As export volumes grow, suppliers are looking for even earlier financing to support growth in business orders. Some providers see this as a natural extension of supply chain finance, and are ready to get involved. Liz Salecka reports.

While receivables and supply chain financing have boosted exporters’ working capital at a time of limited access to credit, longer production and distribution cycles and growth in business orders have sparked growing interest in even earlier access to trade finance.

Greater demand is now anticipated for the early financing of finished goods, held overseas as inventory or at the pre-shipment stage, as well as the purchase order financing of goods not yet produced.

“Purchase order financing is an area of great interest and represents a natural extension to facilities such as supply chain finance. It is being sought across a range of industries including retailing, automotive, agricultural products and pharmaceuticals,” says Phillip Kerle, CEO, Demica, pointing that demand is particularly rife among companies seeking to expand their businesses.

“There is competition for funding and banks are looking to do less exotic types of financings at present. However, purchase order financing will happen eventually because there will be pressure on the banks to be more innovative, and that pressure will come from their customers.”

Pressure from Asia

According to Chris Vukas, managing director, UPS Capital marketing/technology, demand for early-stage financing will reach new heights as the global economy recovers and exporters in regions such as Asia receive more international orders.

“If demand remains at the same level then companies can continue to meet their manufacturing requirements and fund their goods in transit from the direct proceeds of their sales as well as receivables financing,” he explains. “However, as the global economy picks up, and orders rise, they will need to find additional financing so that they can meet the growth in orders.”
Deutsche Bank has been actively offering pre-shipment finance, which can take many forms including purchase order financing and inventory financing, for several years.

Jon Richman, global product head, trade and financial supply chain, global transaction banking at Deutsche Bank acknowledges that there is huge demand for earlier financing from suppliers in Asia, but points out that this is becoming a global theme.

“Larger buyers are closely managing their working capital cycles and when this happens someone else always bears the brunt,” he says.

“Longer working capital cycles for suppliers have also led to a pronounced need for pre-shipment finance and this void needs to be filled.”

Collateral risk issues

Many banks have shied away from offering any form of pre-invoice financing because of the risks perceived in offering finance against orders for goods, whose manufacture, warehousing and transportation is outside their control.

“It can be quite difficult to get this type of finance. From a bank’s point of view, the further away you are from cash exchanging hands, the greater the risk,” says Richman.

While finance can be provided against finished goods, where both the purchase order and the goods serve as collateral, it is important for banks to ensure that they fully understand the property rights that prevail in the supplier’s home country as this will impact their ability to repossess the goods should something go wrong.

Added to this are concerns over how they can market and sell the goods if they are required to take possession.
“This type of finance has to be made available to suppliers in a country which has a good legal system so that should something go wrong with the order, the bank can take possession of the goods involved,” says Demica’s Kerle, pointing out that the less-transparent legal regimes, which prevail in many Asian countries such as China and Indonesia, represent a major concern for most banks.

“Banks are also hesitant here because they are concerned about what would happen should something go wrong with an order and they need to take possession of the goods.

“This is not as great a problem if you offer purchase order financing against commodities, such as coal, which can be easily sold on via exchanges. However, it could be a major problem if you are financing an order for shoes, and you end up having to take possession of the shoes.”

Demica, whose Citadel platform offers the flexibility to collect purchase order information directly from buyers to support such transactions, is a firm advocate of purchase order financing and is currently looking to secure interest from banks to provide funding.

Kerle believes that banks’ concerns can be alleviated if they are selective in who they offer early financing to, and apply a strict underwriting criteria.

“Banks need to look at the history of the trading relationship between a buyer and its supplier, and the supplier’s ability to deliver quality goods on time. It is unlikely that this sort of financing would be made available to a new supplier,” he says. “To offer this type of financing, there needs to be a very thorough risk assessment.”

Deutsche’s Richman agrees that careful selection criteria is vital, but points out that this task can be made much easier if banks offer early financing to overseas suppliers, who they know well, and whose risk profile they have already assessed.

Extending SCF

While many suppliers look for pre-shipment finance on a bilateral or standalone basis, there is also demand from suppliers who are already part of established supply chain finance programmes.

“In the second scenario, the bank will have assessed the risk parameters and will have a deep understanding of the supply chain relationships, so there is a much less of a risk in the provision of pre-shipment finance,” Richman says.

“The bank knows the buyer and is also aware of the track record of trading between the buyer and the supplier. As there is greater control over the flow of funds, the risk is better managed and much more can be done in terms of extending credit to the supplier.

“The extension of supply chain finance to include pre-shipment finance is a very important development. Credit frameworks are emerging, and to be able to use information that you already have on risk as a basis on which to offer further credit is an innovative move.”

He adds that the provision of any type of pre-shipment finance on a standalone or bilateral basis should be stricter, and involve more stringent financial tests.

Logistical support

Richman also points out that not all banks are in a good position to offer this type of financing as it calls for on-the-ground presence where the supplier is based so that the bank can fully understand the risks involved and offer local advice.

“A lot of banks do not have the global networks required to support the provision of supply chain finance and then extend this to include pre-shipment finance,” he says.

However, while the provision of early financing to overseas suppliers may be fraught with difficulties, working with a logistics company can resolve some of the concerns banks face.

UPS Capital’s global asset based lending division enters partnerships with banks to offer purchase order financing for finished goods, which are under UPS’s control – either stored in a UPS facility or in transit – and typically provides a quarter to one fifth of the financing required itself.

“As the partner company in the financing, we can offer transparency into where the goods are and what is happening to them and this is a huge benefit to banks when offering this type of early stage financing. Banks value this information because it provides them with greater visibility,” says UPS’s Vukas.

“We would offer pre-shipment finance if we picked up the goods from a supplier’s factory site or at the dock, but the other issue that has to be considered is the country’s legal system and the rules governing property rights.”

He adds that early financing is most likely to initially take off in countries which have a stable legal system and a solid regime of property rights.

However, Vukas firmly believes there are ways of taking the risk out of offering early stage financing to overseas suppliers – not least of which is by collaborating with local banks, which can manage risks on the ground.

“Local banks have an understanding of the local jurisdiction, local property rights, and can also gain visibility into a supplier and the manufacturing of a product. It is possible that a local bank could offer very early stage purchase order financing as a component of an overall financing,” he says.

“A US bank could, for example, outsource the purchase order financing of goods in the pre-production stage in China to a Chinese bank, and then provide additional financing itself further down the supply chain.

“If the manufacturing is in China and you are working with a bank in China that can assess the risks effectively, then there may be ways to promote this type of financing.” GTR