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Enhancing Cross-Border Supplier Relationships in Latin America

by Dennis Dubois, Director, Senior Product Manager for Trade and Supply Chain Finance for Latin America, Bank of America Merrill Lynch and Hernan Mayol, Director, Latin America Global Trade, Treasury and Liquidity Sales, Bank of America Merrill Lynch

Supply chain finance (SCF) has become increasingly prevalent, since the global financial crisis, in all regions as highly rated buyers recognise the mutual advantages that these programmes bring to both buyers and sellers. Buyers benefit from longer payment terms and the potential for better commercial terms with suppliers, while suppliers are able to leverage the buyer’s credit rating to receive a competitive discount rate on early receipt of cash. This in turn adds to their ability to forecast cash flow and create greater certainty over the timing of receivables. The growth of SCF programmes is no longer limited to buyer organisations located in mature markets in Europe and North America; indeed, we are seeing considerable interest amongst multinational firms headquartered in Latin America as they seek to increase the resilience of their supply chain and enhance working capital.

Integration with trade processes

With working capital now a fundamental priority for every company, there is a temptation for buyers to extend payment terms. However, treasurers and finance managers are increasingly recognising that this behaviour increases risk and compromises the interests of suppliers. There are other ways of supporting suppliers, such as directly financing their purchases, but in most countries in Latin America, SCF is treated more favourably in terms of accounting treatment and has the additional benefit of optimising the buyer’s own working capital. While for many years practices such as forfaiting and factoring have been in wide use, for suppliers SCF formalises and provides a more transparent means of discounting receivables using the buyer’s risk as support, while giving the buyer greater control of the process.

Furthermore, SCF often sits alongside other trade and cash management solutions within a wider context.As companies expand internationally, logistics, supplier risk, and customer credit risk become greater challenges. This is particularly the case in regions such as Latin America where information on trading partners may be more fragmented and less comprehensive than in other regions and where the risk of fraud or limited transparency may exist. Consequently, companies are focused on moving and securing merchandise quickly with clean documentation and efficient logistics to ensure that the flow of goods is as streamlined as possible. Establishing supply chain management and financing solutions encourages standardisation and automation of physical and financial processes, avoiding exceptions and manual processing, and reducing costs. According to Aberdeen Research, a typical company with revenues of $1bn can save between $10-$40m in costs each year through enhanced trade processes, which highlights the importance of focusing on these practices.

The working capital dilemma

More efficient supply chains have resulted in ‘just in time’ manufacturing becoming the norm in most organisations to reduce cash trapped in inventory. Consequently, buyers have become highly reliant on their suppliers’ ability to deliver in exact accordance with their requirements. The financial crisis, and environmental catastrophes such as the earthquake and tsunami in Japan, have illustrated the importance of managing this risk effectively.

Smaller suppliers in particular are often caught in a liquidity trap. They need to deliver quickly to their customers to remain competitive, often with tight margins in order to win business. In addition, their customers will often try to extend payment terms to optimise their own working capital. These challenges make it difficult for suppliers to continue sourcing materials and paying employees and contractors in order to deliver goods and services to customers. Without access to liquidity this dilemma is largely unsolvable and becomes increasingly significant the longer the supply chain extends as every company seeks to protect their own working capital.

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