SMEs in need of diversified funding options

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1 SMEs in need of diversified funding options The 2015 ICC Global Survey on Trade Finance reveals that bank funding constraints remain a major obstacle for SMEs. The answer is to increase their options says, Vincent O Brien

2 Despite playing a vital role in facilitating trade both as principal traders and as part of global supply chains small and medium-sized enterprises (SMEs) are struggling to access funding. Indeed, ICC s latest Global Survey on Trade Finance which surveyed 482 banks across 112 countries shows that SMEs are finding it significantly more challenging to access trade finance than their large corporate counterparts. Specifically, 53% of SMEs trade finance funding applications are rejected contrasting large corporates that have 79% of their applications accepted. This is particularly alarming given that SMEs account for as much as 45% of total trade transactions submitted globally, while large corporates account for 39% and multinationals 14%. Regulatory response One issue is the unintended consequences of the regulatory response to the 2008 crisis. According to the Survey, 68% of banks reported that, among sectors, SMEs are the most negatively impacted by Basel III and other regulatory initiatives. And, unlike large corporates, which can access the capital markets or use cash flow to fund major supply chain requirements, SMEs rely heavily on bank finance for both trade and growth. For instance, in Latin America despite SMEs representing approximately 80% of companies involved in trade in the region they account for less than 15% of total trade financing, an imbalance being reinforced by the regulatory tightening. SMEs: the engine of trade Of course, this is a serious issue: around 95% of global businesses are classified as SMEs, accounting for 60% of all employment. SMEs are therefore the driving force of the global economy, bringing diversity, innovation and support for international supply chains.

3 What is more, SMEs dominate emerging market economies, where they are responsible for the vast majority of growth and employment opportunities. Indeed, within emerging markets SMEs are increasingly important with respect to trade with nimble emerging market SMEs able to take advantage of the many niche opportunities that can quickly arise, perhaps in neighbouring emerging economies. Certainly, SMEs are the dynamo of south-south trade and it is these new corridors that have been driving growth in international trade for a decade. SMEs are therefore good news: though it is a story that will turn sour if SME funding remains constrained. Arise the alternatives With banks severely and increasingly impeded with respect to trade finance, it is imperative that both businesses and governments identify alternative sources of financing for SMEs. In fact, many SMEs are turning to new or alternative financiers able to support trade in areas where banks are restricted by low risk appetites, regulatory burdens or stakeholder concerns. New lenders are emerging often started by former trade financiers that understand the low risk attributes of trade finance yet appreciate being able to operate efficiently and quickly.... there is growing confidence that both old and new solutions can help bridge the divide between what SMEs need and what is currently in offe

4 This is just one solution, however, although as a market driven alternative one to be encouraged. The 2015 ICC Global Survey on Trade Finance identified two further alternative sources of financing for SMEs: Export credit agencies (ECAs) and Multilateral Development Banks (MDBs). ECAs and MDBs Certainly, ECAs and MDBs have been increasing their commitment to trade finance often acting as a lifeline for emerging market trade as well as for third-tier banks trying to support SMEs. According to this year s Survey, banks have become more positive about the role of MDBs and ECAs in addressing trade finance shortfalls. Some 75% of respondents agreed that MDBs help narrow trade finance gaps at least to some extent. ECAs are also narrowing gaps according to 72% of respondents. One example is the launch of the Trade Finance Facilitation Program (TFFP) launched by the Inter-American Development Bank (IDB) in 2005 to support Latin American and the Caribbean banks access to international trade finance markets. So far, a total of 5,271 individual trade transactions have been supported with a total value of US$5.03 billion. Certainly, the innovative trade finance models of the existing MDBs trade facilitation programmes and the creation of new development banks (also with a focus on trade) are adding to the alternative sources of finance helping to keep supply chains open. That said, if the gap is really to be closed it is the specialist or alternative lenders that will do it. According to the Survey, flexible specialist financiers are increasingly providing the financial lifeblood that drives innovation, as well as offering liquidity in areas whether regions, industries or to SMEs that banks are increasingly struggling to support.

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10 Furthermore, specialist financiers are being recognized for their close interaction with clients and detailed local knowledge making them strong funders of SMEs. Local/global partnerships Nonetheless, a key role remains for the global banks with respect to supporting SME funding. Global banks in partnership with local banks can generate a strong conduit for SMEs to access global markets. As with the specialists, local banks are more familiar with SMEs, as well as the business environment they operate in. Yet they lack the reach and capabilities of global banks, especially in trade finance. Conversely, global banks are developing highly-sophisticated digital platforms that help automate the delivery of their trade and transaction banking offerings encompassing cash and working capital management, trade finance and payments processing. Yet they remain challenged with respect to catering for the growth in demand for financing, particularly for emerging market trade. The constraints are simply too great, and they are here to stay. Of course, this suggests a marriage or at least closer collaboration between global and local banks. Such a partnership allows borrowers the widest choice of available financing solutions while facilitating their access to efficient and sophisticated solutions. So, despite the SME funding gap outlined in the 2015 ICC Global Survey on Trade Finance, there is growing confidence that both old and new solutions can help bridge the divide between what SMEs need and what is currently in offer. Vincent O Brien is a trade finance expert and Chair of the ICC Banking Commission Market Intelligence Group