- THE MAGAZINE
To be competitive, companies need to sell across borders. That’s true for financial institutions, too. Increasingly, they are looking to trade finance products and services as a way to increase their market share and their market penetration.
One of the challenges in international trade finance, however, is that banks need to collateralize their loans. Without ready access—through the legal system—to a creditor’s collateral in case of default, there is no incentive to provide financing. That concern restricts many loans to the bank’s home country or limits the assets listed as collateral to assets within that country. There are ways around that stricture, however.
“FGI Finance is an alternative to commercial banks,” according to Ben Brachot, national director of business development. “We can work with U.S. banks to carve out and collateralize international assets, providing loans under local law,” he explains.
FGI works throughout the world, including regions where the commercial, legal, and financial environments are still developing and are considered risky. “We leverage relationships with local partners—attorneys, accountants, credit agencies, etc.—and manage the loans from New York,” Brachot notes, working with employees who speak the local language and work the local time zone. Consequently, clients anywhere in the world can call during their own normal business hours and be served by knowledgeable agents.
FGI Finance has clients in more than 60 countries. For American companies selling internationally, FGI provides receivables financing and asset-based lending. For companies with international operations, “FGI lends to their foreign subsidiary under local laws,” Brachot says. For foreign companies, FGI may lend funds directly, often providing financing at a lower rate than the client’s local financial institutions.
The Overseas Private Investment Corporation (OPIC) is another option for financing when private sector banks and insurers have refused financing for projects in risky regions. The OPIC provides funding for international investments and guarantees, including political risk insurance, and support for private equity investment funds.
“We’re seeing more asset-based lending being utilized by international companies,” Brachot reports. Where lenders previously only factored in accounts receivables, they’re now including inventory, fixed assets, and real estate as part of the collateral. Once common only with large companies, it is becoming more prevalent with small- and mid-size businesses.
Supply chain finance
“One of the newest trends we’re seeing is the world of supply chain finance,” notes Stephen Herrick, VP and senior trade manager of the global trade services group at Bank of the West. “Supply chain finance breaks the cumbersome documents away from trade action,” he explains, and moves the process away from the letters of credit that have been the mainstay for small- and mid-size businesses.
As Herrick explains, traditionally, very large multinationals had strong credit ratings and leveraged that strength to help finance some of their smaller suppliers. Now, banks are becoming involved, using automation to work with small and medium companies and their even smaller suppliers in a multitude of scenarios with multiple variables.
For example, a very large retailer may enter into an agreement with its bank so that the bank or its clearinghouse, essentially, becomes the accounts payable or accounts receivable office. Payments are made from there, and receivables are sent there. The retailer may encourage its suppliers to join the same clearinghouse. When they ship products, the invoice goes directly to the clearinghouse. “Then, when the purchaser receives the goods, it logs into the system and authorizes payment,” Herrick says. “As a bank, we can contact the supplier and discount the purchase, taking a discount if they want payment now, and paying the full invoice at its maturity.”
That scenario can be a win for the entities involved, particularly when the cost of funds is less for the multinational company than for its supplier. “It reduces the finance charges the supplier has to pay (assuming it borrowed funds), and the buyer doesn’t have to pay the full cost of the goods,” Herrick explains. It also moves part of the accounting to the bank or its clearinghouse, reducing overhead. Similar services are available for accounts receivable and accounts payable.
Wells Fargo, for instance, offers a program it calls TradeXchange. It provides a variety of instruments, including both supplier and sales financing. Its trade cycle financing option funds each stage of a transaction rather than funding the total outlay at once and lets clients get advances based upon import shipments. Its risk mitigation or global forfeiting program, “purchase(s) your qualified receivables so you can sell to foreign buyers on extended terms without tying up cash or assuming the risks of possible late payments, default by a foreign buyer, or foreign exchange fluctuations,” according to Wells Fargo literature.
Commodity and structured trader financing
In 2012, HSBC is deploying its new Commodity and Structured Trader Finance program in North America. This offers customized and working capital commodity trade financing solutions to clients operating complex supply chains, according to HSBC spokesman Clinton Riley. “Structured trade finance is a specialized activity dedicated to the financing of high-value supply chains, especially upstream financing of cross-border commodity flows and limited recourse trade finance,” he explains. “Every loan is bespoke, with each facility tailored to the specific needs of the client, transaction, and jurisdiction.” It provides short-term working capital or longer-term funding for five years or more.
Letters of credit
While much of the world is using supply chain financing to replace letters of credit, their use is actually growing in some parts of the world, Herrick says. “Overall, letters of credit are relatively static regarding the amount of trade they represent,” he admits. “Their use is growing, however, in regions where you won’t use supply chain finance. The Middle East, for example, has a high level of perceived risk, so letters of credit are used there to guarantee payment.” They also remain the norm in Eastern Europe, in many of the former Soviet bloc nations.
Banker’s acceptances are another option, depending upon the bank. Basically, these work like post-dated checks, constituting an agreement to pay the holder at a specified date. Like other financial instruments, they may be discounted and sold.
“Stability is a relative concept,” Herrick acknowledges. “Although there is a certain amount of stress on banks in the industrialized world, there are very few examples of default.” Herrick doesn’t envision a return to letters of credit in industrialized regions except “…in the case of abrogation of debt, war, or major political dissent. There’s no trend toward letters of credit in the EU,” he notes, despite financial turmoil in some of its member states.
HSBC is expanding its Business without Borders initiative which it launched September 2011. This unique initiative is designed as an information exchange to provide the tools, information, and events to “inform and inspire American business leaders to seize growing global possibilities and opportunities.” This Web portal provides access to international expertise, global success stories, a network builder of live events throughout the U.S., and a global opportunity tool.
Large commercial banks tend to have in-depth knowledge of the commercial environment and of markets in the regions in which they operate. The HSBC main Web site, for example, features several detailed trade reports. One, “HSBC Trade Connections,” is designed to help businesses navigate international trade flows. It comprehensively explores current and future opportunities for international businesses and includes predictions for the next five, 10, and 15 years based upon regions and individual countries. The next forecast will be released in late February 2012. It provides trade data from throughout the world, along with leading trade indicators and macro-economic trend information. It includes insights from suppliers and manufacturers to put the data into perspective.
Another report, “The Southern Silk Road,” published June 2011, details the growing south-south trade connections between Asia, Latin America, Africa, and the Middle East. It details the developing trade patterns and opportunities as well as the effects of trade restrictions, infrastructure, and obstacles. The rationale behind some acquisitions also is explored, along with HSBC’s predictions regarding the relative strength of the U.S. dollar and the Chinese renminbi. HSBC has produced 36 country reports that may be downloaded from its Web site.
HSBC also publishes the HSBC Trade Confidence Index twice each year. It covers 21 markets and is based upon a survey of 6,390 exporters, importers, and traders from small- and mid-market companies.
World Bank resources
In late 2011, the World Bank began to include the private sector in its planning, in the dawning realization that the private sector is a catalyst for sustainable economic development. Companies, therefore, can expect to play an increasing role, bidding not only for public sector projects but a growing number of private sector projects.
The World Banks and its related multilateral banks—the African Development Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, and the Inter-American Development Bank—provide resources to develop particular regions. In the past decade their funding has quadrupled, from $10 billion to more than $40 billion. Some also provide grants for technical assistance, advisory assistance, or project preparation. The benefit to borrowers is that these development banks provide financing at rates significantly lower than market rates. The benefit to other companies is that they guarantee financing for regions and projects that non-governmental financial intuitions refuse to fund. The multilateral development banks and financial institutions also advise their clients, helping to improve markets and projects so they are more likely to attract other investors.
Many of the private sector projects are financed through the International Finance Corp. (IFC). Among its services, it features a $3 billion Global Trade Finance Program. That program offers full or partial guarantees to confirming banks in emerging markets for transactions related to trade. The guarantees are transaction-specific and are available for all eligible private sector trade transactions. Guarantees may be based upon letters of credit, promissory notes and bills of exchange, bid and performance bonds, advance payment guarantees, and suppliers’ credit for goods importation. The IFC also provides short-term, pre-export financing to local banks.
The IFC is similar to the Export-Import Bank in that the programs are accessed not by individual companies, but by their commercial banks. In developing regions, local banks form relationships with international commercial banks to increase their access to capital.
Logistics financial tracking
“A large part of trade financing involves financing the supply chain itself,” according to Dan Herbert, VP of Trade Tech, a company that creates software solutions for the international logistics industry. Unlike traditional trade finance with relatively fixed assets, logistics providers are engaged in arbitrage, buying and selling services each day. “Without technology to manage those transactions, they can quickly get out of control,” simply because of the vast volumes of goods involved, the thousands of miles, and multiple time zones and fluctuating costs of various routes and currencies.
Trade Cash Financial Cloud Computing from Trade Tech works with some of the world’s largest logistics providers and carriers to provide global visibility down to the local level, as well as global standardization, depth of coverage, multi-currency capacity, and enhanced revenue automation, among other features. These are many of the supply chain finance features that are offered by the large commercial banks. Trade Cash is integrated into the accounting function. “To understand costs, it is essential that [the] accounting system system is completely integrated into buy/sell operations,” Herbert says.
As Bill Fehr, sales director, elaborates, cloud computing is ideal for global, real-time financial transactions. Using Trade Cash, “You know where your money is, in multiple currencies in all offices throughout the world. And, this visibility can extend to your agencies and franchisees.” It is particularly beneficial when tracking transactions that involve multiple currencies—such as the cost of raw materials from several countries, insurance, plus in-country transportation and ocean freight.“The users put in the currency adjustments,” Herbert adds, to allow for changes based upon such factors as rate arbitrage and sailing dates, for example.
“Operations have to know where their money is and the real profit and loss on each shipment,” Herbert emphasizes. “That knowledge is improved by collaboration throughout the supply chain, and by an effective sales and marketing team. Often, even the big companies really don’t know what’s going on with their finances. Or, when they do, it’s 30, 60, or 90 days later.” The Trade Cash computing cloud lets companies manage on a micro basis, at the purchase order level.
Virtual data rooms
Social media technology is being tapped for private deals in ways that speed deal-making without compromising information security. Virtual data rooms are becoming popular as a way to share proprietary data for joint ventures, partnerships, individual deals, debt restructuring, private equity and venture capital fundraising, and other endeavors, including acquisitions and mergers, without opening the corporate firewall and without the need for couriers. “Smart rooms are an alternative for faxes and FedEx,” according to Brandon Farley, managing director of BMC Group’s SmartRoom.
SmartRoom uses a secure private cloud to deliver private information, effectively outsourcing the information technology resources to a third party. Farley says this reduces the opportunity for information leaks by taking the administration outside the company. He cites increased security and lower cost of service as benefits.
“Organizations use our platform to organize the information so they are always ready to respond to market opportunities,” he explains. It also ensures that multiple potential clients can see the same documents, thus minimizing costs and reducing uncertainty. “Between 85 and 90 percent of our current clients use SmartRoom to host documentation related to raising capital, company valuations, mergers and acquisitions, and bankruptcy,” Farley says. The virtual rooms also are used to host audit documentation.
Having standard documentation ready, off-site, “Puts you in a state of readiness,” Farley stresses. Rather than waiting for documents to be couriered to prospects or for a secure Web site to be constructed, prospects can be given a Web address and password they can access instantly. Foley also sees potential applications for virtual data rooms to provide mobile access to sensitive data. If the device is lost or compromised, hackers may access certain data, but not the intellectual property, formulas, or lab notebooks upon which the company is based.
Virtual data rooms are provided in a software as a service (SaaS) model, and access may be restricted by time, IP address, or document to limit risk. “You also can turn off access at the device level,” Farley says. “With global economic considerations, companies need a global footprint to address global opportunities.”
Trade financing is changing for the better, involving more types of players than ever before. Today’s hot products in trade finance reflect those changes, expanding the idea of what is possible and bringing advanced products and services to companies of all sizes. wt