Trade Finance Gap

THE GAP IN TRADE FINANCE

The gap between the perception and actual level of risk of the transactions is clearly one of the main causes of the rationing to which certain regions are subject.

This gap tends to increase in periods of crisis, even though the performance record does not deteriorate that much.

Trade finance is a particularly safe form of finance since it is underwritten by collateral and documented credit operations. The low-risk nature of short-term trade finance is supported by data collected by the ICC which shows the average transaction default rate on short-term international trade credit is 0.021 per cent, of which 57 per cent is recovered through the sale of the underlying asset.

Additional factors include asymmetry of information about risk levels of certain clients and markets, and lower profits.

In a challenging environment, it is mandatory to be much more accurate than usual.

It is sad to see that some businesses willing to get access to finance are reluctant to share proper and clear infos to financial institutions.

It is often that I see businesses over showing marketing presentations without really detailing and explaining the trade flows, the risks, the way they are organised etc…

In the frame of KYC processes and client assessments, Financial Institutions expect to clearly understand the organizational structure, business model, trade flows and the way risks are managed.

What is frustrating is that most of these companies are clean in terms of business but have this difficulty to adjust their approach toward financial institutions.

Besides complex regulations to which Financial Institutions are subjected, they should be more transaction oriented.

On the other side businesses should have a better understanding of Financial Institutions world and have an approach where Financial Institutions should have a 360° view on their business environment.

‘’Each door has a key’’