17 March 2020
The World Trade Organization estimates that the ‘vast majority’ of the $20+ trillion in annual global trade relies on some sort of financing or guarantee between importer and supplier. This financing can take many forms, from bank letters of credit and secured lending, to traditional accounts receivable factoring (receivables purchase), to importer-initiated financing and payment discounts which loosely fall under the term “supply chain finance”.
Even though there’s a high demand for these types of international trade financing, it is not always available to exporters in the SME sector. The Asian Development Bank calculates the unmet demand for trade financing to be $1.5 trillion globally, with exporters in Asia feeling the most acute need for solutions to solve their working capital crunches.
Several factors are behind this trade finance gap. Global trade volumes have consistently grown, from just under $4 trillion in 1990 to nearly $20 trillion in 2018. More of this trade is being done on an open account basis, as Western importers expect payment terms from their suppliers. All the while, big banks have pulled back from the trade finance market in recent years due to regulatory constraints and paper-intensive processes that impact profits.
The need for liquidity in supply chains will be especially strong in 2020. Geopolitical developments such as the tariff wars and Brexit have added an element of uncertainty to the global economy, and both of these events have been eclipsed by the unexpected coronavirus outbreak.
In just the first two months of 2020, coronavirus has disrupted supply chains in multiple industry sectors including apparel, automotive, commodities, consumer goods, electronics, machinery and packaging. Goods are stuck in ports with no workers, or ships are sailing with half-empty capacity. This stoppage has caused havoc in global trade, and it is estimated that Chinese suppliers need billions to soften the blow of the coronavirus outbreak to their supply chains.
Flexible Solution: AR Factoring
One solution that can provide flexible and speedy relief is importer-led accounts receivable-factoring. The importer acts to introduce this solution to its suppliers, who are the actual clients of the finance company.
Here’s how it works. The finance company evaluates the creditworthiness of the importer and grants a credit limit amount and financing rate. Armed with this information, the financing company approaches the importer’s suppliers with an offer to purchase receivables, up to the amount of the credit limit granted.
If agreed, the finance company will purchase receivable at the time of shipment of goods, advancing up to 100% of the invoice value, less any fees, to the supplier. The importer then pays the financing company at the invoice due date.
Benefits for importers and suppliers
This practice brings several benefits to suppliers:
- For a cash-strapped supplier that is often unable to qualify for bank loans, the importer’s creditworthiness is a handy means to improve its own financial position.
- Receivables factoring is not a loan and can be implemented independently of bank financing. There is no impact on existing lines of credit or other loans, and no security is required.
- The supplier can control the injection of working capital by choosing when and which invoices to sell. This is especially helpful during expansion or peak seasons.
- In the case of non-recourse financing, once the invoice is sold to the finance company, the finance company takes on the risk of non-payment from the buyer. This guarantee is one reason fast-growing exporters find exporting financing especially attractive.
Importers benefit as well:
- Importers are able procure goods on extended payment terms without putting cash flow pressure on their suppliers, which is a common pain point in the trade finance space.
- They can receive goods and convert them to revenue without tying up availability under existing credit lines.
- Export receivables factoring is an especially attractive option for trade in jurisdictions not supported by the lender.
Importer-led receivables factoring is a flexible and straightforward method for importers and their suppliers to optimize working capital and strengthen their relationships. As the year progresses, supply chain liquidity will be more important than ever before.
Peter Clement is Business Development Director for Stenn International Ltd., with Headquarters in London, England. Residing in the Northeast, Mr. Clement specializes in providing expertise in international trade finance for global corporations. In this role, he is responsible for the continuous growth and retention of the broker, finance, and direct sales channels for North America.
Prior to joining Stenn, Mr. Clement spent 17 years with Coface North America where he held multiple positions including Regional Broker Director and Direct Sales Agent. He was dedicated to developing bank, broker, and direct relationships that resulted in sustainable and profitable business.
In nearly 70 countries, Stenn is a global leader in trade finance.