Trade finance today has evolved far beyond providing letters of credit and working capital. New products and services are becoming available that integrate trade processes with finance; that leverage technology for new services; and that bundle various types of financing, cargo insurance, and even logistics into a single package that speeds payments and provides credit for exporters  as well as their suppliers.

“Functionalities are converging,” according to Kitt Carswell, senior offering manager for trade and supply chain at CGI. He says that when CGI’s client banks communicate their strategic visions, those priorities often focus upon delivering cash management and trade services  “in a way that provides seamless integration and greater control over functionality on a landing page, while helping users to drill down into background systems intuitively.”

To navigate this new environment, here are the top 10 things you need to know.

1. Foreign bank risk

In today’s economic climate, it’s becoming increasingly difficult for foreign buyers to obtain credit and for the sellers to be assured of payment after the goods have been delivered to the buyers. Historically, obtaining a letter of credit by the seller from the buyer’s bank in favor of the seller has been the established solution. However, “during the past five years we have witnessed bank defaults and failures worldwide and, oftentimes, the letter of credit was not paid,” says Gerry Arteaga, senior VP and global trade advisory manager for Bank of the West. “Currently, there is an economic urgency in trying to secure foreign bank credit and performance by all companies with new international buyers.

“A lot of sellers with international buyers don’t understand that when selling to new clients (with whom they have had no credit history) they not only face the foreign debt risk of the buyer, but also the foreign bank’s risk,” Arteaga explains. “If the foreign bank faces a financial challenge, that bank’s payment on the outstanding letter of credit it issued in favor of seller could be in jeopardy.”

Several new programs are emerging to reduce such risks. “The letter of credit may be ‘confirmed’ by the issuing or advising bank, which practically guarantees payment in the event of geopolitical and financial instability of the country, the financial institution, and, possibly, the buyer if that letter of credit (also called deferred payment letter of credit) may be discounted by the confirming bank and paid to the seller without recourse, well before such LCs might expire,” Arteaga explains.

In addition, there are multitudes of supply chain management trade finance tools that are available at different financial institutions. They typically include specific programs for accounts payable and accounts receivable.

2. Risky markets

Even the largest commercial banks sometimes avoid regions or projects they consider risky. Financing may still be available, however, through the Export-Import Bank of the U.S. As America’s official export credit agency, the Ex-Im Bank and commercial lenders often partner to provide exporters with liquidity, confidence to accept new international contracts, increase export sales, and compete more effectively in the international marketplace. It also fills the credit gap for companies operating in environments that commercial banks decline. Although the Ex-Im Bank lists its key markets in Latin America, Asia, and Africa, it also can help with export financing to developed nations.  

New financing programs from the Ex-Im Bank are similar to many of those developed commercially, but the terms and qualifiers are different. New programs include Express Insurance and Renewable Express. Express Insurance extends competitive credit terms to foreign buyers—typically with lower rates than they can access domestically. It also helps companies obtain receivables financing from domestic lenders. Renewable Express provides post-completion financing for renewable power producers seeking financing between $3 million and $10 million. That industry traditionally has experienced difficulty obtaining financing.

Commercial banks offer multiple options in terms of financing options, risk management, pricing, and terms, including Ex-Im programs. “Ex-Im and commercial banks augment each other,” Arteaga emphasizes.

3. Accounts payable/receivable

Accounts payable financing is a popular new addition among commercial banks to strengthen borrowers’ relationships with their suppliers and reduce their cost of goods. Their premise is that U.S. finance charges are lower than those in suppliers’ home countries and that the savings may be passed on to their customers. It also offers access to cash through the sale of its receivables and has no borrowing base restrictions. This improves the balance sheets of both the corporation and the supplier by reducing suppliers’ need to borrow, and, for the corporation, providing extended terms.

Accounts receivables programs are being added by several commercial banks and work in much the same way. The Bank of the West’s accounts receivables program, for example, “allows clients to monetize receivables by selling their receivables to us, while remaining the collecting agent,” according to Arteaga. Thus, companies obtain working capital without adding debt to the balance sheet and can offer more competitive terms to buyers without affecting the Days Sales Outstanding.

4. Inventory management

Some programs, however, are specific to a particular bank. For example, Bank of the West’s options also include inventory management. Designed for medium to large companies, the bank involves Utexam Logistics Limited (ULL) as a middle party between the supplier and the client. In Arteaga’s example, a supplier purchases inventory, of which half is pre-sold. ULL purchases and warehouses the remaining unsold inventory and sells it back to the supplier as needed, thereby increasing the supplier’s immediate cash while decreasing its inventory level.

That option may be particularly attractive when goods have long lead times for manufacturing, long transit times, or come from economically or politically unstable regions.

5. Bank stratification

All financers are not created equal. “Banking in this country is very stratified,” according to David Bovee, president of Zenith Assets, a company that specializes in first-time exporters. A community bank may have domestic trade finance capabilities but lack the resources to handle import and export financing.  In contrast, large commercial banks have offices throughout the world and generally are delegated underwriters for the Ex-Im Bank.

Aside from distinct programs aimed at their clients, many also have programs to help other banking partners and thereby enhance the overall financing environments. Citi is one of these. In September, Citi launched the eSource Center for Banks to provide insights on markets, regulations, and banking trends to help banks identify opportunities and access tools. The eSource Center shares market knowledge so partner banks can better help their clients. It includes information about standard market practices in more than 100 countries in specific country profiles developed by teams with deep knowledge of the financial environment.

Also in September, trade banks ING and Santander partnered with Citi in the Trade MAPS Multi-Bank Global Trade Program. This program provides capital management, liquidity and credit, and speeds payments, thus effectively freeing capital sooner. “By broadening the investor base to purchase assets that we originate, we expand our lending capability…thus expanding trade and liquidity options,” says John Monaghan, global head of trade capabilities at Citi’s Global Transaction Services.

Many commercial banks also are working through the financial cooperative SWIFT to send secure messages and payment instructions among banks on its network to support corporate clients with their multi-bank processing needs, Monaghan explains. Consequently, clients can interact with multiple banks using a single, secure platform.

6. Non-bank options

Traditional banks provide most of the trade finance, but other options are emerging. Chris Vukas, VP of marketing and technology at UPS Capital, says that rather than the siloed approach traditionally taken by banks, financial markets are moving toward a turn-key approach.

“Arranging trade financing for exports today is like being your own general contractor,” Vukas says. Companies’ resources are stretched thin, so they’re focused on the bureaucracy rather than on building out their international markets. Turn-key financial services that are bundled with other export services, he says, will free exporters to concentrate on building their businesses.

UPS Capital is building out its turn-key capabilities. “At UPS, we look at the global customer experience in terms of commerce conversion, considering transactions from procurement through accounts receivables and collections,” Vukas says. Based upon clients’ specific needs, UPS Capital brokers trade finance packages that include financing, trade protection, and information, as well as logistics.

UPS’s position as a major global logistics provider adds another layer of insurance. “Because we move the goods, we know those goods actually exist while in transit,” Vukas says. Unlike banks, which hold the paperwork, UPS holds the shipment for a time, thereby holding at least some of the collateral.

Although UPS Capital provides many of the services itself, it also works with specialists—including the Ex-Im Bank—to provide financing and insurance options. Currently, it is developing an export bundling package in concert with U.S. federal agencies. By accessing bundled packages, shippers can expand their international markets and be assured of using proper tariffs and gaining the most appropriate instruments for finance and insurance. 

“We’re not competing with banks,” Vukas stresses. “We’re just taking parts of the global commerce process and ensuring the entirety is assembled properly for the needs of our export and import customers.”

7. Technology

“There have been a lot of changes in the financial market during the past couple of years,” Citi’s Monaghan notes. “We’ve seen a lot of improvement in electronic trade platforms, improved turnaround time for financing and payments, and the desire to deploy solutions in a broader area.” Consequently, colleague Jeff Carlson, VP of North American Trade, adds, “We’re starting to see not just general products that work for everybody, but technology-driven solutions that can be highly specialized.”

Those solutions are provided to the banking industry by technology companies like Syncada by Visa and CGI. Information technology is the behind-the-scenes ingredient that helps organizations improve cash flow by automating payments, invoice processing, or financing, or by automating all three in an end-to-end system. As Kurt Schneiber, CEO at Syncada from Visa, emphasizes, “Web-based cloud computing increases visibility for buyers and suppliers, so the end-to-end process is much easier to manage.”

CGI’s Carswell agrees. CGI, for example, deploys software as a service (SaaS) to help its financial clients develop comprehensive corporate portals that can integrate cash management, trade finance, foreign currency, and other functions onto a single platform. “We have all services on the same platform, so our bank customers can access the same instance, operating on one database for their customers throughout the world. That’s particularly helpful for their global clients,” Carswell says.

The application of technology to an emerging stream of trade finance products and services is also enhancing information visibility. Information technology (IT) has the potential to leverage expertise and established networks. Eventually, Vukas says he envisions applications that streamline transactions to a simple mouse click. For example,  “Once best-in-class players are assembled for a transaction, a shipper wishing to duplicate that transaction (including logistics, insurance, and finance components) can go to an app, click ‘do it again,’ and drive the action for each of the transaction’s components. Currently, however,  IT remains as a source of information to alert customers to incoming deliveries, locate products en route, and provide visibility and automation for the billing cycle. 

8. Electronic invoicing

Right now, however, electronic invoicing is gaining popularity and already is widely used in Europe. As Syncada’s Schneiber elaborates, “In the U.S., electronic invoices are not yet standardized, but are understood. Once banks join the Syncada network, organizations can send electronic or paper invoices directly to a Syncada address for prompt payment.” This technology works effectively with electronic invoices as well as with paper invoices, which can be scanned into the system.

The system’s embedded audit engine verifies items, quantities, prices, and payment terms, matching invoices and purchase orders electronically—and automatically. Consequently, payments can be processed faster, client cash flow is improved, and staff can be freed for other tasks. Syncada’s global trade program includes document processing and matching as well as managing trade terms, factoring, supply chain financing, and post-shipment financing. It is being used for a variety of industries, including freight and transportation.

There’s another, subtler, benefit to such automated systems, Schneiber says. “One of a bank’s primary businesses is to make loans. This invoice system helps banks identify their (more promising) customers and thus makes banks more willing to extend financing to those firms’ suppliers because the bank already has a window into invoicing cycles. And, through Syncada, it has a payment mechanism in place.” For the banks, automation enhances their opportunities to increase the revenue streams on their processing and financing instruments, he adds.

9. Audit tools

“Trade financing isn’t just about financing anymore,” Citi’s Carlson says. It includes side issues such as data availability, collaboration, and account information throughout the supply chain. Citi manages some of its finance solutions through Syncada from Visa. 

“It’s a perfect story of logistics and payments coming together, similar to the purchasing card evolution in the 1990s,” Jeff Cousins, VP and market manager, Citi Integrated Freight Processing, adds. “Syncada marries process with trade finance and provides a very powerful audit tool.  

“A significant percent of all transportation orders don’t get invoiced,” Cousins points out. Yet, through Syncada, carriers and shippers have visibility to match activity against invoices.  The technology also can be used to process and generate invoices, make payments globally, and manage supply chain financing throughout the world.

10. Obtain credit before you need it

“Many conservatively run companies don’t borrow capital, so they may not have established a line of credit,” observes Bovee. Those firms need to establish a line of credit before it may be needed. “It typically takes 90 days to establish a credit line,” he says, which gives banks time to understand the character of the client. In addition to the exporter’s own credit, “The credit worthiness of the buyer is also a key area to focus upon,” Bovee says. Credit worthiness can be evaluated through services like Dun & Bradstreet’s international credit report.

Bovee also advises clients to educate themselves about the entire export process so they are never forced to learn the process in a crisis. For example, “Don’t wait until there is a collection crisis to learning the collections policy. Typically, the smaller the company, the less sophisticated is their credit and collections policy,” Bovee notes. “Finance, risk, and credit are so tightly interwoven as to be virtually interchangeable.”