Ahoy, captains of industry! Today, we embark on a journey through the stormy waters of trade financing!
Supply Chain Management is hot. Supply Chain Visibility is even more alluring. Nearly daily, you can read articles or join webinars about how important visibility has become in managing cargo worldwide. However! It's not just about moving physical goods from one place to another; it's also about the financial transactions that make that trade possible. Without trade finance, we wouldn't have a global economy. Trade finance is the backbone of the worldwide economy. It links people, businesses, and countries in a web of trust and credit.
But there's a problem: The World Trade Organization estimates that US$ 2-5 trillion in trade finance capacity is needed to "just" enable a rapid recovery from the consequences of the pandemic.
And there is a second problem: 1 in 2 SMEs don't receive the trade financing they need. This means they also lack the money to invest, grow and create new jobs. It also means nearly 200 million businesses worldwide are being held back by a need for more access to credit. And this is just one piece of the puzzle. We also know that SMEs contribute 50-70% of global GDP or 70% of jobs worldwide.
So, while trade finance is essential to global trade, it is simultaneously vulnerable to economic shocks. And there have been several economic shocks and events in the last five years, including the COVID-19 pandemic, which has caused significant disruptions to global supply chains. The likelihood of another pandemic event of similar or larger magnitude is estimated to be around 25% within the next 10 years. Other events in the last five years that have impacted the global economy include Brexit, the trade war between the United States and China, fluctuations in oil prices, and the war in Ukraine. Furthermore, some countries have been experiencing economic downturns due to high debt levels or other internal factors. Let alone the interest rates. When interest rates rise, investments in the supply chain are drawn back like ships caught on the rocks. In practical terms, this means fewer new production facilities, slowed technological upgrades, and less innovation behind the scenes. It's like trying to sail against the wind – nigh impossible to make progress.
If we don't take steps now to improve trade finance resilience and preparedness against future economic shocks, and if we don't start preparing for an event with a similar or larger magnitude – we risk economic catastrophe for SMEs worldwide. And let me repeat; they contribute 50-70% of global GDP and 70% of jobs worldwide.
SMEs are often forced to accept loans because they urgently need loan financing, which creates an unfavorable situation where large enterprises have a strong lever in the supply chain. In contrast, SMEs have to bear the disadvantage of higher financing costs.
However, a new frontier in finance could revolutionize how SMEs and supply chain managers access financing: DeFi, short for Decentralized Finance, has quickly emerged as a game-changer in the financial world. DeFi platforms enable improved transparency, accessibility, and efficiency – a triple treat! So, let's dive into how DeFi can support trade financing and help level the playing field for SMEs.
- Easy-breezy financing access: With smart contracts automating the process of verifying and approving financing requests, SMEs can bid farewell to the tedious paperwork and endless waiting times. DeFi platforms offer a never-before-seen level of efficiency and objectivity in data processing, plugging any loopholes that may have previously been present in the financing process. What does this mean for you, Ms. or Mr. Supply Chain Manager, CFO, or CEO? Quicker turnaround times, keeping you smiling even during tight financial squeezes!
- Trading finance instruments like a pro: DeFi platforms facilitate the creation and trading of supply chain finance instruments. This means that SMEs will no longer be the David in a world of Goliaths. By leveraging DeFi, SMEs can gain equal footing with larger enterprises, which traditional financial institutions have historically given priority. Additionally, this approach permits financing institutions to evaluate the operational conditions of SMEs directly, providing appropriately tailored financial solutions.
- A new era of collateral: One prevalent challenge SMEs face in obtaining financing is the strict collateral requirements imposed by traditional banks. These typically include the provision of fixed assets, which can be problematic for small and medium-sized businesses. DeFi platforms offer an exciting alternative solution, allowing for the use of decentralized and alternative forms of collateral for supply chain finance loans. By opening up new avenues for collateral, DeFi is supporting SMEs with a more flexible and inclusive approach to supply chain financing.
"But what about the risks, the security concerns?" I hear you ask. Fret not! Established DeFi platforms prioritize the safety and security of their users, employing robust blockchain technology and smart contract audits by independent experts. Plus, as the platforms evolve, they strive to become even more secure and trustworthy, keeping your business's success front and center.
To summarize, DeFi platforms help bridge the gap between SMEs and their access to fair and efficient trade finance solutions. DeFi plays an invaluable role in empowering small and medium-sized businesses to thrive by democratizing finance and leveling the playing field. By offering more accessible access to financing, enabling the creation of new financial instruments, and providing alternative collateral options, DeFi is transforming the playing field for smaller enterprises. It is evident that SMEs and supply chain professionals must proactively explore DeFi solutions that can propel their businesses to new heights. With due diligence and careful planning, Decentralized finance could become the catalyst for unlocking growth opportunities and ensuring the long-term financial sustainability of SMEs in the global marketplace.So, why wait any longer? Take the plunge and explore the world of DeFi to revolutionize your business's trade financing. Unleash your company's potential and prepare to soar to new heights with DeFi as your ally. Don't just take my word for it – see for yourself!