Trade finance is an umbrella term for the short-term financing of goods and services which are traded around the world, and includes a range of products such as Letters of Credit, Documentary Collections and import/export loans. Traditionally a form of finance that has been heavily reliant on bank and institutional funding, trade finance is now beginning to emerge within the alternative finance sector. Trade finance uses the goods or materials being shipped as the ’security’ backing a deal, rather than assets that the business or directors own.
We've made some forecasts and predictions for where we see the trade finance sector moving in 2016:
1. Digitalisation of the Letter of Credit We’re not quite there yet, and we doubt Letters of Credit will be 100% digitalised by the end of 2016, but there’s been headwind into the digitalisation of shipping documents, Letters of Credit and Bills of Lading. Where are we now? eB/Ls (Electronic Bills of Lading) have been around for several years now (such as essDOCS http://www.essdocs.com/). Bolero http://www.bolero.net/ also celebrated its first full end-to-end electronic Letter of Credit last year, which was considered a first within the industry.
The alternative finance sector has the ability to accelerate the digitalisation of trade finance, just as it istransforming the invoice finance sector.
2. Blockchain could disrupt the Supply Chain
Elements of the global supply chain are being disrupted by using blockchain technology (note, we use the term blockchain as the underlying mechanism rather than cryptocurrencies such as bitcoin!). Supply chain finance is the financing of goods which allows a business to lengthen its payment terms to suppliers while also allowing SMEs to get paid early to prevent cashflow problems https://www.tradefinanceglobal.com/finance-produc... We recently spoke to Skuchain http://www.skuchain.com/ who are using blockchain technology to hold payments in escrow to help buyers and sellers interact. They are also working using QR codes and a blockchain API to allow businesses to track goods securely, even as they transfer ownership throughout the journey. We could start to see the financing of goods between a buyer and seller validated through blockchain technology, meaning banks wouldn’t need to get involved, and the entire transaction is tracked from production to arrival at the buyer’s warehouse!
3. More investment to back alternative finance companies
This year we have seen huge investment into trade finance platforms, including Ebury's $83m round https://www.ebury.com/blog/2015/11/18/ebury-annou... – enabling the company to expand to, and invest in, US companies. This has also been seen across the board in the alternative finance sector. Funding Circle, for example, has raised $273m in equity money to date.
We believe that traditional risk averse lenders will diversify their portfolios and back alternative and non-bank trade finance companies, which will serve to accelerate growth.
We believe that trade finance will continue its growth in 2016, as non bank funders continue to increase their slice of the pie.
Written by James Sinclair from Trade Finance Global