Many companies need third-party trade financing and insurance to sell goods abroad. SMBs often need help getting the funding they need to run their businesses. However, blockchain technology will offer them new financing ways. This technology could improve transparency, speed, and accuracy of trade finance risk assessment. For SMEs with credit issues, this could increase international trade credit.
An Overview of the Problems Faced by SMEs
SMEs are a vital part of the global economy. They often cannot get bank loans and rely on personal or family funds to start and grow their businesses. This makes them a crucial part of global economic and social growth. Small and medium-sized businesses also face sector-specific issues, like a lack of data needed to run a business effectively, hire other auxiliary services needed to grow and go global and inefficient ways to make payments. This can make it difficult for them to compete with larger businesses. SMEs often need help to obtain the trade finance they need to grow their businesses. Additionally, they often face regulatory hurdles as follows.
Loans
Banks have become increasingly risk-averse since the 2008 banking crisis, which has made it difficult for small and medium-sized businesses (SMEs) to get loans. In fact, according to the IFC, 40% of small and medium-sized enterprises in rising markets have unmet financing requirements of 5.2 trillion US dollars annually.
Financing
Trade finance is a critical business function for international SMEs. However, conventional trade finance services like LCs, forfaiting, and credit insurance can take a lot of work for small and medium-sized businesses to get funding.
Cash Inflow Issues
Money shortages can be a big problem for small businesses. When they need more money, it can take a lot of work to bring their bills current. This can cause them to grow slowly or even go out of business.
Payment Options
When it comes to international trade, sometimes goods need to be paid for up to a year after they are shipped. This is where trade finance comes in – it helps to ensure that payments are made on time and that everyone involved in the transaction is protected. Trade finance can provide credit, payment guarantees, and insurance to ensure that everyone involved in a trade transaction gets what they need.
Higher Rejection Rate
When it comes to international trade, sometimes goods need to be paid for up to a year after they are shipped. This is where trade finance comes in – it helps to ensure that payments are made on time and that everyone involved in the transaction is protected. Trade finance can provide credit, payment guarantees, and insurance to ensure that everyone involved in a trade transaction gets what they need.
Also Read: Why Invoice Funding is the Best Option for MSMEs: An Overview
Elaborate Explanation on Blockchain Solutions for SMEs
The promising solutions offered by blockchain for SMEs are:
Trade Finance
Trade finance professionals are increasingly turning to blockchain technology to create comprehensive transaction ecosystems for messaging, settlement and documentation. Open and consensus-based finance products become more efficient as a result.
Supply-chain Finance(SCF)
The benefits of blockchain technology for SCF include increased efficiency and more people gaining access to this type of financing. This technology makes it easier to obtain SCF by making the data more flexible and efficient. As a result, more people in the chain can benefit from this financing.
Contracts
Blockchain technology could offer smart contracts to small and medium-sized businesses, which is excellent. Smart contracts, like traditional contracts, state the terms and penalties of an agreement and automatically enforce them without middle agents.
Funding
Small and medium-sized businesses (SMBs) could benefit significantly from blockchain technology. With blockchain, peer-to-peer lending could be revived, increasing trust and transparency between borrowers and lenders. Additionally, blockchain makes equity fundraising for SMEs faster and easier by eliminating middlemen. This could be a great way for SMBs to get the funding they need to grow and succeed.
A Brief About the Trade Policy Makers’ Lessons
Financing models and blockchain technology need to improve to support future SME financing. Capital providers can make lending decisions using more data, better algorithms, and blockchain-related applications that track payments and contract fulfilment. This will allow other devices and software to communicate with each other.
Endnote
Transparency and trust are essential for a healthy banking system. Blockchain technology could make banks’ risk assessments more accurate by making information more open. This could lead to fewer rejected loan applications and a stronger economy.
MSMEBlog advises MSMEs on how to obtain proper financing and provides information on available funding sources. Find out more about MSME financing at https://www.msmeblog.com/.
