Trade finance is the safety net for SMEs

With coronavirus pandemic putting the survival of small and medium businesses in doubt, these enterprises cannot be starved of liquidity that is so badly needed now

Covid-19 has severely affected economies, impacting international and local trade. Worsening trade restrictions and reducing volumes have caused companies to take extreme measures, including restructuring and reorganising their supply chains.

Combine this with the shortage of financing, and it now appears that trade financing could hold the key to galvanising economic growth.

However, access to trade finance was already a problem before the pandemic, with research showing that over 50 per cent of requests for financial support get declined. Other reports indicate that the global trade finance gap now stands at $1.5 trillion, and the International Chamber of Commerce estimates that almost $5 trillion of trade credit will be needed to kick-start the recovery from the crisis.

Unfortunately, Covid-19 has only exacerbated trade financing gaps, which is seriously impacting small businesses’ survival chances.

Although the UAE is not closed for business, trade is limited by restrictions in place to mitigate the spread of the virus, meaning all local companies involved in trade are in jeopardy. However, the government has quickly stepped up to provide solutions to spur the economy.

In March, Dubai revealed a Dh1.5 billion stimulus package designed to boost the retail, trade, tourism, and energy sectors. The Central Bank launched the Targeted Economic Support Scheme (TESS) programme, which has been extended to local and international banks in the UAE and provides relief towards bank repayment commitments.

Limited to a few

Several international banks have given this scheme to a few select clients, particularly those with a healthy balance sheet. As a result, some larger, more stable firms are reaping the benefits from the TESS initiative. However, most SMEs are unable to qualify for it, furthering their inability to service ongoing financial obligations and ultimately resulting in an increased risk of default.

Given that 70 per cent of small businesses in Dubai are predicted to shut down their operations over the next four months because of Covid-19, and given that the SME sector represents over 98 per cent of organisations in the UAE and contributes to 52 per cent of the non-oil GDP, the availability of alternative trade financing solutions — more straightforward and accessible — is pivotal to economic and financial recovery plans.

Having been in the UAE for over five years, we have witnessed businesses that were previously concerned about pricing and processes now become more flexible to trade finance options. They’re learning to appreciate the offshore, non-recourse nature of the product, which allows for immediate liquidity while providing payment protection, and thus providing muchneeded security.

We understand the importance of ensuring business continuity during unprecedented times, especially as banks across the country scale back on lending due to the fear of the unknown. Historically, banks have always been cautious in crises due to increased market volatility, and decreased liquidity and risk mitigation.

Safety in digital

Due to the absence of necessary financing support, SMEs are most vulnerable in these circumstances, meaning that specialised trade finance companies are critical to their survival.

Another trend we’ve seen is the acceleration of digitisation. Today, financing solutions that enable businesses to generate quick liquidity without the need to tie up cash or securities, coupled with the added benefit of credit protection, have empowered them to invest in new technologies.

Digitisation has enabled them to create and deliver tailored solutions that assist customers in overcoming the impact of Covid-19, pushing them to become more agile than ever before. Conversely, during such crises, there is an increased likelihood of double-invoicing or fraud, which can be successfully mitigated through factoring.

Trade finance especially is paramount in the creation of job opportunities and in assisting supply chain operations, which is why it’s essential to fill that gap by providing customised, faster, and smarter trade financing solutions that come with limited drawbacks and cater to smaller and nontraditional investors.