Trade Finance and Fintech: What European importers might want to know

April 15, 2023

As the global trade finance gap widens, European importers should explore new technologies to successfully compete in the marketplace.

Europe is one of the most economically dynamic regions in the world: The European Union (EU) had a gross domestic product of US$16.6 trillion, which amounted to a full one-sixth of the entire world. The region is also a major importer, with some of the most popular categories being metals; machinery and equipment; chemicals and chemical products; computer, electronic, and optimal products; and electrical equipment.

Importers face a challenging competitive landscape in the EU. They have to contend with the complexity of importing from multiple markets and possibly redistributing across just as many markets across the EU. They face stiff competition from importers not only in their own country but from those in neighbouring countries, especially those that have a coast.

On top of these challenges, European importers have to deal with the same problems that importers in other markets have to contend with. These are mainly struggles with working capital. While they have favourable terms with exporters, who they usually do not need to pay for as long as 90 or 120 days, they still face a crunch in cash flow as a small business.

This lack of working capital affects how they do business: they cannot increase the volume of the products they already import, they cannot expand the type of products they import, and they cannot work with a greater diversity of exporters.

To overcome these challenges, European importers might choose to excel at trade finance. To do so, they must be made aware of several key facts and trends. Let’s go through some of them together.

The trade finance gap is monumental.

The trade finance gap stands at US$1.7 trillion, according to the Asian Development Bank

This is the shortfall between importers and exporters who need capital, and the amount of capital that they are unable to borrow.

Most importers, in other words, cannot get the capital they need. This stems from the fact that they are likely trying to obtain the most common source of capital, bank loans. But as traditional financial institutions, banks have an extensive amount of requirements that most importers cannot meet.

In this kind of environment, the importer who has more capital has a doubly more advantage, as most of their peers cannot get it.

Trade finance is intersecting with technology.

Most people think of fintech as largely a consumer space. There are digital banks; mobile money platforms; buy now, pay later apps, and so on. But fintech is also transforming the business-to-business space, and trade finance is no exception.

This transformation is driven by some of the technologies that dominate headlines. Some companies are putting their record-keeping, including both financial and non-financial information, on the blockchain. Since the blockchain is a digital ledger, one that is famously immutable, this secures the organization’s data. Other companies are even experimenting with artificial intelligence for the risk assessment process.

European importers need to participate in these shifts. While trade finance has long been a traditional industry, the entrance of cutting-edge tech means that they have to get on board. The European importers who embrace these new solutions will find themselves at an advantage over their more conservative peers.

There are alternative forms of financing beyond bank loans.

One of the most innovative new forms of financing is supply chain financing, or reverse factoring. The way it works is simple: the importer involves the participation of a third party or supply chain financier to enable their suppliers to receive early payments against export invoices. This solution is innovative for several reasons. The first is speed: the process is much faster than a traditional business loan. Besides, it doesn’t figure as a loan on a company’s balance sheet.

Secondly, the importer extends his credit line to his suppliers, who will be happy to receive their funds right after shipping the goods.

Lastly, supply chain financing is more accessible. While most third-party factoring companies do require trade history between partners, revenue thresholds, and other requirements, these are considerably less stringent than banks. This put supply chain financing within the reach of many more businesses stuck in the trade finance gap.

Trade finance in Europe

Trade finance is ever-changing, and Europe will be at the forefront of these shifts, as a major importing hub in the world. Importers can choose to embrace these changes: see finance as a competitive advantage, seek out new technologies that enhance their supply chain or trade finance, and strive for alternative forms of capital. The importers who lead these changes can grow their importing business, expanding to include new products, markets, and customers.