To acquire the data presented in this analysis, TFG surveyed firms in the target regions to gain a better understanding of SMEs’ trade finance usage norms and their propensity to pay for new or additional trade finance products and services.

The survey was designed to gain insight into firms based on numerous factors, including business type, operating location, annual revenue, use of third-party financing, average inventory levels, current number of lenders, current debt utilisation, current cost of debt financing, and letter of credit use.

The survey asked respondents to indicate their level of interest in a new market entrant that seeks to provide trade, inventory, and invoice finance.

It also investigated the likelihood of SMEs to pay for these services at a 4%-8% per annum price point.

The world’s trade finance gap is growing.

According to the Asian Development Bank (ADB), the global trade finance gap hit a record $1.7 trillion in 2020, up 15% from a previous high of $1.5 trillion in 2018.

Other estimates from the UK All-Party Parliamentary Groups (APPG) on trade finance put the current gap as high as $3 trillion to $5 trillion.

Regardless of the exact size of the gap today, there is no debate that it disproportionately impacts micro, small, and medium enterprises (MSMEs).

In order to gauge the market gaps for trade finance, TFG asked respondents whether a specific SME trade finance lending product would be of interest.

90% of respondents showed interest, as it would facilitate financing to pay suppliers and to hold stocks, as well as be useful for invoice finance purposes.

However, when provided with the specific price point of 4%-8% per annum for these services, interest dropped to 80%.

Some of the factors that influence propensity to pay:

• Current financing costs
• Firm revenue
• Inventory levels

Slightly more than half of all respondents use LCs in some capacity, and more than 95% of those consider them to be an important part of their business operations.

Consequently, it is clear that LCs and DCs still hold a prominent position in trade finance for SMEs.

That being said, firms that do use LCs reported a significantly higher propensity to pay for trade, inventory, and invoice facility services from the new entrant than those firms that do not.

In the current environment, we see demand from many mid-market corporates and SMEs, which are looking for additional flexibility from their trade, inventory, and receivables finance partners across structures, their asset base, and terms.

We have seen the same demand for liquidity increasing in the corporate space, coupled with a shortage of expertise from the trade finance industry.

Therefore, a bank offering such services allows for flexibility with the client, where there is a modest compromise on pricing.

This creates an appealing offering as it sits in between clearing banks and alternative finance options