The Trade Finance Gap Is Also a Preparation Gap

The Trade Finance Gap Is Also an Advisory Gap

The global trade finance gap is generally discussed as a shortage of credit capacity, bank risk appetite and financial intermediation. Those constraints are material. From our perspective, however, another part of the problem sits on the demand side: many SMEs approach institutional lenders without investing adequately in transaction structuring, credit preparation, documentary controls and specialist structured trade and commodity finance advisory.

The Asian Development Bank's latest Global Trade Finance Gap Survey estimates that the global trade finance gap remained approximately US$2.5 trillion in 2025, equivalent to roughly 10% of global trade. The persistence of that figure demonstrates that access to working capital, documentary credit capacity, guarantees and other forms of trade finance remains a significant constraint on international commerce.

ADB's Global Trade Finance Gap Survey provides useful empirical context for the scale of the problem.

Smaller companies have historically experienced particular difficulty accessing institutional trade finance. The World Trade Organization's work on trade finance and SMEs similarly documents the financing constraints faced by smaller businesses participating in international trade.

It would nevertheless be a mistake to interpret every financing rejection as evidence that a bank declined an otherwise fully financeable trade. Some transactions are rejected because of lender capacity, country limits, sanctions exposure or portfolio considerations. Others reach the market without having been prepared to the standard required for institutional underwriting.

The Gap Is Not Exclusively a Supply-of-Capital Problem

The supply-side constraints are well understood. Banks operate within regulatory capital requirements, country and obligor limits, financial-crime controls, correspondent-banking relationships, sector limits, portfolio concentration thresholds and internal return-on-capital requirements. A lender may therefore decline a transaction even where the underlying commercial trade is genuine.

There is, however, a separate issue concerning the quality of the financing request itself. ADB's 2023 Trade Finance Gaps, Growth and Jobs Survey recorded poorly presented applications and insufficient information among reasons reported by banks for declining trade finance requests. The same analysis identified areas within companies' control, including financial literacy, the ability to present bankable proposals and cooperation with KYC and due-diligence requirements.

ADB's 2023 Trade Finance Gaps, Growth and Jobs Survey is particularly relevant to this distinction.

An institution cannot approve a transaction simply because the borrower has identified a profitable commercial opportunity. The institution must be able to understand, diligence, structure and control the associated credit exposure.

What We See in the Market

From our perspective as a structured debt adviser, one of the more persistent contradictions in the SME market is the willingness to assume substantial commercial exposure while treating specialist financing advice as an unusually unacceptable risk.

A company may be prepared to enter into a multimillion-dollar commodity purchase agreement, commit to freight, incur inspection costs, accept commodity-price volatility, extend credit to a buyer, carry inventory for several months and expose itself to demurrage, quality disputes or logistical delays.

Yet the same company may refuse to invest a comparatively modest amount in determining whether the financing structure is workable before committing itself to the transaction.

The advisory fee is visible, immediate and certain. The cost of poor structuring is less visible at the outset, but it can be materially larger.

Structured Trade Finance Is Not Merely Lender Matching

One reason SMEs sometimes undervalue advisory work is that the financing assignment is reduced to the question of finding a lender with sufficient capital.

Institutional structured trade finance starts with the underlying commercial transaction. The lender needs to understand the seller, buyer, commodity, purchase price, sales price, gross trade margin, shipment period, payment terms, title transfer, risk transfer, logistics, documentary flow and expected cash-conversion period.

From there, the financing structure must identify a credible primary source of repayment and, where appropriate, secondary collateral support. In a conventional self-liquidating trade, the primary source of repayment may be the identifiable proceeds generated when the financed goods are sold to the underlying buyer.

The lender must then determine whether those proceeds can be assigned, redirected into a controlled account or otherwise subjected to sufficient cash dominion to protect the repayment path.

The Financing Instrument Must Match the Trade Cycle

An SME seeking US$10 million of working capital does not necessarily require a US$10 million term loan. The correct facility depends on when cash leaves the business, when control over goods or receivables arises and when the transaction generates repayment proceeds.

A buyer importing goods may require a documentary letter of credit. An applicant requiring tenor while its supplier requires sight payment may consider a UPAS structure. An exporter needing liquidity before shipment may require pre-shipment or pre-export finance. A commodity trader holding eligible stock may support an inventory or borrowing-base facility. A company selling on deferred open-account terms may require receivables finance or forfaiting.

The Global Supply Chain Finance Forum's standard definitions distinguish among receivables discounting, forfaiting, factoring, payables finance, loans or advances against receivables, distributor finance, inventory finance and pre-shipment finance precisely because these structures perform different economic functions.

Requesting the wrong product can result in rejection even where another form of financing might have been viable. In those circumstances, the absence of approval does not necessarily indicate an absence of available capital. It can indicate a mismatch between the financing requested and the commercial transaction being financed.

Tenor Has to Follow the Cash Conversion Cycle

Tenor mismatch is a straightforward example of how an otherwise commercial trade can become difficult to finance.

Assume a supplier requires 15 days to prepare goods for shipment, the ocean voyage takes 35 days, discharge and inspection require another 10 days and the buyer pays 60 days after acceptance. The financing exposure extends substantially beyond the ocean-transit period.

The credit structure therefore needs to consider the availability period, drawdown date, shipment window, receivables period and ultimate maturity of the facility. A facility maturing before the commercial transaction generates cash creates refinancing or repayment risk by design.

Conversely, requesting unnecessary tenor increases lender exposure, consumes additional capital and may make the transaction less attractive than required.

Ownership of Inventory Does Not Automatically Create Borrowing Capacity

Another recurring misconception is that a company holding US$20 million of inventory should automatically be able to borrow a substantial percentage of that amount.

Asset-based and borrowing-base lenders normally distinguish between gross asset value and eligible collateral. Inventory may be subject to eligibility criteria based on commodity type, location, liquidity, age, ownership, valuation methodology, insurance, title and existing liens. The lender then applies an advance rate designed to create an appropriate collateral cushion.

The U.S. Office of the Comptroller of the Currency's Asset-Based Lending Handbook illustrates the same underwriting principle: receivables and inventory are analyzed for eligibility and appropriate advance rates, with inventory generally receiving lower advance rates because it is less liquid than a receivable that merely needs to be collected.

A statement that the borrower owns a large quantity of goods is therefore only the beginning of the collateral analysis.

Receivables Finance Has Its Own Eligibility Analysis

The same principle applies to trade receivables.

A lender may examine the identity and credit quality of each obligor, invoice aging, historical dilution, credit notes, contractual disputes, rights of set-off, contra accounts, concentration by debtor, foreign receivable exposure and whether the relevant receivable can be validly assigned.

A US$10 million accounts-receivable ledger does not necessarily support US$10 million of eligible collateral. Certain receivables may be overdue, disputed, unbilled, concentrated in one weak debtor or otherwise ineligible under the facility documentation.

These concepts are familiar to institutional asset-based lenders but can be unfamiliar to an SME approaching the market for the first time.

Documentary Risk Is Part of the Credit Structure

International trade remains highly documentary. Commercial invoices, bills of lading, packing lists, certificates of origin, certificates of quantity and quality, insurance documents, warehouse receipts and inspection reports may all affect payment or lender control.

Where a documentary credit is involved, the ICC Uniform Customs and Practice for Documentary Credits, UCP 600 provides the principal international rule framework used by banks. One of its foundational concepts is that banks deal with documents rather than with the underlying goods, services or performance.

Documentary conditions that are poorly drafted can create discrepancies, delay reimbursement, complicate discounting or leave the financing institution without the document it expected to control.

A commercially sensible trade can therefore contain a defective documentary structure.

Lenders Require Control as Well as Collateral

Ownership is not synonymous with lender control.

Structured trade finance frequently depends on mechanisms that allow the financing institution to exercise meaningful control over goods, documents or proceeds during the financed transaction. Depending on the structure, this can include direct supplier payment, endorsed bills of lading, controlled warehouse release, collateral-management agreements, receivables assignments, notices of assignment, controlled collection accounts and assignment of insurance proceeds.

Revolving facilities may additionally require borrowing-base certificates, periodic inventory reporting, collateral audits, stock reconciliations and regular recalculation of available borrowing capacity.

These controls are not administrative embellishments. They are often central to the lender's willingness to treat a transaction as self-liquidating and adequately secured.

The Borrower Is Only One Part of the Credit Analysis

Trade finance underwriting extends beyond the balance sheet of the applicant.

The financing institution may need to assess supplier performance risk, buyer credit risk, issuing-bank risk, warehouse risk, inspection risk, logistics risk, country risk and commodity risk. The relative importance of each depends on the structure.

An investment-grade offtaker may materially improve a receivables-backed transaction. The same facility concentrated in a small, thinly capitalized buyer can produce a fundamentally different credit outcome.

Similarly, an inventory facility concentrated in one warehouse, one country or one volatile commodity may attract additional haircuts, reserves or concentration limits.

KYC, CDD and Sanctions Review Are Part of Financing Execution

Compliance is frequently treated by applicants as a separate administrative exercise. For financial institutions, it is integral to the transaction.

The joint Wolfsberg Group, ICC and BAFT Trade Finance Principles address financial-crime controls across documentary credits, collections, guarantees, standby letters of credit, open-account trade and financial-institution trade loans. The framework covers customer due diligence, name screening, sanctions, export controls, escalation and transaction review.

A lender may therefore need satisfactory information concerning ultimate beneficial ownership, source of funds, transaction purpose, expected business activity, suppliers, buyers, banks, jurisdictions and goods before it can proceed.

An otherwise profitable trade can fail at compliance review if the relevant parties cannot be adequately identified or the transaction cannot be reconciled with the customer's expected activity.

SMEs Face an Institutional Capability Gap

Major commodity houses typically employ treasury professionals, trade-finance specialists, credit analysts, legal teams, operations staff and risk managers. Those functions allow the company to manage banking relationships, documentation, exposure limits and transaction execution internally.

Many SMEs cannot economically maintain that infrastructure. The owner or managing director may simultaneously be responsible for procurement, sales, logistics, cash management and lender discussions.

This creates an information asymmetry between the commercial company and the institution underwriting its transaction.

Specialist advisory can bridge that gap by converting a commercial opportunity into a financing proposition expressed in terms familiar to institutional credit: facility sizing, utilization, tenor, advance rates, borrowing-base eligibility, repayment waterfalls, collateral controls, obligor risk and documentary conditions.

SMEs Often Evaluate Advisory Cost in Isolation

The reluctance to pay professional advisory fees is understandable. A retainer is a known cash outflow. Financing approval remains uncertain.

But the relevant economic comparison is not simply between paying an adviser and paying nothing.

The alternative may include management spending months approaching institutions that cannot finance the requested product, circulating inconsistent information through intermediaries, repeatedly instructing legal counsel, losing supplier allocations, allowing purchase contracts to expire or committing to a trade before the financing structure has been validated.

Advisory cost should therefore be considered alongside the value at risk in the transaction and the potential cost of unsuccessful execution.

Concern About Advisory Risk Is Legitimate

Companies should not pay advisers indiscriminately.

The trade-finance market includes experienced practitioners, limited-purpose introducers, poorly qualified intermediaries and fraudulent operators. Proper counterparty diligence is therefore appropriate before entering an advisory engagement.

A company should understand the adviser's scope, deliverables, fee structure, distribution responsibilities, termination provisions and conflicts. It should also understand what the adviser expressly does not control.

In particular, no independent adviser can legitimately guarantee that a bank, credit fund or other financing institution will approve a transaction. Credit approval remains the decision of the institution assuming the risk.

The Absence of a Financing Guarantee Does Not Make Advisory Work Valueless

One of the most common objections to a retainer is that the company could pay for the advisory work and still receive a negative lender decision.

That is correct.

The adviser can control the quality of its analysis, structuring, preparation, lender selection and execution. It cannot control a credit committee, sanctions decision, country limit, sudden change in commodity prices or a lender's internal portfolio position.

For that reason, professional fees and success compensation perform different functions. A retainer compensates work performed during the mandate. A success fee, where applicable, compensates a successful financing outcome.

Requiring all compensation to depend exclusively on financial close instead transfers the entire cost of unsuccessful execution to the adviser, including failures caused by matters outside the adviser's control.

Trade Finance Can Be Low Risk While Individual Applications Remain Unfinanceable

This distinction is important because established trade-finance products themselves have historically demonstrated comparatively strong credit performance.

The ICC Trade Register continues to report low default rates across trade, supply-chain and export-finance products.

There is no contradiction between that finding and a large global financing gap.

A financial institution can regard trade finance as an attractive asset class while declining an individual SME because its financial information, structure, counterparties, compliance profile, collateral or repayment mechanics do not satisfy underwriting requirements.

Avoiding Advisory Fees Can Produce Uncontrolled Distribution

There is another recurring feature of the SME market. A company unwilling to appoint one accountable adviser may nevertheless circulate the same transaction through a long chain of unpaid brokers and introducers.

Several versions of the transaction can then reach the same institution. One intermediary describes the requirement as a letter of credit, another as a commodity loan and another as a standby-backed facility. Facility amounts change. Tenor changes. Pricing changes. Documents circulate without central control.

This does not create broader institutional coverage in any meaningful sense.

It creates uncontrolled distribution without a defined financing strategy.

Repeated Poor Distribution Can Damage a Transaction

Financing markets are not infinitely reusable.

Once a transaction has been circulated widely in an incomplete or inconsistent form, the borrower may have difficulty reintroducing it after the structure has been corrected. Potential lenders may already have reviewed the opportunity, assigned an internal decline or associated the transaction with execution problems.

A disciplined mandate therefore distinguishes structuring from distribution. The transaction should first be prepared sufficiently to determine what financing is actually required and which institutions are credible counterparties for that requirement.

Distribution should follow the financing strategy. It should not substitute for one.

Proper Advisory May Conclude That the Transaction Should Not Proceed

Advisory value should not be measured exclusively by whether debt is ultimately raised.

A proper credit review may identify that the requested facility is too large relative to the borrower's contribution, that the trade margin cannot support the cost of financing, that the proposed buyer is not sufficiently creditworthy or that the requested tenor materially exceeds the normal cash conversion cycle.

It may identify defective collateral-control arrangements, an unenforceable receivables assignment, excessive obligor concentration, unacceptable commodity exposure or a documentary-credit structure that does not correspond with the commercial contract.

In those circumstances, the appropriate advice may be to restructure the trade before approaching lenders. Avoiding an unsuitable transaction can preserve substantially more capital than obtaining financing for it on the wrong terms.

SMEs Should Concentrate on the Variables They Can Control

An SME cannot determine global interest rates, regulatory capital treatment, a bank's country limit or the geopolitical environment.

It can maintain complete financial information. It can organize its KYC and beneficial-ownership records. It can negotiate coherent purchase and sales contracts. It can select credible counterparties. It can calculate its actual working-capital requirement. It can understand its gross margin and cash-conversion cycle. It can prepare the documentary package before approaching lenders.

It can also decide whether the complexity of the transaction justifies engaging external specialists.

Those measures cannot eliminate systemic constraints on trade finance, but they can reduce the number of potentially viable transactions that fail unnecessarily because the borrower was not ready for underwriting.

There Is an Advisory Gap Within the Trade Finance Gap

Large multinational traders can internalize much of the expertise required to structure institutional financing. An experienced commodity house may already employ specialists in treasury, credit, trade finance, legal documentation, operations and risk management.

An SME generally cannot maintain the same infrastructure.

The companies with the greatest need for external expertise can therefore also be the companies most sensitive to its cost. This creates an uncomfortable circularity: the company lacks internal structuring capacity, views professional advisory expenditure as too uncertain, approaches lenders without that capacity and then interprets the resulting decline as evidence that trade finance is unavailable.

That sequence does not explain the entire US$2.5 trillion global trade finance gap. It does explain a category of transactions that never successfully move from commercial opportunity to institutional credit.

Structured Trade Finance Advisory FAQ

What is the trade finance gap?

It is the difference between demand for trade finance and the financing that financial institutions ultimately approve. ADB's latest survey estimates the global gap at approximately US$2.5 trillion.

Are banks responsible for the entire gap?

No. Bank capital requirements, country risk, compliance costs and risk appetite are important contributors, but borrower readiness and transaction quality also affect credit outcomes.

Can a poorly presented transaction actually be declined for that reason?

Yes. ADB has reported insufficient information and poor presentation among reasons given by banks for declining trade finance applications. A lender requires enough reliable information to analyze the borrower, underlying trade, counterparties, repayment source and relevant controls.

What is a self-liquidating trade finance transaction?

Broadly, it is a financing structure in which repayment is expected to arise from the cash generated by the underlying financed trade itself, such as buyer proceeds received following the sale of financed inventory.

What is a borrowing base?

A borrowing base determines availability under a revolving facility by applying agreed eligibility criteria, advance rates, reserves and concentration limits to specified collateral such as inventory or receivables.

What is an advance rate?

It is the percentage of eligible collateral value against which the lender is prepared to make financing available. The difference between collateral value and the advance represents part of the lender's collateral cushion.

What is dilution in receivables finance?

Dilution refers to reductions in receivable value for reasons other than cash collection, including credit notes, returns, rebates, pricing disputes and other adjustments. Historical dilution can affect receivable eligibility and advance rates.

What is cash dominion?

Cash dominion refers broadly to arrangements giving the lender control over specified collections or transaction proceeds, often through a controlled collection account or contractual payment direction.

Why does KYC matter if the trade is profitable?

Financial institutions remain subject to customer-due-diligence, sanctions, AML and other financial-crime requirements regardless of transaction profitability. An institution unable to become comfortable with ownership, counterparties, jurisdictions or transaction purpose may be unable to proceed.

Does paying an advisory fee guarantee financing?

No. An adviser can structure and execute the mandate but cannot control an independent lender's credit decision. Financing remains subject to underwriting, compliance, documentation, collateral requirements, internal limits and final approval.

Why pay an adviser if financing is not guaranteed?

Because the professional work required to analyze, structure, prepare and distribute the transaction exists independently of the lender's final credit decision. The relevant economic comparison includes the potential cost of approaching the market with an unsuitable structure or incomplete documentation.

Can advisory turn any transaction into a financeable one?

No. Advisory cannot manufacture creditworthiness, eliminate sanctions risk, create collateral that does not exist or make an uneconomic trade profitable. In some cases, proper advisory will conclude that the transaction should be restructured or not financed.

Does every SME need an external trade finance adviser?

No. Companies with experienced internal treasury, trade-finance, credit and legal capabilities may manage the process directly. External advisory becomes more relevant where the company lacks that infrastructure or the transaction requires specialist structuring and institutional execution.

The Market Needs More Capital and Better-Prepared Transactions

The global trade finance gap is a genuine systemic problem. Expanding guarantee capacity, development-finance participation, correspondent banking, supply-chain finance, trade digitalization and private credit participation can all increase the supply of capital.

The demand side deserves equivalent attention.

Financial institutions require coherent transaction economics, reliable information, acceptable counterparties, compliant documentation, identifiable repayment sources and controls appropriate to the credit being extended.

SMEs that do not maintain those capabilities internally should regard specialist trade finance preparation as part of the cost of accessing institutional capital.

Advisory firms should be diligenced. Fees should correspond to a defined scope. Conflicts should be understood. Financing outcomes should never be guaranteed.

But treating all advisory expenditure as an unacceptable risk can itself contribute to failed financing processes. The trade finance gap is not only a shortage of money. It is also a problem of credit readiness, information quality, transaction architecture and execution.