When small to medium-sized enterprises (SMEs) become more reliant on global trade, they also become more vulnerable to the kinds of disruptions that have been raining down on the logistics industry these past few years. These include COVID-related lockdowns, port labor disputes, rising inflation, and geopolitical conflicts like the ongoing war in Ukraine. When issues like these create logistical bottlenecks, businesses must often resort to pulling out cash reserves to maintain steady operations until goods are delivered and payments are received.
The problem is that many SMEs must rely on stable revenues to keep the engine of their business running – they lack the established infrastructure and financial safety net of large corporations. They also are unlikely to receive financing from a highly traditional industry that is still dominated by risk-averse banks.
That is why freight fintech companies are rushing in to fill this financing gap and offer SMEs a much broader range of options to get around logistics challenges, get goods into customers’ hands, and keep capital flowing. We’ll examine here how these fintechs are dramatically changing the freight forwarding landscape for SMEs.
Data from McKinsey shows that despite the fact that SMEs account for up to 70% of global GDP, 40% of SME credit applications are being rejected by traditional financial institutions, creating a $1.7 trillion SME trade financing gap. There are various reasons for this:
- Higher risk: SMEs are viewed as a higher risk for financing as it can be difficult to access trade, financial, and regulatory data for them across regions.
- Difficult underwriting: SMEs lack the historical financial data that large-sized companies possess, making it more difficult to do underwriting.
The good news is that newer, non-bank financing instruments are emerging to enable more economic inclusivity for SMEs such as factoring, forfaiting, or payables finance. The role of most freight fintechs is to make these kinds of instruments more accessible to small businesses.
One of the most ostensible changes that freight fintech is introducing is how SMEs engage with logistics providers like freight forwarders.
Previously, the time that it took logistics managers to find and secure container space could take anywhere from hours to days. Now, the “platformization” of the industry is seeing SaaS-based, online booking systems that enable SMEs to compare, quote, and book container space in minutes. This not only helps SMEs to handle shipping more intelligently but also gives them the efficiency they need to get goods on time and get paid.
Blockchain, or distributed ledger solutions, are already being talked about for the potential transparency and efficiency they could bring to global supply chains, including those of SMEs. These benefits include:
- Easier B2B payments: The use of stablecoins – or cryptocurrency designed to be relatively stable by being pegged to a commodity or currency – for faster and cheaper B2B payments.
- Identity management: Blockchain for documentation and identity management, resulting in easier KYC (Know Your Customer) and KYB (Know Your Business) verification for SMEs along with global underwriting.
- DeFi for lower capital costs: Adopting DeFi (decentralized finance) and Smart Contracts to build secured credit pools, enabling a lower cost of capital for SMEs.
One representative case study is TradeLens, an open and neutral industry platform underpinned by blockchain technology and supported by major logistics players such as Maersk and Hapag-Lloyd. The platform has already helped multiple companies by providing a more timely and consistent view of logistics data for their containerized freight across the globe.
As mentioned above, cash flow is one of the biggest hurdles SMEs face in terms of maintaining business operations during disruptive events such as blocked ports or economic instability. A report from money management solution firm the Wave report showed that 57% of US small business owners surveyed had less than $5,000 set aside for such a financial crisis, while 48% said they would be unable to shift to outside revenue streams in the case of such an event.
In response to these challenges, freight fintechs are coming out with digital Pay-It-Later solutions to help SME importers maintain cash flow in the midst of logistics issues such as releasing cargo in detention or demurrage.
We offer this kind of supply chain solution in our BlueX Pay platform, with an integrated Pay-it-Later solution to help SMEs better manage cash flow, especially during peak periods. Importers can choose to use the BlueX Pay-it-Later service for either their shipping or their inventory orders. They can also use BlueX Pay to send and receive payments easily in-country or across borders, whether it is via bank-to-bank transfers or via digital wallets.