Experts share their trade finance tips now that funds are more readily available.

The worldwide economic squeeze of the past few years not only put the brakes on consumer lending, but commercial lending, particularly trade finance, also seemingly dried up overnight.

The good news is that the purse strings are starting to loosen up.

According to William Nowicki, Head of Trade and Supply Chain North America, HSBC: “As the economy began to stabilize last year and is continuing to improve into this year as well, we do see an improvement in the access to trade financing for U.S. companies. An indication of this improving environment was noted in our last Trade Confidence Index in the second half of 2010, where 27 percent of respondents noted that they expected access to trade finance to increase over the next six months and 94 percent expected it to either maintain the same level or increase.”

Nowicki also reports an uptick in global trade among clients. “Within HSBC’s Trade and Supply Chain business unit, we have seen an increase among our customers in both exporting and importing activity in the first quarter of this year, indicating that businesses are beginning to see improvements in demand for their products and services overseas as well as increased consumer demand here in the U.S. In particular, exports have increased significantly, which may be an indication that the focus on creating more opportunities for U.S. exports is showing some initial success. This improving environment should increase the need for and access to trade finance in the U.S.”

Maureen Sullivan, Managing Director, North America Trade Sales Executive, Bank of America Merrill Lynch, also sees an improving trade finance landscape.

“What we’ve seen is that the economy and the capital markets have strengthened. We’re witnessing an improved environment for trade finance facilities and some easing on pricing. This is certainly the case when compared to 12-18 months ago. Companies have done a really good job of deploying diligent working capital management tools, and that’s resulted in healthier financial performance. Where we’ve seen this translate into is increased interest in our supply chain finance techniques, which helps companies both fuel their growth and expand their inventory.”

Letters of Credit have also been the go-to financial instrument and remain popular, say both executives.

“We saw an increase in the demand for traditional trade finance solutions such as Letters of Credit (LCs) during the economic downturn as a way for suppliers to obtain financing and to ensure cash flow. The return to these instruments, which can be used to ensure payment receipt in a volatile market environment, resulted in an overall increase in the use of documentary trade instruments over the past two years,” says Nowicki. “In addition to being a risk mitigation tool during periods of economic adversity, traditional trade finance solutions, such as LCs, can also be important when companies are exploring new markets, particularly trade with some emerging markets where there may be more uncertainty in the local business, political, or banking environment. As a result, we do find that there is an increased demand for LC instruments when trading is occurring in the emerging markets.”

As for lingering uncertainties, the impact of the new global regulatory standards for banks outlined in Basel III, could represent some challenges for trade finance.

“We are following Basel III very closely,” affirms Sullivan, “and we understand the purpose and importance of minimizing systemic risk in the financial system.”

However, “Some of the proposed changes for capital, risk, and tenor treatment may have unintended consequences for trade finance,” she cautions. “We are participating in the various industry forums to ensure fair and accurate treatment of trade finance assets. But, at the same time, we continue to be poised to support our clients’ trade finance requirements even as Basel III is rolled out.”

Last December, all major G-20 financial centers agreed to adopt Basel III. Rollout of all the framework’s reforms will take place over the next 8 years.

As for the immediate future, Sullivan says, “We’re very optimistic with the activity we’ve seen so far in 2011. Again, I think it speaks to the fact that our clients have improved financial performance, markets have eased in terms of credit capacity and credit underwriting, and finally, pricing has become more competitive. All of that will create the ‘perfect storm’ for growth in the trade finance arena.” wt