In Africa and other continents around the world, SMEs account for a huge percentage of GDP, employment and agricultural output in Africa. As such, the SME sector should be the first point of contact for capital and finance.
In our recent Twitter Space chat, “Trade Finance Trends for African SMEs Growth”, we featured Chimenem Nwoka, CEO and Co-Founder of Breeze Africa. He talks about the Importance of Trade Finance in local and International Business for African SMEs.
What is Trade Finance:
Chimenem, in simple words, says trade finance is essentially the financial institution sitting between a buyer and a seller making sure the transaction goes smoothly. Investopedia defines Trade finance as the financial instruments and products companies use to facilitate international trade and commerce. Here is where Trade Finance is the backbone of SME trade globally and internationally.
Importance of Trade Finance for African SMEs
Trade Finance Provides Access to External Working Capital
One of the Importance of Trade Finance for African SMEs is its provision of external working capital. It removes the constraints of self-funding businesses by providing capital that helps promote a smooth flow of daily operations.
It might take months for a business to have access to payment for delivered goods in certain situations. Lack of this capital can be a roadblock to business growth and productivity.
Trade finances allow SMEs to optimise their internal funds on upcoming business projects, prospects or opportunities.
Trade Finance Reduces the Risk of Payment for Counterparties.
Both parties in a global or local trade transaction are regularly threatened by transactional risks. The importer is threatened by the risk of non-performance, while the exporter has the risk of non-payment. These risks are strengthened by trading rules and regulations of both parties, changes in the exchange rate caused by currency fluctuation, and international trade barriers imposed by the government.
Trade Finance steps in during the transaction to represent both parties, providing A letter of Credit backed by the shipping document. This guarantees the payment of the goods in situations where the importer may default in payment, thereby improving the trust element for parties involved in the trading transaction.
Boost SMEs’ Contribution to the Economic Growth
For some years, SMEs have stood as the major driving force and key player for economic growth in the continent. SMEs constitute 80% of African enterprises.
Due to their high contribution to raising the living standard of the continent, they have become really important in developing national growth policies and employment.
SMEs in underdeveloped countries, especially African countries, have it worse, facing difficulty accessing finance for trading activities. The Importance of Trade Finance for African SMEs can be seen in how it serves as the direct and indirect saviour to SMEs and the continent by providing expert support and finance when needed.
In conclusion, Trade, especially international trade, might be impossible for SMEs without Trade Finance. About 80 per cent of trade worldwide uses trade finance, and Africa shouldn’t be any different. To know more about this, please press play to listen to other insights that Chimenem Nwoka, CEO and Co-Founder of Breeze Africa, shared during the Twitter Spaces chat on Trade Finance Trends for African SMEs Growth.