“Who’s paying them?”

Small businesses in the U.S. have reportedly been hit hard by the tariff announcements. Many of them import goods from overseas and are the ones responsible for paying the tariff costs, which are essentially taxes placed on foreign products brought into the import country. Big-box retailers like Walmart don’t face this same financial burden. They have the competitive advantage and the leverage to pass tariff expenses onto their overseas suppliers if necessary.

Amid new trade policies, buyers and suppliers are reviewing the terms of their trading partnerships. Some are negotiating proactive solutions in response, including how to address payment and any new added costs from tariffs.

Whether it’s the overseas supplier who will have to absorb tariff prices or the importer who ends up covering them, trade finance can be used to protect and improve cash flow for both buyers and sellers across the international supply chain.  It’s also a means for buyers and sellers to negotiate more favorable payment terms with one another, so all players can proceed with strong, stable cash flow when doing cross-border business.

Win-win tool for dealing with tariffs

For businesses trading internationally, sorting out payments during the tariff rollouts is likely a top priority. Small, midsized and larger companies are all involved in this new trade playbook and are all part of getting a product to market.

In this trading web of exporters, importers and other supply partnerships, someone will have to either absorb, pass on or split tariff charges.

Just like it has been during other supply chain events, including COVID-19 and geopolitical disruptions, trade finance can be a solid tool to help companies bridge cash flow between raw material procurement, production and payment receipt. It can be used to finance longer payment terms between the buyer and seller, so that sellers get funded right away while the buyer can pay at a later date.

Fun fact: Trade finance already supports 80-90% of global trade, according to the World Trade Organization. This financing ensures that both parties in a commercial transaction have the cash they need, especially if prices spike, like in the case of tariff charges.

Financial flexibility during times of transition

Tariffs are determined by the country of origin and the type of product being imported.

Right now, a lot of companies are talking about the uncertainty tariffs are causing for their business. Some however have anticipated tariffs and have already adjusted their business strategies accordingly, including price adjustments with suppliers, inventory stockpiling, diversifying their sourcing and supply chains, and focusing on additional markets outside U.S.

Those companies that haven’t already gotten the ball rolling on these adjustments are likely in the process of considering their options now that tariffs have shaken up trade norms.

As companies reassess their tactics, trade finance is a flexible solution that can adapt to a business’ evolving needs.

If a company, for example, shifts sourcing from one country to another, or partners with retailers in new markets, then a trade finance firm can help facilitate seamless transactions between buyer and seller – including the payment terms between the two.

The mechanics behind trade finance

Trade finance is a set of financial tools that improve cash flow, mitigate trade risk, and unlock business growth.

One type of trade finance is known as export factoring. Using export factoring, companies can sell their receivables or invoices to a financial intermediary. The financial intermediary then provides up to 90% of the invoice amount to the company upfront and in cash.

The concept behind export factoring is that businesses choosing to use it can get paid right away, rather than having to wait months to collect payment from their buyers.

For reference, recent data showed that a large U.S. buyer takes an average of 54.7 days to pay their invoices. Businesses can be strained financially if they have to wait that long to get paid.

Aside from the immediate liquidity export factoring provides, non-recourse export factoring also includes credit protection that ensures you get paid even if your customer defaults. Collection services are also part of export factoring arrangements, where the trade finance company acts as an extension of a business’s “back office”. With collections services, the trade finance company handles payment collections and supports exporters as they navigate and work with buyers in foreign markets.

Supply chain finance is another type of trade finance, but it is often initiated by the buyer, rather than the seller. Through supply chain finance, a retailer can offer its vendors early funding, equipping them with the cash to maintain operations and keep up with orders.

Like export factoring, supply chain finance helps suppliers get paid faster while giving buyers longer windows until payment is due. This dynamic ultimately allows buyers and sellers to have more cash on hand, a crucial element for general working capital – and with the handling of tariffs.

The upshot

As the tariff and international trade landscape evolves, trade finance, and the age-old technique of factoring your receivables to secure payment upfront can prove to be the right antidote to optimize cash flow.

No matter where the tide turns next, trade finance tools offer a potential safety net for companies engaged in international trade.

The post How to use trade finance tools to gain flexibility during trade policy upheaval appeared first on Trade Ready.

At a time when stability and access to working capital are essential, there is an urgent need for more effective, robust supply chain finance (SCF) solutions.

This makes the passing of a concise but extremely powerful piece of legislation particularly pertinent. The UK’s Electronic Trade Documents Act 2023 (ETDA) came into force in September.

While most businesses will likely have paid little heed to this development, its relevance is profound for companies of all sizes that trade domestically or internationally.

The legislation has an immediate global impact as between 60%-80% of all global trade is governed by English law, regardless of the domicile of the counterparties.

The ETDA reflects the essence of the 2017 UNCITRAL Model Law on Electronic Transferable Records (MLETR), that has been adopted by Singapore and the UAE amongst others, and which will form the root of similar legislation being adopted by G20 nations.

So, what is the ETDA? And importantly, what does it mean for businesses?

One small step for legislation

The processes behind funding trade and drafting their documentation largely rely upon the same laborious, manual methods. Consequently, they are insecure, inefficient, siloed, and impractical. Digitalisation is widely acknowledged as being the way forward for both physical and financial supply chains but applying digital capabilities to trade finance is not straightforward.

Unlike in other sectors of finance, where digital progress is more advanced, the rules upon which trade finance is governed date back centuries. Trade finance is therefore built on entrenched, longstanding legal specifications established for a paper-based age. The principles of “possession” and “transfer”, for example – which pertain to the exchange of trade documentation and are vital to facilitating trade finance – have remained largely unchanged in most jurisdictions.

In effect, according to the wording of global trade rules, paper documents are the format by which trade finance has to be conducted. And this has been the fundamental barrier to digital trade document adoption.

What the ETDA does is give certain documents commonly used in global trade the same legal status in digital form as their paper-based equivalents.

Superficially a small change, this amendment is the breakthrough that has been needed to allow digital documents to become mainstream and come into their own.

One giant leap for businesses and their balance sheets

Specifically, the ETDA has significant implications for negotiable documents such as promissory notes and bills of exchange. It is the digitalising of these documents – and their legal recognition – that is key. Free from the inefficiency constraints of paper, digital versions of negotiable instruments (or “DNIs”) are creating an avenue to transform and optimise SCF, and, in the process, discard inefficient and insecure paper-based processes.

From a corporate treasurer’s perspective there is considerable value to be gained – including, fundamentally, improvements to working capital through more effective funding and cost savings, with earnings within their existing supply chains.

DNIs are a scalable, flexible and binding promise of payment by a business. Crucially, this enables today’s fractured, impractical funding structures that result in lengthy payment cycles and strains on working capital to be completely inverted – from a “bottom up” approach to a “top down” one.

This means tying funding to the balance sheet of the issuer, rather than that of the generally weaker creditworthiness of businesses’ SME suppliers. A business can therefore borrow from a financial institution (FI) and then cascade funding down to their suppliers by issuing DNIs.

DNIs dispense with the separate assignment agreements and irrevocable payment undertakings (IPUs) that are currently necessary for the transfer of trade documentation. And, with the DNI the basis of the lending rather than non-negotiable invoices, not only can 100% of invoice values be financed, but payments can be made immediately, thereby massively speeding up access to funding across supply chains.

This approach enables smaller suppliers to optimise their working capital through early payments which, in turn, ensures supply chain security for the business, generates opportunities for supplier discounts, and improves buyer-supplier relationships.

DNIs also allow corporates to have far greater control of how and when they use SCF, including being able to negotiate payment terms with suppliers to pay early or on time, depending on their liquidity needs. They are inherently more flexible than existing solutions, meaning treasurers can effortlessly switch between different funding methods – such as employing either their own or third-party cash – depending on which is the most effective for them at any given time, predicated, for instance, on their business cycle or cash position.

For example, if a typically cash-rich business runs into liquidity issues, instead of having to limit their dynamic discounting programmes, they can use DNIs to access external liquidity to extend payment terms as needed.

In terms of bottom-line contribution, a typical supplier early payment programme using digital documents such as this, can result in annual net benefits of between 1-7% of cost of goods. Furthermore, regardless of whether supplier early payment discounts are negotiated, businesses can also use digital instruments to avail themselves of post maturity finance and can thereby ‘buy’ themselves an approximate additional 50% cash in hand (i.e. a 60 day supplier invoice is settled with a bill or bill drawn for an additional 30 days) to plug financing gaps as needed.

Harnessing Digital Negotiable Instruments (DNIs)

One consideration that must be made regarding DNI adoption is the ETDA stipulation that the use of a reliable electronic trade document system and sufficient security on electronic documents is required for a DNI to be legally recognised. While clarity regarding exactly what constitutes a “reliable system” is currently being sought, there are DNI solutions readily available that, by passing key possession and reliability tests, already conform with the ETDA’s definition.

These solutions, such as the TradeSecure platform, place quantum-secure digital seals around DNIs that require a specific cryptographic key and protect electronic signatures using quantum notary technology. Such capabilities ensure DNIs cannot be duplicated or tampered with, thereby assuring the ownership and authenticity of the instrument. Easy trackability also streamlines and automates the audit process.

ETDA: Enter The Digital Age

One can reasonably ask that, if the use of promissory notes is already possible, why don’t businesses employ them? Simply put, without digitalisation, this process was heavily reliant on physical, paper documentation, the inherent administrative costs that accompany it, and the slow pace of transfer via mail. As a short-term financing process (between 90-120 days), long turnarounds have made them previously not worthwhile.

With digital documents, there is no long waiting period for paperwork to move through the supply chain, creating a far more readily available cash pool. This is because digital instruments can be exchanged in (close to) real-time, expediting processes by approximately 10-12 days, and thereby enhancing time to revenue and operational efficiency.

DNIs can easily be integrated into current SCF programmes via APIs, making them interoperable with existing global trade platforms and businesses’ ERP systems. For smaller businesses that may not use ERP, invoice data can be uploaded simply using CSV files. DNI adoption is therefore non-disruptive, straightforward, and efficient.

Once onboarded, using digital trade documents rather than paper versions will bring direct cost savings, with costs linked to paper trade documents estimated to be three times more than their electronic counterparts.

There is little doubt that to the bystander that the ETDA is a dry and inconsequential piece of legalese. However, by enabling the digitisation of trade documentation, it and similar legislation being implemented across the G20 and beyond, promises to create opportunities for corporates to conduct trade financing unlike what has come before.

By issuing a digital promissory note (DNP) or bill of exchange that gets immediately financed by a financial institution and discounted by suppliers, and then being able to choose the timing and frequency of the use of these solutions is transformational for businesses – driving extensive commercial advantage. As businesses seek to seize the opportunities abound and adoption inevitably accelerates, let us enter the age of SCF 2.0.

The post New UK legislation on electronic trade documents ushers in a world of possibilities for global businesses appeared first on Trade Ready.

In every industry, networks of suppliers, manufacturers, trade intermediaries and customers have spread around the globe as companies strive to lower their costs, increase their profits and improve productivity in a highly competitive global marketplace. A paradigm shift has occurred in which companies that once built domestically to sell internationally now look globally for raw materials, services and finished goods to sell into a defined marketplace.

This shift is happening because of reduced barriers to trade and investment, lower transportation costs, ease of information flows, new enabling technologies and the emergence of economies such as China and India.

Supply chain management aims to manage the flow of goods, information and finances among these business networks in the most efficient manner. Companies have discovered that effective supply chain management cuts costs, reduces waste, prevents over-production and helps ensure that customers are more satisfied with product, price and service. This means it is an essential tool for competitiveness in a global marketplace.

Co-ordinating the flow of materials, information and finance through each of the components in the supply chain, however, involves many challenges.

A primary challenge is that each company in the chain is likely to have conflicting business objectives and requirements. For example, a supplier of raw materials would prefer a manufacturing company to purchase large amounts of raw products on a regular basis. The supplier will also want the best possible price for its raw product.

However, the manufacturer wants to pay the lowest possible price for the product and also wants flexibility in when and how much to purchase.

Trying to predict the unpredictable

Another major challenge is the inherent uncertainty embedded in every supply chain. This must always be planned for, but can never be predicted.

With global supply chains, the level of uncertainty increases with each additional market that is involved.

Political actions in another country can have dramatic effects on the supply chain; natural disasters might have a major impact on shipping and transportation; and wars, labour strikes, or civil unrest can result in low productivity. The supply chain can also be affected by shortages of raw materials or product components and transportation problems. Costs of raw products and components also tend to vary over time.

Global supply chain management also faces the challenge of variations in customer demand that occur seasonally and over longer time periods. Managing the production and transportation of goods over large distances to meet the peak period of demand can be very difficult.

But wait – there’s more!

Other challenges that companies face with global supply chains include the following:

• Currency fluctuations: When dealing with suppliers or customers overseas, companies must plan for fluctuating charges and income from foreign exchange rate variations.
• Maintaining intellectual property protection: A company might be able to have a product assembled overseas more cost effectively than assembling it domestically. However, some countries have less stringent laws regulating protection of intellectual property.
• Identifying and assuring the reliability of international business partners: With suppliers, distributors, customers and business partners located in many regional areas of the world, it can be difficult for companies to monitor the business practices and financial stability of all organizations in the supply chain.
• Accessing finance and insurance: Financial transactions conducted internationally are always more complicated than domestic transactions. Companies must establish lines of credit with banks and work with other members of the supply chain to identify preferred methods of payment. Obtaining the correct insurance to protect foreign property and shipments is also essential.
• Compliance with international regulations and standards: Quality standards, import and export restrictions, safety and packing regulations and labelling regulations vary around the globe. For companies new to international trade, ensuring that materials provided by a foreign supplier will meet all domestic entry regulations can be a daunting undertaking.

The post What are the biggest challenges of managing global supply chains? appeared first on Trade Ready.

Trade finance has shifted from a fairly esoteric, focused and niche element of global trade to become an integral part of the most fundamental aspect of international trade: the global supply chain.

A slow but inexorable shift away from traditional trade finance instruments, such as documentary letters of credit, has motivated banks and other providers to seek ways to stay engaged in, and critical to, the conduct of trade and the provision of trade finance.

Adapting to the new era of supply chain management

Settlement of international trade transactions on an open account basis—in effect, settlement of an invoice by cheque—has eliminated historically attractive margins for trade finance providers, and has removed several lucrative risk-mitigation features that were available under traditional instruments.

Banks and trade finance providers have been working for several years to devise product and service offerings that could usefully and credibly be offered to the market while generating acceptable returns for the providers.

Enter SCF, or supply chain finance.

Trade financiers’ interest in supply chain finance comes at a time when global sourcing patterns are changing drastically and becoming concentrated in Asia, which for many importing nations means supply chains become extended—geographically, and in terms of the time required for transactions to complete.

Similarly, payment cycles extended for some time, with key metrics such as days sales outstanding (DSO) on the rise.

Out with transactions, in with solutions

Trade finance specialists have taken a markedly greater solution orientation in responding to the needs of their customers, and have become very directly involved in efforts to optimize the financial efficiency of global supply chains for their clients and for their clients’ business partners in the supply chain.

This contrasts sharply with the much more transaction-oriented view that prevailed only a few years ago, and likely better serves the efficient conduct of international trade across the globe.

An often-quoted analogy is the idea that trade bankers are now much more interested in designing and building a structure, rather than simply providing a “brick” when a trade client needs help.

As indicated, trade finance providers are becoming active earlier in the life of a trade transaction, now providing solutions, such as financing based on purchase orders, and remaining engaged beyond the traditional point of financial settlement.

By engaging closely with importers and exporters, banks have learned significantly more about their clients’ businesses, and leading trade financiers have been able to develop event-triggered financing solutions across the transaction lifecycle and across the supply chain.

Innovation led online trading platforms into the mainstream

The future of international trade—and therefore, trade finance—promises more change and innovation than the industry has seen in its entire history to date.

As online trading platforms become increasingly mainstream and able to credibly handle a wider range of products and services, the financing of exchange (trade) on such forums will start to gather momentum.

Clearly, this will be limited to smaller items, generally for small businesses, yet it is often noted that small businesses are the drivers of leading global economies.

eBay, the pioneering—and leading—online marketplace has taken some acquisition steps that line up interestingly with the core value propositions in trade finance. eBay provides a rough process for assessing the risk of trading with a potential importer or exporter (the user’s “Feedback Profile,” which is a collection of comments provided by others who have transacted with the individual or company).

The platform provides customized software to assist with inventory management, including a dispute resolution mechanism, and identifies its top exporters through tiered “levels” based on monthly volumes.

eBay acquired online payments provider PayPal in October 2002, adding payment facilitation on a global basis to its trade-finance-type capabilities. Most of PayPal’s major competitors have since shut down—similar Internet-based payment systems from Citibank, Yahoo! Inc. and even Western Union could not compete against the PayPal brand.

Relative newcomers like Paypal are challenging traditional providers

PayPal now has more than 169 million active accounts in 190 markets and 25 currencies around the world

As much as trade finance has been a conservative line of business, in keeping with its banking DNA, the changing realities and dynamics of global commerce are demanding—and will continue to demand—innovation and responsiveness from leading providers of trade finance.

Traditional providers of financing and payment solutions to international trade are being challenged by numerous entrants to the market, including courier companies (now logistics solution providers) with trade finance units such as UPS Capital, specialized hedge funds supporting trade, investment bankers such as Merrill Lynch, and even the finance arms of global companies such as GE Capital.

From a technology perspective, the variety of providers increases the likelihood that “out of the box” thinking will add to the dynamics of innovation.

These new players will help shape the application of technology to the development of additional solutions and value propositions in trade finance.

These new and emerging providers of trade finance are noted to raise awareness: while UPS Capital has provided trade finance to their logistics customer base for over a decade, a number of the new providers, including those from the investment finance arena (as opposed to banking), are still working to carve out unique and sustainable offerings in trade finance.

Some new players, such as London or New York–based hedge funds, may focus on enabling trade with higher-risk emerging markets, in hopes of generating higher returns for their financing activities.

An appreciation for the technology options and solutions in the market can help international traders determine their approach to the conduct of international trade and global business, tailoring the solution to specific requirements.

As more companies go global, and do so earlier in their lifecycle (as evidenced by the expression “the global start-up”), trade finance solutions will need to be creative, flexible and responsive—all facilitated and enabled through technology.

How do you see supply chain finance changing over the years? Are you enjoying the advantages of a more solution-based approach to trade finance?

The post Why the future of supply chain finance belongs to financiers who think ‘outside the box” appeared first on Trade Ready.

Northstar Trade Finance was founded in Canada in 1994, specifically to address the unique needs of Canadian SMEs and their international trading partners.

Outstanding strategic partnership model

Northstar first caught the US Ex-Im Bank’s attention several years ago with their strategic partnership model. Northstar works closely with many financial institutions and public sector partners, several of which are shareholders of Northstar.

They have also developed a series of alliances with world-class export credit and export insurance agencies, as operations expanded beyond Canada to the United States, United Kingdom, and continental Europe, among other markets.

The partnership approach, combined with the world-class technical competency of the Northstar team, led the US Ex-Im Bank, America’s export credit agency, to authorize them as a delegated lender.

That meant they were approved to make credit decisions and lending transactions on behalf of Ex-Im: a privileged role accorded to very few trusted organizations.

After several years as a Delegated Lender, their strong continuing efforts have been rewarded with this prestigious honor.

Scott Shepherd, CITP®|FIBP®, the President and CEO of Northstar, notes that “This recognition, by one of the top export credit and insurance organizations in the world, is a tremendous win for the Northstar Team.”

It’s an undeniable acknowledgment of the value and effectiveness of our partnership approach, as well as our single-minded focus on and commitment to SMEs pursuing opportunities in the global marketplace.

Addressing a crucial need for SMEs

International trade forms a significant portion of many nation’s GDPs, and SMEs are increasingly recognized as engines of growth, job creation and economic value. Yet access to trade financing to fund these activities has often been underappreciated or difficult to acquire.

More recently, the direct and critical link between trade success and access to financing – including traditional trade finance and emerging solutions in supply chain finance – has been recognized at the most senior levels of political leadership and by heads of key international institutions like the WTO and various multilateral development banks.

Many small and medium-sized enterprises pursuing opportunities in international markets, however, still have trouble accessing trade financing – including highly effective risk mitigation solutions – through traditional providers of trade and supply chain finance.

Northstar has therefore developed an effective business model aimed specifically at addressing the unique challenges and needs of SMEs in Canada and internationally.

Even as major financial institutions reduce their international exposures or exit lines of business like trade finance, Northstar is actively working to extend its footprint, both directly and through expansion of its international partnerships.

Shepherd, a long-time supporter of FITT and a CITP®|FIBP®, notes, “At Northstar, we have gathered a team of top-level credit, risk and international market experts.”

“In addition to developing and structuring effective financing solutions in support of trade, we are uniquely positioned to provide advice and support to SMEs operating in or aspiring to operate in international markets, from OECD economies to emerging markets.”

“Our network of partners and associates provides an additional resource-base upon which Northstar can draw to help enable SME trade activity.”

Providing excellence in trade finance with innovation and expertise

It is clear that no single bank, export credit agency, multilateral institution or other entity can meet all of the trade financing needs in Canada or internationally.

It is equally a reality that SMEs continue to experience disproportionate difficulty in obtaining adequate, affordable levels of financing – including trade financing – despite the increased rhetoric about the importance of this market segment.

In Canada, the clear directive of the federal government through the Global Markets Action Plan, to support SMEs in their pursuit of international opportunity, is consistent with similar priorities in many markets around the world.

The reality, however, is that 80-90% of trade activity is supported by some form of trade finance, yet SMEs continue to experience difficulty in accessing trade finance, and the traditional providers of this form of financing are now increasingly challenged by credit and capital constraints and by limitations in capacity linked to increasing regulatory pressure.

As trading patterns evolve and exporters expand and diversify beyond traditional trading partners, the needs of SMEs for expert advice and well-structured financing will increase exponentially, as will the need for alternate sources and additional capacity.

Northstar, however, is nothing short of a world-class innovator in the financing of international commerce, benefitting from strategic alliances with organizations like FITT, numerous shareholder financial institutions, and various top-tier export credit and international institutions.

The award from US Ex-Im reflects the technical competency of the Northstar team: a key element of international business and trade.

Through more than two decades of evolution, building a network of effective partnerships, alliances and collaborations around the globe, they have been able to serve a crucial need for SMEs at a time when access to effective and innovative trade financing is more important than ever.

The post Northstar from Canada wins prestigious award from the Export-Import Bank of the United States appeared first on Trade Ready.

Due diligence on a trading partner means:

• The nature of the prevailing legal tradition and the ability (or not!) to enforce redress even if you do “win” the case
• The nuances and complexities of cross-cultural interaction and negotiation
• Selection of local representation

…the list is long, and for many, daunting.

Diligent finance means you get paid

As an exporter (to take one view on the conduct of trade), if you do everything correctly and succeed in closing an attractive deal – or even better, establish a promising relationship – but somehow fail to get paid in the end, after producing and shipping the agreed goods or services, then all that effort and all the skill and effectiveness may be for naught.

This is where a generally misunderstood and underappreciated element of international commerce comes in: trade and supply chain finance.

Before your eyes glaze over in despair and disappointment at the prospect of  a discussion of – ugh – finance, think of this as your “SHOW ME THE MONEY” moment.

Trade is a great deal of fun, and it is personally and professionally enriching, but it is, after all, most commonly a commercial undertaking, at the end of which one hopes to be paid handsomely, for having ventured where others dare not.

What do we mean when we say trade finance?

Trade finance – quite literally the financing of international trade – has a long history of operating modestly and quietly in the background, facilitating billions in annual merchandise trade flows without seeking so much as a tip of the proverbial hat in acknowledgment.

It is unassumingly enabling the flow of financing in support of trade, while at the same time, helping to mitigate risks of all kinds, in the most challenging markets on the globe. In this respect, one might say that trade finance is very Canadian in character: effective, low-key and unpretentious.

In our training and advisory activities, and in recently published “Financing Trade and International Supply Chains” (Gower, UK), we argue that trade financing at its core is about some combination of four elements:

• The facilitation of secure and timely payment across borders
• The provision of financing to one or more trading parties
• The effective mitigation of a wide variety of risks
• The enabling of information flow about aspects of the physical and financial flows related to a trade transaction or relationship

Trade finance accounts for trillions of dollars worth of trade transactions

While the use of traditional mechanisms like documentary letters of credit (L/Cs) are in (relative) decline in many markets, the long-established and much-maligned L/C still facilitates roughly 10% of annual merchandise trade flows, which are in the $18 trillion range today.

It does so on the basis of rules and practices that are broadly understood and accepted throughout the world, in no small part due to the work of the International Chamber of Commerce Banking Commission in Paris, and the related jurisprudence that has evolved around such mechanisms.

More recently, and particularly in the post-2009 economic and business environment, many trading partners have opted to shift away from traditional mechanisms, despite their advantages, due to cost and process intensiveness.

Companies of all sizes, in markets around the world, are increasingly conducting business on open account terms – where the exporter produces and ships the agreed goods, and the importer sends payment at an agreed point in the transaction.

Financial institutions and trade finance ‘boutiques’, as well as various technology-based platform providers, have been working to evolve their value proposition in this area.

The brand new world of supply chain finance

Supply Chain Finance (SCF) is so new, in fact, that there is a multi-association effort underway now to devise a common set of nomenclature and terminology around the financing of international supply chains.

This effort falls under the auspices of the ICC Banking Commission that involves numerous specialty industry associations.

Until recently, some providers of traditional trade finance would have contended (perhaps some still do) that there is nothing fundamentally new in SCF. This is, in my view, a short-sighted perspective that ignores one major reality:

The shift to SCF models motivates bankers, financiers and traders to look at the conduct of trade in the context of an ecosystem of trading relationships, and not merely on a bilateral, one buyer, one seller approach.

The need for supplier finance programs

Even as governments tout the importance of SMEs as engines of economic value-creation, there exists an environment (globally) where small and medium-sized enterprises report ongoing, serious challenges in accessing timely and affordable financing in support of their international ambitions. The evolution of trade and supply chain finance is both critically needed and more than welcome

Supplier Finance Programs (also referred to as Buyer-Led Supply Chain Finance, among other terms) are one of the most popular and growing favours of SCF in the market today.

The key in such programs is that a large global buyer engages with their primary banker to provide financing to strategically important members of their (typically emerging market based) SMEs. This is done on the basis of invoices submitted by the qualifying suppliers and approved for payment by the buyer.

In effect, the invoice(s) are discounted, and the supplier receives funds significantly earlier than would otherwise be the case, improving cash flow and working capital.

This financing is extended on the basis of the credit standing of the large buyer (since the bank is ‘lending’ against an invoice that has been approved for settlement).

This tends to make the financing less expensive than what the supplier would be charged on their own merit, and allows the buyer to assure a steady and sustainable supply of key production components from strategic suppliers.

Innovation in SCF solutions

In addition to various SCF techniques taking hold in the market, there is a very visible increase in the application of technology to the provision of trade and supply chain finance.

Trade-related documentation is being increasingly ‘dematerialized’ and dealt with in electronic format. Likewise, settlement and financing models, are shifting from paper-based models to data-driven solutions that take the subjectivity out of payment and financing decisions.

This also accelerates the payment and financing process significantly, and thus helps to inject material amounts of liquidity – read cash – into the global market.

This at a time when industry estimates (Asian Development Bank, 2015) suggest that there is a global gap in trade finance in the range of $1.9 trillion annually, and at a time when government and international institutions are increasingly focused on sustaining the success of SMEs in international markets.

The perennial mission for those of us engaged in this business, to get more Canadian companies and more SMEs in general interested in international markets, continues to be challenging. Post-crisis realities, however, strongly suggest (again!) that market diversification is a critical target for the Canadian economy.

One way to enable companies in pursuit of such opportunities, is to ensure the availability of adequate levels of affordable trade and supply chain finance.

Another would be to provide competent technical advice and the vision necessary to see that there are transformational forces at work in the business of trade and the financing of trade today.

Complacency among traditional providers is a serious risk, when Facebook now has a banking licence from the central bank in Ireland, PayPal is entering the working capital lending business and encouraging cross-border commerce, and Alibaba announces that it will support its trading community with trade financing solutions.

Bottom line? Trade finance is not a luxury or an esoteric branch of financing to be ignored in the hopes it goes away or fades into the background of a transaction. It is a strategically critical enabler of trade activity, and an evolving part of next-generation international commerce.

The advice and support you get in this area can make or break your international trade aspirations and strategy, so challenge conventional thinking and limited vision from your trade financiers, if you run in to it.

What aspects of your international trade financing can you change to improve your business strategies?

What else does Alexander do?

Learn more about the intricacies of Trade Finance from one of the leading subject market experts on the topic. His critically acclaimed book Financing Trade and International Supply Chains will give you deeper insights into nature of trade finance at its core, and of the versatility of this discipline in enabling trade flows involving businesses of all sizes.

The post The role of trade finance in making or breaking your global business aspirations appeared first on Trade Ready.