The Importance of LEI to Small Businesses and Entrepreneurs

Over the past two decades, the world has seen tremendous changes that have largely been contributed by technological advancement. Consequently, many novel industries have since emerged. The World Wide Web has greatly enhanced connectivity and communication between people, businesses, and countries. Small- and medium-sized enterprises have been the driving force of many economies around the globe.

If you are an entrepreneur, you must have encountered various regulatory requirements and obligations that are required to operate a business. They usually tend to differ depending on regions and countries. There is one particular requirement known as Legal Entity Identifier (LEI) that has become a universal requirement, especially if you are operating internationally. So, what is LEI number; it’s a unique identifier that contains 20 alphanumeric characters. Legal Entity Identifiers contain vital information about a particular business.

The Background of LEIs

One of the main reasons for establishing the LEI system was to facilitate transparency among businesses. During the 2008 financial crisis, it was rather difficult for financial institutions to clearly identify and ascertain entities; the introduction of LEI helped in solving this problem. Not only do LEIs aid in providing important information about the companies in the system, but they also give additional information about the issuing entities.

The Businesses That Require Legal Entity Identifiers

Nowadays, the Legal Entity Identifier system has tremendously grown and has been adopted by many nations. It is mandatory for companies that are based or operating in Europe to have an LEI number. The MiFID II legislative framework adopted by the European Union was put in place to protect investors, besides moderating the financial markets. Thus, the LEI system was incorporated since it was the appropriate method for achieving this goal.

How SMEs Can Benefit from Using LEIs

Given the efficiency and success of using LEIs in large corporations, the use of the system has started to be adopted even for smaller operating businesses. The following are some of the ways in which entrepreneurs and small businesses can benefit from using LEI.

Identification of Your Company

Considering how the world has evolved to become highly interconnected, business relations have become very versatile. The World Trade Organization has reported that factors including e-commerce platforms and leveled operating fields have made small- and medium-sized enterprises have a wide customer reach. Approximately 97 percent of internet-based businesses export their products and merchandise. Since most operations are done virtually, trust has become a key component in conducting financial transactions. Legal Entity Identifiers have helped SMEs to appropriately identify their trading partners.

Getting Financial Aid

A steady cash flow is an important requirement for SMEs to operate, grow, and expand their production. These days, financial institutions have put stringent measures in a bid to curb money laundering and giving finances to organizations that are linked to terrorism. Thus, Legal Entity Identifiers help banks to know the firms they are dealing with. Therefore, it has become a requirement for businesses that are seeking financing to have an operating LEI. Thus, entrepreneurs have a better chance of thriving if their businesses have valid Legal Entity Identifiers.

Fraud Prevention

There are many firms that have an online presence; unfortunately, some of these businesses are set up with the aim of swindling people. The information that is available on the LEI system improves trust among market participants; it’s because the data on the system is constantly being updated, which helps in reducing cases of fraud.

Final Thoughts

There’s no doubt that the introduction of Legal Entity Identifiers has helped in bringing sanity to the business world. Apart from keeping entrepreneurs and investors safe, the system also improves the efficiency of operations between entities. If you are operating a business venture that is gaining traction, be sure to get an LEI number. It will help in improving the image and performance of your firm in the global marketplace.

The post The Importance of LEI to Small Businesses and Entrepreneurs appeared first on Home Business Magazine.

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