Trade Finance Goes Creative: The Reader-to-Reader Report: Trade Finance
September 4, 2006
Use of trade finance is increasing with open accounts more common and banks facilitating global supply chains.
Few aspects of the global supply chain are as critical as trade finance—and few are undergoing as big a transformation. Traditional practices are giving way to new products as more companies—both big and small, public and private—respond to increasing pressure to make their assets work harder.
In the trade area, that means that letters of credit are being replaced by alternative forms of trade finance that don’t tie up the balance sheet. Whether that entails open accounts or customized products and lines of credit, the creative capacity of lenders are being put to the test to provide workable solutions.
To find out how far this sea change in trade finance is extending—and what it means—we asked our readers. Of the 150 responses (3% of the total survey), the mean size of companies was $48 million annual sales (with 30% ranging from $10 million to $100 million, and 10% in excess of $100 million).
We were interested in several specific areas:
- How have our readers’ use of trade finance instruments changed over the past 12 months?
- What is the range of financial institutions being used?
- How does the Export-Import Bank of the United States figure in trade financing?
- Are trade finance institutions being asked to provide more services than before?
Here’s what they said:
More use of Trade Finance
A full 25% of the respondents reported that they have made more use of trade finance in the past 12 months. Only 7% reported a decrease.
…. But Failure to Get Trade Financing Still Kills Deals
Forty-one percent reported that the failure to obtain acceptable trade finance rendered them unable to complete foreign transactions.
Commercial Banks are the Principal Lenders with a Widening Range of Options
Nine out of 10 respondents make use of commercial banks as their principal lender. But other institutions—private capital providers, government, even logistics providers—are being called into service for trade finance.
The Export-Import Bank of the United States Remains a Powerful Partner for Its Clients
Twenty-three percent of the sample included Ex-Im in their trade finance strategy, a remarkably high number given the specialized requirements. It is revealing to note the broad spectrum of services and products customers derive from Ex-Im in developing trade finance capabilities.
Use of Multiple Institutions is the Norm
Fifty-two percent of the respondents have relationships with more than one trade lender (48% have an exclusive relationship).
Of those with multiple lenders, the principal reason is to draw upon different capacities from different lenders.
Letters of Credit Are The Most Widely Used Instrument…
…But Those Using Open Accounts are Doing Much of their Trade With Them
A third of the sample is financing more than 75% of its transactions with open accounts. Half are using open accounts for half their transactions.
Commercial Banks are Being Asked to Provide More Up-Stream Support in the Global Supply Chain
Perhaps the most significant finding is the extent to which a relatively constant 30% of respondents are looking to their commercial banks to help finance their global vendors, suppliers and even customers.
Banks Are Being Asked to Take On More Tasks
More customers are asking their commercial bank lenders to process open accounts (purchase orders/invoice reconciliation), use their IT infrastructure to provide monitor visibility, broker customs and provide back-office order processing. Nearly half look to their commercial bank to process open account purchase orders and invoice reconciliation, almost as many want the bank’s technology to help monitor supply chain visibility.
Open account processing
(purchase order/invoice reconciliation) .........................47%
Use of technology platforms to monitor visibility
and provide information reporting in your global
supply chain from node to node (i.e. from vendor
to broker to transport to customs).........................42%
Customs brokerage and oversight.........................32%
Back-office order processing.........................18%
Other.........................10%
Total Respondents.........................60
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