Why do you need to know what type of oil fuels your car? Trade finance is a major type of fuel, but it runs the global economy rather than your car. In fact, a significant portion of global trade wouldn’t be possible without trade finance. Whether you enjoy the benefits of globalism or have felt its adverse effects, it can’t be disputed that trade finance creates opportunity across the globe.
So, how does it work? Well, in its most simplified expression, trade finance is essentially a loan that bridges the financial gap between supplier and retailer while mitigating the risks they both face. Ok, wait — that’s still a bit complex to grasp if this is your first time approaching the subject. Let’s get simpler.
Let’s say you’re a clothing retailer and you want to bring fancy foreign fashion brands into your store. These brands want to sell their clothing, naturally. But your store is small and relatively new. In order to mitigate the risk to their companies, they want you to pay for their clothing before it even ships out.
But what kind of situation would that leave you in? Without any protections in place, these bigger brands might stomp all over smaller stores, taking their money without sending the product, or sending one that’s sub-par in quality. Or what if a mistake happens? You’ve paid for the clothes but they’re damaged in transit or lost at sea.
Rather than accepting all this risk on yourself, you get someone to finance the trade — a third party to pay the high-end fashion brand to ship their clothing to your store. In practice, this is like a loan to you that you get to pay off over time with the revenue you make from selling the clothes you just imported! It’s a simple, but very effective financial trick that goes a long way to create opportunity, especially for smaller companies that could be ruined by taking that kind of risk on themselves without support.
Banks and other investment institutions are the main sources of trade finance funds. But regulations put in place in the wake of the financial crisis, terrorist attacks, and wars in certain parts of the world have started to limit access to trade access, with banks in some places refusing to take on the risk themselves or lacking the funds to do so. Less access to trade finance is particularly troublesome for developing countries but blocks financial growth everywhere in our interconnected world.
But have no fear — technology is here! Blockchain technology in particular looks poised to provide a cure to whatever ills are currently endangering trade finance and the global flow of wealth. Envoy is deploying a blockchain-based solution focused on this very issue, throwing down the barriers that keep some away from the opportunities of trade finance while establishing a system that’s more secure and more transparent than anything any regulators could create.
Envoy’s system allows multiple financiers to fund the same contracts, distributing risk even more and providing an opportunity for even smaller or struggling entities to get a leg up and prove their worth. It also compiles the entire process into one paper-free space that saves time and resources, helping businesses capitalize on their new opportunities quickly. At the same time, blockchain’s inherent characteristics of decentralization eliminate the need for bulky regulators and other middlemen. That’s because putting trade finance on the blockchain insures the veracity of contracts while creating a permanent record of all transactions, which makes it far easier to authorities to identify and prosecute any entities attempting to act illegally with child labor or funding terrorist groups.
Blockchain-based trade finance is the future of global economic growth, and Envoy is spearheading the drive forward.
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