptable for trade finance with a higher capacity and lower operational cost for the finance provider. It is also possible to assume that the underlying issue for financiers not to finance SMEs is their poor creditworthiness and failure to prove collateral, in which case the hypothesis would be false. 

With a streamlined and centralized approach to KYC, AML, and trade documentation, this study justifies that banks and financiers would be able to increase their investments into SMEs along with expanding their trade finance business units. The referenced survey shows that the biggest issues for banks and lenders to expand their trade finance business units is rooted in a lack of profitability due to high transactional cost, as well as KYC and AML regulations/procedures. Since lenders in many cases will be able to see better return on SME finances, there will always be a driver behind their interest, which organically will increase along with an improved transparency.

Current situation

During the pandemic (COVID-19) banks and major corporations saw their loan books shrink to historic lows which are considered a major issue for big finance. The issue is not whether there are enough projects and finance seekers, but rather the risk and access to projects and companies. The long protocols and procedures banks and investors must provide capital to a borrower are long-drawn and difficult which results in far less capital being put to work in either local or cross-border operations resulting in large cash reserves which exceed the necessary reserve policies and block the opportunity to grow and, develop local and as well as international communities and economies. The first reason for the extreme cash reserves is due to the risk banks has to take to finance companies and projects which are either new or do not have credit rate which is trusted by the financiers. The second and most important reason is the access to companies and projects who are seeking finance but can’t borrow due to low exposure to the financing market and high-interest rates which makes the project unrealistic. Companies who seek finance usually approach a couple of banks and investors to secure the best financing and terms, but only among the bunch/or the one, they have approached instead of having access to a marketplace of financiers offering on the same debt and giving the finance seeker a much larger exposure to capital and ensure the best obtainable terms possible.

Many financiers within the maritime business are dealing with medium-sized debt obligations with a certain risk appetite, as the industry is volatile and risky with assets being non-liquid and preventing capital providers to exit their positions in a relatively short period. In contrast to bonds, a finance structure within the maritime industry is often provided by a single capital provider taking all the risk and not being able to trade the debt as tradable securities, which could result in a much larger risk appetite as the risk-taker would be able to exit their position much faster and easier.

Market Sentiment

The need to allocate funds and growing economies throughout the world creates an incentive to provide both capital providers and finance seekers a centralized platform to interact through which standardize the medium-sized debt obligation market and gives access to much-needed capital for borrowers and a much larger list of financing projects to capital providers benefitting both sides in a simple yet advanced platform allowing users to interact and agree upon financing. The terminal provides great opportunities for SMEs who would previously struggle to find finance and the financier would, in turn, be able to enjoy better returns than that of loans to multinational firms. On the flip multinational firms with well-established finance channels will also be able to benefit from the terminal, whereas they can now have several financiers offering on one finance application, driving the interest rate down. From previous research findings, we observed that several reasons have been the cause for a high rejection rate of financing for SMEs, but more than others documentation and lack of collateral. As Globe Merchant Exchange wishes to streamline much of the documentation process, there should be a more optimistic sentiment from financiers. 

Trade finance is one of the subjects that the terminal wishes to affect the most change. We have observed that there is a huge need for SME traders, which very often have the logistics of the trade laid out but are unable to find finance in the end. While the terminal and registration process make it easier for traders to have the documentation ready and live up to the financiers’ requirements, the exchange creates a place to visualize their project to several financiers at once.

Obstacles and solutions

The single largest obstacle in gathering all finance seekers and capital providers in one centralized platform is the fact that many established finance seekers have one or few preferred partners when seeking finance, this could be due to the long relationship the parties has established over multiple years and deals, but also the further advantages a finance seeker will be looking for when signing up. With a centralized platform and a long list of qualified and verified financiers, the terminal allows finance seekers to market their projects digitally to a much broader group consisting of investors, banks, and institutional investors which will allow them to receive the best offers possible and not discuss the project’s financing with a couple of financiers, spending far too much time and energy, but rather post a financing project to the platform and ensure direct interaction to a large list of financiers, leading to a potential cut in the interest rate and savings of millions of dollars during the maturity of a project.

 

A critical point for the terminal and exchange to become a success is to uphold a high standard of professionalism among finance seekers and financiers for both parties to feel secure about the use of the terminal and confident in the counterpart’s ability to perform. The registration process for users and the document requirements for type 2 users when creating a finance application, are created to ensure the quality of the terminal.

 

Financiers usually have approval processes set in place for finance clients, which can be long and unavoidable. On the terminal the type 2 user profiles will give the financiers an extensive overview of the client they are dealing with and to provide additional certainty, finance seekers must include a financial statement and proof of collateral in their financial applications. Most information will be available for the financier, but some of the information type 2 users can make available upon request.

Roadmap

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