SECTOR REPORT / TRADE FINANCE
Companies craving increased flexibility and efficiency in their financial supply chains are finding technology can provide the key.
As trading relationships become more complex and the Internet enables greater trade, companies are looking for better means to manage the trade process. From handling documents to using more efficient trade finance mechanisms, banks and solution providers are on the case, offering sophisticated solutions for the sophisticated trade partnership. Solutions now being offered can help improve efficiency throughout the trade process, drive down costs and create visibility across the supply chain.
In addition, as companies become more sophisticated in how they trade, the desire for more sophisticated trade finance mechanisms also grows. Banks and solutions providers are working to enable companies, both large and small, to use more efficient trade financing techniques and to better manage their trade processes.
For smaller companies, the demand may simply be to make importing or exporting less difficult. Lionel Taylor, in international product management at Royal Bank of Scotland, explains: “The Internet helps a bit, but trade is so complex, they want it made easier across the process. Larger corporations in their own way are saying the same thing; they need to become more efficient,” he says. “They are competing globally so they are constantly under pressure to cut costs throughout the financial supply chain and become more efficient, and they are seriously looking at how they can do that within the trade finance process.”
Efficiency and Control
Corporations are looking to simplify processes both within the document management stream and within the trade finance stream. From getting a quote to sending a purchase order—and ensuring that the details move into a letter of credit (LC) or some other instrument—they are looking to make life easier. Notes Taylor, “Technology has become a great enabler.” Banks and solutions providers are now offering technology and automation to reduce costs and drive efficiency and transparency through the process.
For example, with such systems companies can initiate and track letters of credit online and monitor the supply chain throughout the trade cycle. “In addition, they only have to key information in once, as the data can be inherited into other documents within the transaction cycle. This is a great time saver that cuts down on errors and makes the whole process more efficient,” Taylor adds.
Frank Bothe, director of trade finance product management at Deutsche Bank, notes that the bank’s platform, InfoTrack, can collate trade-related data—including documentary credits, bankers’ guarantees, documentary collections, open account and shipping details—which allows companies to easily access time-accurate information on the status of individual trades right along the value chain. “The platform also permits third parties such as freight forwarders and insurers to access the information online, with access controlled and secured by the client,” he notes.
The ability to electronically raise documents and the inheritance of information from one step of the process to another creates visibility both internally and externally. For larger companies a significant challenge involves knowing what associates are doing globally, and developing greater internal visibility can help them achieve that.
This drive to improve efficiency and transparency has changed the way companies look at trade finance. Increased communication between trading partners and the continual push to reduce costs in supply chains is driving a change in trading terms to open account, according to Taylor. “This, together with a move to extend payment terms, is creating a real liquidity challenge to many overseas suppliers who previously were in receipt of an LC, which was used as a means to raise finance,” he says.
Bothe points out that trading partners do not want to take the risks associated with open-account trading but fear the costs associated with traditional risk mitigation techniques. He says: “The risks have not gone away; it is just that the demands of the purchasers have increased, forcing the sellers to save money on risk mitigation. What we have been doing is providing cost-effective and efficient ways of offering those same tried and tested mitigants.”
Asset-based Lending Grows
Duncan Jackson, vice president of business development and marketing at TradeBeam, says that corporates want to get into more efficient financing. “The big thing now is asset-based lending leveraging off assets, rather than the balance sheet,” he explains. “In order to do this, you need to know where goods are at any point in time and the value of goods,” he says. “You need the original invoice, the ship loading documents and original packing slip, and so on. To make this possible, you really need clear integration of the physical and financial supply chains.”
Solutions such as that offered by TradeBeam and TradeCard can show on a line-item basis where goods are and a detailed description to classify them for customs—down to the place of production and materials. Using this to more efficiently get financing is the next step for those multinational corporates that are of sufficient scale and with sufficient global trade business to warrant it. Asset-based finance offers a much better return than simple balance sheet finance.
The increased popularity of receivables financing among corporates has led to the development of a wide range of solutions to fit individual needs, according to Albert Traunthaler, director of structured trade and export finance at Deutsche Bank. “For instance, for diversified portfolios of receivables without significant risk concentrations, we created an insurance-wrapped solution. When a seller has significant concentrations of rated, well-known debtors, Deutsche Bank can provide a combination of insured and uninsured limits in support of the purchase program,” he says. “Should sellers have a receivable portfolio containing a limited number of highly rated buyers, then a structure without insurance cover might be possible.”
The goal is to have a finance solution that is supply chain event-driven—where the trade finance mechanism can be easily and quickly switched to match the ideal solution for those particular goods at that particular time. Whether the traditional letter of credit or a more asset-based solution, technology is enabling purchasers and their suppliers to more efficiently manage trade relationships.
For the largest of multinational retail and manufacturing outfits, this is indeed what they are looking for. For smaller firms, just creating more efficiency and visibility through the trade management and finance process is enough. Regardless, technology is out there, both from banks and solution providers, to help improve trade processes.