SMEs And Trading Houses: The Synergies For International Trade

Insights Articles | 25 June 2024

International trade presents significant opportunities for small and medium-sized enterprises (SMEs) but comes with challenges. A significant hurdle is securing the necessary financing.

In 2022, the global trade finance gap was a massive $2.5 trillion, a substantial issue since over 80% of international trade relies on this type of financing.

Looking back at history, Japan’s remarkable economic recovery after World War II offers valuable lessons.

The sōgō shōshas dynamic trading houses helped rebuild Japan’s economy by supporting emerging businesses, driving exports and opening doors to international trade.

Today, SMEs must find reliable partners abroad and safeguard their trades against risks. By acting as intermediaries or facilitating the exchange of goods between suppliers and buyers across countries, modern trade houses are filling the role the Japanese sōgō shōshas have played for centuries.

As times have evolved, the services offered by trade houses have broadened to include financing, risk mitigation, quality control and compliance to make international markets even more accessible to SMEs.

Understanding The Risks And Points Of Failure

In international trade, SMEs encounter challenges that vary depending on their business nature and target markets.

One significant hurdle is access to finance. SMEs often need help securing international trade finance due to limited credit histories in foreign markets and a lack of substantial assets or collateral, making it challenging to meet traditional banking requirements. Trade finance has become capital expensive for the banks’ balance sheets, and a bank’s retail business is often financially more rewarding.

Another quest is finding reliable partners. Identifying trustworthy suppliers, distributors and agents in foreign markets can be daunting. There are risks such as fraud, nonpayment, delivery of substandard products and last-minute withdrawal by buyers.

SMEs frequently grapple with regulatory and compliance issues. Navigating the varying trade laws, customs requirements and product standards across different countries is complex. It can lead to costly delays and additional expenses.

  • Language And Cultural Barriers: Effective communication is crucial despite the democratization of the English language. Language differences and cultural misunderstandings can complicate negotiations, contract drafting and relationship-building.
  • Logistics And Shipping Issues: Delays, substandard quality or inaccurate quantity of goods can disrupt supply chains and damage customer relationships.

Moreover, political and economic instability in foreign markets poses additional risks. For example, geopolitical events have caused global supply chain disruptions, leaving SMEs vulnerable to blocked market access and increased competition, leading to price drops and higher production costs due to rising energy and fertilizer prices. Businesses in sanctioned countries need help securing conventional financing, let alone the cost aspect of financing.

Safety Mechanisms Offered By Trade Houses

Trade houses can provide a suite of safety mechanisms leveraging their expertise and extensive networks in international markets, helping SMEs broaden their global footprint.

One key mechanism is factoring, where trading houses buy a business’s accounts receivable at a discounted rate, offering immediate cash for future buyer payments. This approach is particularly beneficial for SMEs, as it bypasses the need for asset collateral or extensive credit checks required by banks, thus not affecting the company’s balance sheet and creditworthiness.

Unlike banks, many trading houses provide financing by collateralizing the goods traded rather than relying on the company’s balance sheets. This helps ensure that SMEs in their early stages of development, where they may not have substantial assets or a solid financial track record, still get access to growth opportunities.

Trade houses conduct comprehensive due diligence and risk assessments, evaluating the creditworthiness of both sellers and their international partners to mitigate the risks of nonpayment and trade disputes.

Trade houses can enable SMEs’ compliance with foreign market laws and regulations, potentially reducing legal disputes. To further enhance transaction security, trade houses often collateralize the goods being traded and require fixed down payments from buyers.

Moreover, their global networks can be beneficial. Suppose a buyer withdraws at the last minute. In that case, trade houses can find an alternative, safeguarding SMEs from sudden disruptions and financial losses.

Trade houses are helpful allies in supporting SMEs in the complex world of international trade. However, selecting the right trade house requires thorough research.

Factors To Consider When Selecting A Trade House

The choice of a trade house can significantly impact the success and security of cross-border transactions. Some factors businesses should consider when making an informed selection:

  • Industry Expertise: A trade house with experience and expertise in the industry or sector relevant to the business can provide valuable insights and customized solutions.
  • Global Presence: A reputable trade house should have a vast global network of trusted traders, buyers and sellers and a presence in key geographic regions critical to the business’s international expansion.
  • Financial Stability And Resources: The financial stability of the trade house is essential. SMEs should assess whether the trade house has the necessary resources to support their trade activities, including financing options and risk management capabilities.
  • Cultural And Language Proficiency: A trading house proficient in the target markets’ languages and cultures can bridge potential communication gaps and facilitate smoother transactions.
  • Reputation And Track Record: SMEs should research the trade house’s history, client testimonials and trade cases to ensure reliability and trustworthiness.

Final Thoughts

According to World Bank data, SMEs account for over 90% of businesses and more than 50% of employment worldwide. Yet, their participation in international trade is limited.

Nurturing these small and medium-sized businesses to thrive in international markets can play a role in changing the status quo.

Working with trading houses can be one of the solutions to help SMEs grow and expand their business in unknown markets. Supporting SMEs can help limit risks, contributing to a more robust economy and global trade stability.

In nurturing the potential of SMEs, we invest in a brighter, more equitable future for both businesses and societies across the globe.

The above highlights the complexity of international trade for SMEs and the need for careful planning and strategic decision-making to navigate these obstacles successfully.