Trade Finance for the rest of us
“Buy low, sell high, collect early and pay late”
My younger self, sitting in her MBA class, always considered this classic tenant of business not only simple, but also doable. However, a year after graduation and after joining the real trade world — at the Canton import/ export fair in Guangzhou, China — the true complications behind collecting early and paying late became evident. Suppliers would constantly push to get paid before producing goods, to be able to produce and ship their goods. On the other hand, I wanted to pay late as I didn't trust that suppliers would keep their word and deliver what I purchased.
This exact problem is experienced by millions of buyers and sellers, small and large, for all sorts of trade transactions worldwide.
Trade Finance is focused on solving this complex and multifaceted issue, as it provides funds to fill payment gaps (in transactions or POs) - from manufacturing to shipping to receiving goods. If I were to refer back to my business school learnings, Trade Finance allows suppliers to collect early and buyers to pay late.
That said, Trade Finance does not work as well as it could and it is increasingly clear that there is room for more players on the lending side to enable more opportunities for borrowers. There are increasing opportunities to improve the ecosystem by solving traditional trade finance pain points. This is Fishtail’s playground - let’s explore what our focus is and why what we do matters.
Traditional Trade Finance pain points:
- Trade Finance prioritizes developed market enterprises: to mitigate risk, traditional lenders (banks) have a strong focus on financing enterprise transactions in North American and European markets, and shy away from “smaller fish” in emerging markets.
- Access to financing is limited for SMBs: Due to strict and lengthy guidelines, only established, large businesses can more easily comply with a bank’s trade finance application. SMBs are therefore left with alternative routes which frequently involve glorified (or unglorified!) loan sharks that demand high interest rates and strict terms of collection upon failure. SMBs are therefore credit constrained. As a World Bank study indicated, 65 million SMBs were credit constrained in 2017, approximately 40% of all SMBs worldwide.
- Current transactions are complex and lengthy: A myriad of intricate and timely workflows involving multiple parties increase process complexities and affect overall turnaround time. While Banks take weeks or months to assess and decide if they can finance a transaction, SMBs need the capital yesterday.
- Large orders are often not a possibility: for traders, accepting and fulfilling large orders often becomes impossible due to working capital tie-up. This situation is detrimental to both sides - it limits growth for the supplier and leaves the buyer dissatisfied.
- PO Financing: Filling financial gaps early on in a trade, when a Purchase Order is received, is a big problem for many. Traditional lenders have a hard time understanding supply chains and measuring risks and, because of that, don’t lend at this stage. In contrast, Fishtail’s platform derisks individual trades thanks to our Machine Learning based credit and underwriting technology, allowing for faster (and earlier) financing approvals.
- Automation: We automate time-consuming, manual processes typically associated with trade finance, including shipment monitoring, KYC contracting, credit risk analysis, underwriting, and originating. The result is a speedy, modern platform that makes trade finance easier, fairer and faster.
- Lower interest rates: Thanks to our automation and ML-based technology, we can de-risk, lower the cost of trade financing, and ultimately offer lower interest rates.
- SMBs in emerging markets: it is our mission to level the trade finance playing field. The modernized mechanics of how we operate create fertile soil for the underserved millions of SMBs in emerging markets to plant their growth seeds and access needed capital to grow.
- Work with, and connect, diverse ecosystem parties: We not only serve cargo owners/suppliers, logistics companies/forwarders and lenders, but also offer a marketplace that matches borrowers with lenders.
- Sustainability: We tie interest rates to sustainable practices by predicting CO2 emissions for everything that moves, and leverage related data to drive interest rates for individual transactions.
The bottom line
The need to upgrade the multi trillion global trade finance ecosystem has been evident for years. The ones suffering most from the system’s inefficiencies are the ones who need capital most: SMBs in emerging markets. Fishtail focuses on this segment, hence our motto: trade finance for the rest of us.