The days of plentiful, cheap liquidity and relaxed attitudes to risk are clearly gone, which has created significant issues for companies trying to finance and mitigate risk on their trade activities.
Current economic conditions, together with the ensuing liquidity constraints and raised risk sensitivities, have inevitably driven major changes in trade and supply chain finance (SCF). One aspect of this is that supply chains are now as complex as they have ever been and there is no reason to believe that this complexity will reduce as they evolve to meet future business needs.This makes supply chain management even harder. Supply chain financing solutions also have to evolve to support this development, and in doing so need to combine a broad range of complementary components that may include tools such as letters of credit. However, the extent to which this evolution of supply chain financing solutions is successful, depends largely upon how proficiently three key problems are addressed:
While the convergence of receivable finance and trade solutions currently taking place is valuable, one of the biggest challenges in this context remains the sheer diversity of supply chain participants. Large suppliers operating from major business centres are relatively easy to on-board when implementing an SCF scheme. The same cannot be said of smaller suppliers - especially those operating from remote locations - where the financing bank's client on-boarding obligations can be both difficult and protracted to fulfil.
This is problematic, as these are precisely the suppliers about which buyers are most concerned in terms of financial support, especially as they are currently finding unsecured credit more difficult to obtain and borrowing costs higher. Unfortunately, buyer urgency relating to these suppliers sometimes results in overly-optimistic expectations about SCF implementation timelines. In practice, even with large suppliers in major locations, it can take months to complete on-boarding. For smaller suppliers (especially in remote locations) it can take far longer or not be practicable at all.
This, and associated commercial relationship considerations, has led some banks to restrict their supply chain solutions to just larger suppliers, who may only represent some 40% of the headcount per chain. From the buyer perspective, this is clearly missing the point.
From a corporate perspective, the sheer diversity and complexity of today's trade flows requires solutions flexible enough to deal with a continually shifting trade landscape, as well as to reach into new and more complex markets.
These needs create changing solution requirements that have also been partially driven by a shift in trade flow patterns. The conventional triangle trade of an emerging market exporting to a developed market, which in turn exports back into another emerging market no longer predominates. South/South trade has grown exponentially in recent years - a trend that seems set to continue.
A further element within this is the aggressive growth of new Asian multinationals, particularly in industries such as telecoms equipment. While these companies might once have been looking for LCs in relatively small size, their demands are now both more sophisticated and larger. Where they are selling telecoms infrastructure into markets such as Africa, they are looking for buyer finance that can be delivered as an integral part of their sales proposition. Indeed, in some cases the financing has become a more important element in the sale than the product.
In tandem with the need for solution flexibility comes the necessity of covering new and geographically diverse markets - including those that are demanding from a regulatory or legal aspect. This is particularly pressing as regards the growing need for cross border SCF. To date, most SCF has essentially been country-specific (albeit often multisite), with limited evidence of comprehensive propositions that deliver along "long haul" trade routes, such as Europe to Asia.
This situation arises because of the difficulty of on-boarding suppliers in a distant country, particularly where that country has a demanding regulatory or legal environment. For example, a bank looking to provide SCF to suppliers in Vietnam on behalf of a buyer in France runs up against the intricacies of on-boarding suppliers in the context of Vietnamese law, as well as the legal implications relating to receivables under local FX regulations.
The problems currently confronting corporations managing the risk and financing of their trade are considerable, but can be addressed. As Adrian Rigby, Global Head of Receivables Finance and Supply Chain at HSBC explains, solutions are available.
In order to address the problems outlined above, companies (and especially large trading companies) now need to have a more blended approach to managing risk and providing liquidity to their global supply chains. In doing so, it is important to recognise that seemingly very different tools - such as letters of credit and supply chain solutions - can in fact be highly complementary, and that these can also be combined to good effect with others - such as guarantees and insurance. Nevertheless, there are two key elements that need to be in place in order for this new approach to succeed:
One of the most striking features of the current economic scenario is how well trade flow has held up. One factor here has been that governments have so far resisted the temptation to revert to the protectionist policies of the 1930s. Quite the reverse in fact - many have been actively trying to facilitate participation in global trade.
In some respects they are pushing at a door already opened by necessity. Numerous companies of all sizes around the world (but especially in Western economies) are finding domestic demand is subdued or declining. They therefore have to decide between staying put and stagnating, or globalising and growing. An increasing number are choosing the latter option and moving for the first time into unknown markets.
This gives rise to the geographic challenge outlined in the previous article and requires support from a partner that can provide the presence, solutions and connections - plus the ability to leverage these homogenously. This would be important at any time but is particularly critical in a trade world where so many traditional assumptions need revisiting. Stressed Eurozone economies are a classic example of this - letters of credit (even with confirmation) may in many cases now be required, where once open account was the norm.
However, the sheer diversity of local economic conditions, coupled with other factors (such as local business practice) means that solution flexibility is at a premium. (For example, newcomers competing with established incumbents in certain emerging markets may have to offer open account terms in local currency.) In some situations the emphasis will be more on risk mitigation, while in others it will be more on liquidity. Nevertheless, in both cases, a banking partner with a broad network footprint is clearly essential in a world where global supply chains are - and will remain -global.
While there is often a tendency to focus on the technology issues relating to supply chain finance solutions, as outlined in the previous article it is in fact the on-boarding of suppliers (especially smaller ones) that can often pose the greatest challenge. Therefore anything that can be done to simplify that process will be conducive to a faster and more efficient program implementation. As a result, structures that minimise engagement with (and input from) suppliers will be extremely attractive.
There are a number of possibilities here. One option is to move towards non-elective financing, under which suppliers may opt in or out of the program, but if they opt in, the financing will automatically be applied to all their receivables presented by the buyer. This is just one example of where the buyer's existing relationship with the supplier can be leveraged to expedite implementation. Alternative structures may even exist beyond the traditional model of reverse factoring, which may further simplify the running of any program.
If deployed appropriately, one of these alternatives could make possible far more efficient servicing of global supply chains containing a wide size range of supplier, with implementation taking a matter of days, rather than months. Another potential benefit is that it also delivers the exceptional solution flexibility that is now essential in today's economic environment. A complete supply chain incorporating all sizes and types of supplier can be immediately accommodated. Then if suitable suppliers subsequently wished to switch to a more conventional buyer-backed SCF mechanism they could be on-boarded in the usual manner.
Today's problems - such as tight/costly credit, large/diverse/dispersed supply chains, increasing risks and new markets - are significant and always changing, but they are not insurmountable. The balance between SCF and more traditional trade and receivables finance solutions is clearly vital in coping with these multiple obstacles, alongside other products such as insurance. However, this will only apply if it can be leveraged by providers with sufficient financial footprint, solution flexibility and creativity.
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