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Supply Chain Financing for the New Trade Finance World
by Christian Nehk, Global Trade Sales, EMEA, Global Treasury Solutions, Bank of America Merrill Lynch
Throughout the ages, wherever there has been trade, there has been some form of trade financing. Historians and academics have suggested that mechanisms for the financing of accounts receivable were in place in England before the 15th century.
Germany has been a leading global trade hub for decades, and the treasury departments of corporates based or operating there are familiar with a variety of financing instruments. More recently though, the increasing globalisation of economies has brought a greater degree of internationalisation to the supply chain. This development, coupled with the financial crisis, is encouraging many companies to think differently about their supply chain financing requirements. In this article, we’ll examine what supply chain financing offers, and how it is evolving to serve the new trading environment.
Changing patterns in global trade
Over the past 40 years, the composition of the global trade market has evolved. The IMF notes that in the early 1970s, trade was largely confined to a handful of advanced economies and that together, the US, Germany and Japan accounted for more than a third of global trade. By 2010 however, China had become the second largest trading partner after the US, and today, other emerging market economies account for a far greater share of global trade.
Germany’s place in this mix remains significant. As a top five producer of automobiles and a key player in many other industries, the country is one of the world’s largest exporters. It therefore plays a significant role in Europe, with the majority of trade conducted within the region.
However the supply chain in Germany, as in many countries, is increasingly global. As the market develops and becomes more complex, effective financing solutions are increasingly being seen as vital, not only to individual businesses but to the economy as a whole. The World Trade Organisation (WTO) estimates that 80-90% of world trade relies on some form of trade finance. Furthermore, as part of its overall objective to help producers, exporters and importers of goods and services conducting business, the WTO has explicitly stated that one of its aims is to “encourage the revival of the complex links and networks involved in the trade finance market.”
Changing perspectives on supply chain financing
Supply chain financing was first conceived by banks and providers around 10 years ago as a potentially innovative funding option for corporates and their suppliers. At the time, it met with mixed reactions, as there were alternative and more direct funding options available at relatively attractive rates.
In the last five years however, both awareness and demand for supply chain financing instruments have increased. The global financial crisis constrained the availability of credit, particularly for small- and medium-sized businesses, which meant that liquidity became even more important to treasury departments and board members. As direct lending facilities became less readily available, this led many businesses in Germany and throughout Europe to consider other effective financing vehicles, either to replace credit lines that were no longer there, or to serve as an additional source of support.
Both corporates and their suppliers have begun to discover the wider benefits that supply chain financing can offer. For the buyer it helps to free up working capital as they can readily extend their payment terms. The supplier benefits from reliability and visibility on payment streams, and often achieves financing at better rates as the finance charges are based on the buyer’s credit rating rather than on the supplier’s own position and rating.
It also provides a form of risk mitigation. By more actively supporting their suppliers, corporates can increase the resiliency and reliability of the supply chain, helping to avoid the impact of any disruption to supplies. For example, the German automotive association, VDA estimated that in 2008, the auto sector imported parts and components to the value of €52 billion, which gives a sense of how vital supplies and supplier relationships are to the industry. Suppliers are crucial to the production process, and there are examples in every business sector that have incurred tangible loss of value where crucial suppliers or supplies have been interrupted.
More broadly, mutually beneficial financing arrangements can also improve working relationships, fostering partner loyalty which can only be good for business and could ultimately result in reduced procurement costs.
