Challenges of SMEs to access Trade Finance

SMEs represents most registered companies in developed and developing countries.

By fact, they play an important role in the global economy by generating employment and income.

While increasing access to Finance by SMEs is important, banks tend to prioritize lending to large companies due to different parameters.

Consequences are that without sufficient supports, SMEs are limited to develop and take advantage of business opportunities.

SMEs that are willing to have access to financial support must have an effective knowledge of the type of Financial Institutions, the various products and services available plus understanding credit policies and procedures.

From Bank perspectives, the main obstacles to Finance SMEs are:

-         High Transaction costs

Indeed, before lending to companies’ banks are incurring costs (Credit assessment costs; processing & monitoring costs…). Differently said, Banks face costs related to the safekeeping and management of funds.

SME loans are high-cost lending transactions due to the size of such loans compare to bigger businesses.

In general bankers perceive that SMEs require much more time, effort and that lending is challenging and generates lower returns than other transactions.

-         Lack of transparency

The opaqueness of some SMEs makes it difficult for banks to determine if they have the capacity and/or willingness to pay.

This is also due to the behavior of some SMEs that are lacking the importance of communicating openly and regularly with their bankers.

As a result, banks tend to either reject SMEs with good prospects or put all SMEs in the same basket, charging high interest rates to all, thereby discouraging the good ones.

-         High default risk

For banks SMEs tend to have weaker management skills to anticipate and respond to adversity and tend to experience bankruptcies more than large firms.

-         Limited collateral

With limited collateral, their ability to offstet higher levels of risk with security for the bank is very limited.

From SME perspectives the main obstacles are:

-         Lack of technical capacity to prepare and present convincing business plans and bankable proposals.

It is especially important that SMEs carefully consider the way they approach banks.

-         High interest rate

The higher the risk, the higher the return that will be demanded by banks.

Understanding risks involved in the business flows and knowing how to mitigate them is the key to negotiate affordable interest rates.

‘’Each door has a key’’

Mourad Nait-Atmane

Founder of Tilelli Consulting Ltd