In the world of international trade, securing funding can be a crucial factor in driving business growth. With over 300,000 UK SMEs engaged in global transactions, cash constraints often hinder their operations as suppliers typically require payment before
end customers settle their dues. Accessing trade finance, therefore, is essential for SMEs to overcome these challenges, enabling them to finance cross-border trades and unlock their growth potential.
The journey, however, from obtaining finance to fully utilising it effectively can have its challenges. One such challenge is the under-utilisation issue, which is where funding is idle between trade cycles due to timing gaps; the idle money creates cost.
Let's delve into how this phenomenon occurs and explore strategies to mitigate its impact.
Understanding Under-Utilisation
Whilst trade finance enables SMEs to navigate cash constraints associated with cross-border trades, the complexities of international trade means funding facilities can sometimes sit idle (i.e. be under-utilised) as orders arrive and goods are waiting to
be transferred. Efficient funding becomes imperative, covering the entire transit period (from order to delivery) charging only for the duration the goods are in transit.
The Cost of Under-Utilisation
Unfortunately, if not optimally managed, under-utilisation can incur unforeseen costs and complications. When companies fail to fully utilise approved facilities, funding costs accrue, leading to additional fees. Often, clients utilise only a portion of
the approved facility, sometimes around 75%, thereby increasing the costs of the funds used.
Identifying Under-Utilisation Factors
Several factors contribute to under-utilisation, including timing discrepancies in trade cycles and dilution of asset value. Dilution occurs when the value of assets being funded diminishes due to various reasons such as old debts, discounts, or warranty
claims. Moreover, timing gaps between trade cycles result in idle cash, adding to funding costs.
Maximising Utilisation with Innovative Trade Finance Providers
Maximising facility utilisation should be a top priority for SMEs. Fintech’s are in a strong position to help companies make better decisions about how much financing to accept through better financial advice, proactive management and close collaboration.
By financing the entire trade cycle, giving visibility on timing gaps, and conducting extensive due diligence up front, fintech companies specialising in this type of financing should be able to minimise dilution issues and fund transactions promptly when
it is needed.
Strategies to Mitigate Under-Utilisation
SMEs require cash flow management for each trade cycle and full visibility into the movement of goods. By sharing this information, scaling businesses can strategically plan their trades and optimise facility utilisation, thereby maximising profitability.
The Role of Fintech in Tackling the challenge
Fintech companies have the agility and innovation to break into this space, and to tackle this problem head on, through a tailored approach and commitment to maximising facility utilisation for companies. This can enable businesses to unlock the full potential
of trade finance and propel their international trade endeavours towards success.
Beyond mere innovation, the fintech sector is driven by the aspiration to improve financial services and better serve customers. Doing what’s right for businesses should be ingrained in the ethos of most fintechs.
Mitigating under-utilisation demands a combination of strategic planning, proactive management, and close collaboration between financial service providers and clients. Only then can companies harness the full power of trade finance to effectively fuel the
growth aspirations of businesses worldwide.