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Industry Perspectives: Using technology to cut SME trade finance costs

Polytrade is a receivables finance company which provides working capital to small and medium-sized enterprises (SMEs) across Asia and the Middle East.

Since launching in 2014, the firm has built up a customer base of over 5,000 borrowers and helped clients to fulfil their orders to multinationals including Walmart, Ikea, Nike and Debenhams.

But this year, Polytrade also started developing a blockchain-based decentralised finance protocol that it says will finance the working capital needs of SMEs.

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In this Industry Perspective, Piyush Gupta, founder and managing director, outlines plans for launching the blockchain-enabled platform, and discusses the ways in which the new solution will help SMEs source affordable trade financing.

 

GTR: Tell us about Polytrade. What has been the focus of the business to date and to what extent has the firm expanded its operations in recent years?

Gupta: In 2014, I first launched a consulting firm called Riqueza Capital that focused on helping SMEs source trade finance in several key markets, including Hong Kong, Singapore, India and Dubai.

Working with the likes of Drip Capital, PrimaDollar, TradeWind, India Factoring and others, we raised more than half a billion dollars for our clients over the past six or seven years, while also developing a reputation for sourcing good quality deals.

During Covid times, every business took a big hit and we were not immune to that. So we quickly changed our strategy and moved our business onto a web-based digital platform, which we had first launched in January 2020. We onboarded more than 100 customers during the first six months, arranging financing for clients we had never met face-to-face. That was a remarkable switch, from having 10 or so meetings to explain our project, to onboarding a company remotely and finalising all the documentation digitally, before wrapping up the transaction and sending it to our lenders.

The plan is to now transition into becoming a blockchain-based protocol, which we will officially launch in January 2022. It has been a good two-year-long journey from a team of four or five people, to where we are now with more than 20 employees. We raised US$1.6mn earlier this year to help develop the new solution.

 

GTR: How does the new Polytrade platform work, and what does it aim to do? 

Gupta: As a decentralised trade finance protocol, Polytrade aims to link cryptocurrency investors to real-world receivables financing assets, in turn helping SMEs source affordable funding, quickly and with no limits on ticket size.

On the borrower side, the plan is to make the solution as decentralised as possible, so any company can be onboarded and submit data.

The SME will submit their invoice to the Polytrade platform, while all the third parties involved in a deal – including those that carry out KYC and credit checks – will be connected to the system through APIs. There is a mechanism built into the platform ensuring that once all the data has been captured and uploaded to the blockchain, a smart contract will decide whether the invoice should be financed or not. If it is to be financed, the smart contract will also decide on the parameters of the deal, the size of the advanced ratio, the interest rate and the factoring fee.

Crypto investors will then be able to invest and earn interest on these real-world assets through stable coins, such as USDT or USDC.

 

GTR: What unique benefits does the platform offer to both SMEs and investors?

Gupta: Before launching Polytrade, we identified several ongoing problems for SMEs. According to the World Economic Forum, 60% of SME requests for financing are rejected worldwide. Meanwhile, the gap in SME trade financing – estimated to be US$1.7tn today – is forecast to increase to US$2.5tn by 2025.

Traditional trade finance lenders often have a manual way of doing things, which means that if they are assessing a client with a US$2mn limit versus one with a US$200,000 limit, the lender will obviously put their energy towards a larger ticket size as the margins are that much better. SMEs with smaller invoices are often simply neglected.

Another factor is that dollar financing is often incredibly expensive. Factoring costs in the US can reach as high as 18% per annum, around 15% in Europe, or roughly 18 to 20% in Latin America. The numbers are a bit more reasonable in Asia, but they are still hovering around 10 to 12% a year.

A third and very compelling problem is that if you go to a trade finance fund as a small company, the lender will assess all your buyers and give you a lump sum annual limit. But this can be very inflexible for SMEs, who are sometimes forced to accept financing for invoices they did not need or want.

Polytrade’s digitised solution aims to tackle these three issues. Whether an invoice is US$10,000 or US$1mn in size, our system has the same process. Secondly, we are not taking any currency risks so will be able to provide cheaper financing for borrowers. Crypto liquidity will be provided through stable coins, which will then be converted into fiat money before lending.

Thirdly, Polytrade is not going to set annual limits. As we are doing spot financing, the platform will finance a company’s invoice on an individual basis. That’s a big change which nobody has done so far in the trade finance industry.

Today, trillions of dollars are locked into stable coins such as USDT or USDC, so you understand how big the potential market is. When these crypto holders go to any crypto protocol they can deposit and earn interest returns of somewhere between 1 to 3%. But we estimate that we’ll be able to offer them returns of as much as 6% by investing in receivables assets.

 

GTR: What sort of appetite have you seen for the platform, and which markets will you likely target?

Gupta: The platform is yet to formally go live, but in the first year we have plans to incentivise borrowers and lenders to sign up to the platform.

It is a very common thing in the industry to do some ‘bootstrapping’ with your own treasury resources when you initially launch. Our native token is called $TRADE, and in the first few months, on our borrower side, we will reduce the cost of funds by giving them additional $TRADE tokens on every successful invoice. This will bring down their borrowing costs.

In the same way, the people who are putting money into the protocol, the depositors, they will be getting a 6% deal on their USDT as well as an additional yield of roughly 4 to 5% through trade tokens.

Our company has existing clientele in the Asean region, so naturally we will target these companies in our first phase. But at the same time we are also aggressively talking to lenders in Latin America, as well as a large US debt fund.

 

GTR: In what ways can new technology innovations such as blockchain and tokens be used to bridge the well-documented trade finance gap?

Gupta: The use case is already strong for blockchain, with various players across the trade and trade finance industry, including logistics companies, banks and credit insurance firms, looking at integrating the technology into their business.

Blockchain means the data is public and stamped in such a way it will never be tampered with. If one invoice is already on chain, that invoice will never be touched by anybody else. As such, I see a sizable evolution ahead in the wider finance industry, including the trade finance market. While none of my clients over the past eight years committed fraud, there have been several scams in that time, and some trade finance funds have vanished from the market as a result.

Today transactions are being settled in fiat, namely US dollars, euros or any other government-backed currency. Cryptocurrencies would offer a new way to start settling these deals, one which is separate from central government or fed involvement – with prices driven instead by supply and demand. But while I believe tokens will play an important role in tackling the trade finance gap, I do not see that happening anytime soon.

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