Alternative investments are everywhere these days, from the launch of spot crypto ETFs like BlackRock’s IBIT to recent headlines about whether alternatives, such as private equity or private credit, might one day be included inside employer-sponsored 401(k) plans.
For all the attention on ETFs and hybrid public/private interval funds, these vehicles only scratch the surface. Alternative assets are attractive for their ability to deliver stability amid market volatility and provide diversification outside public stock and bond markets. The more they become comingled with public vehicles, do they lose some of their luster?
NEW YORK, NEW YORK – NOVEMBER 07: Traders work on the floor of the New York Stock Exchange during the morning trading on November 07, 2024 in New York City. Stocks rose slightly at the opening, a day after the Dow Jones closed up over 1,500 points following former President Donald Trump’s win in the 2024 presidential election. The gain was the market’s biggest jump in two years. The S&P 500 and Nasdaq Composite also closed at all time highs. The market is also expecting an interest-rate decision from the Federal Reserve Bank later today. (Photo by Michael M. Santiago/Getty Images)
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Trade Finance Provides Capital To International SMEs
Consider a truly alternative solution in private credit through trade finance.
Small and medium-sized enterprises (SMEs) in emerging markets are a growing backbone of global economies. According to estimates from The World Bank, SMEs provide at least 45% of the jobs and 33% of the GDP in emerging economies alone. 600 million jobs will be needed by 2030 to accommodate the growing global workforce. They believe SME development will be a major focus for governments around the world.
Yet, these enterprises face a persistent challenge: access to capital.
Trade finance refers to a broad set of financial instruments used to facilitate domestic and international trade. It includes letters of credit and/or inventory-backed lending provided by banks and other financial institutions. Trade finance ensures that sellers receive payment and buyers receive goods, even when they’re separated by thousands of miles and different currencies.
TOPSHOT – A worker walks by wheels of Parmigiano Reggiano cheese stored in the ripening department of the Casearia Castelli, member of Lactalis Group, at the Caseificio Tricolore in Reggio Emilia, Northern Italy, on April 19, 2023. – The global dairy giant Lactalis, which has remained a family business since it was founded in 1933 in Laval, France, announced on April 20, 2023 that it would have sales of more than 28 billion euros by 2022, dethroning Danone as the leading French food company, and joining the world’s top 10 in the food industry. (Photo by Marco BERTORELLO / AFP) (Photo by MARCO BERTORELLO/AFP via Getty Images)
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In recent years, there has been a large trade finance gap globally, especially for international SMEs. Traditional banks have withdrawn funding in many regions due to regulations, risk, or complexity, leaving opportunities for fintech and specialty lenders.
Trade Finance Platforms And Investment Opportunities
Enter a firm like TradeBacked Inc, which lends to domestic middle-market companies with a presence in international markets. They have a particular focus on emerging countries and cross-border trading hubs, including Asia, Europe, Dubai, and Singapore.
TradeBacked doesn’t offer traditional loans. They purchase inventory at a discount from companies using repurchase agreements and may even take physical possession of the assets. The purchase sometimes accounts for 50-90% of the inventory’s appraised value, and it unlocks immediate cash flow for the borrowing company.
For example, if the firm lends $700,000 on $1 million of inventory, they might charge the borrowing company 1.5% interest per month for a 3–12-month term. They pay investors a lower rate (e.g. 10–15%), and the spread (e.g. 2–5%) is their profit.
Sumit Saraf, Managing Partner of TradeBacked Inc. says, “Trade finance, a $60 trillion market, offers a crucial avenue for SMEs to access the much-needed capital that traditional banks often struggle to deliver. Traditional financing in this space comes with a few inherent risks. Our structure, which involves inventory-backed and insured repurchase agreements, offers investors an opportunity in an institutional asset class: attractive, fixed returns with shorter terms compared to traditional private equity, often accompanied by the added benefit of diversification.”
Vault at the National Bank of Laredo (Photo by © Viviane Moos/CORBIS/Corbis via Getty Images)
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Another option, though only available to institutional investors, is Tradeteq. The platform works by connecting originators, such as banks and alternative lenders, with institutional investors via a secure digital marketplace. Trade finance deals are packaged into short-term notes that investors can purchase. Tradeteq also facilitates secondary trading of these short-term notes through its Access Lite platform, offering added liquidity to investors.
Finally, for retail investors, the opportunity for trade finance is still in reach. Federated Hermes Project & Trade Finance Tender Fund (ticker XPTFX) is a closed‑end mutual fund backing trade and supply‐chain finance, often in emerging markets. Please note that its shares aren’t listed on any stock exchange. Liquidity is provided through quarterly repurchase offers at the discretion of Federated Hermes.
Risks In Trade Finance
Trade finance presents a compelling alternative to traditional lending, but it also carries certain risks that investors should be aware of.
As with traditional lending, business failures or cash flow problems can impair a borrower’s ability to honor the repurchase. Default risk can become amplified in emerging markets, where accounting standards, governance, and legal enforcement may be less robust.
Because these deals may involve international parties and jurisdictions, additional risks must be assumed, including those related to currency fluctuations, tax treatment, and changes to local laws. Regulatory or political changes in certain countries could disrupt trade flows or create barriers to enforcement in the event of borrower default.
SME inventory can lose value, be difficult to sell during certain economic cycles, or become damaged. Even though most firms cover inventory damage with insurance, the insurance won’t cover broader cash flow problems or an inability to sell the inventory.
For investors, trade finance offerings are typically private placements, structured notes, or bonds which are illiquid and not traded on public markets. That means capital is illiquid for the duration of the deal, usually 3-12 months. There is no guaranteed early liquidity, so these investments are not suitable for short-term cash needs.
Before investing in trade finance, consult with a financial advisor who is familiar with alternative investments to ensure that these investments align with your portfolio goals and risk tolerance.
Securities are offered through Arkadios Capital. Member FINRA/SIPC. Advisory services are offered through Creative Capital Wealth Management Group. Creative Capital Wealth Management Group and Arkadios are not affiliated through any ownership. This material was created for educational and informational purposes only and is not intended as tax, legal or investment advice.