Co-Founder & Co-CEO at Drip Capital, defining the strategic vision and overseeing product, business development and global operations.
International trade has increasingly become a key force behind global GDP growth. With steady increases in transaction size as well as payment periods, a lot of this trade has become reliant on trade finance facilitation by lenders. In fact, up to 80% of international trade requires some kind of financing.
Since the earliest days of commerce, trade has primarily been financed by institutions and individuals with deep pockets. These financial institutions have been focused heavily on financing large businesses and trading companies that have a reasonable assurance of success.
As a result, small and medium-sized businesses (SMBs) have been left out of the trade finance circuit, despite contributing significantly to global trade. The Asian Development Bank estimated that nearly 45% of SMB trade finance applications are rejected by banks and traditional lenders.
However, a new class of financier has stepped up to the plate in recent years, in the form of alternative finance providers. Data-driven and agile, these fintech firms (to include our own) are pushing to close the gap, relying on technology to break the barriers faced by traditional lenders in servicing SMBs. The success of these newer players in originating high volumes and strong credit quality — key requirements for institutional investors —has resulted in the resurgence of a particular investment asset: trade finance receivables.
The Return Of The Trade Receivable
In a cross-border transaction, there are two parties: an exporter and an importer (i.e., a buyer). A third party (a financier) is introduced when one party needs advance payments. When an exporter generates an invoice against an order from a buyer, with the expectation the buyer will pay that invoice, that invoice is a trade receivable. The