Traders now enjoy multiple options in financing foreign transactions

World traders are enjoying a time of plenty these days when it comes to finding resources to finance their transactions. Choices are out there in abundance.

In supply chain finance, now an integral part of global sourcing and logistics, the services have become much more sophisticated. Online trade portals are employed increasingly to support open account transactions as traditional letter of credit usage shrinks. And, both banks and independent information technology companies are offering the service, often working together.

The portals also now bring in credit, often on an automatic basis, at key points in the supply chain. Suppliers, for example, can access working capital and accounts receivable discounting, while buyers get inventory financial support.

And, the portal connections support closer relationships between cross-border suppliers and buyers, which translates into each offering the other a benefit: buyers are offering early payments, and suppliers, in turn, discount their invoices. That is helping to lower the cost of capital throughout the global chain.

At the same time, U.S. exporters are finding more specialized non-bank lenders to finance their equipment deals in emerging markets on a stand-alone, or “one-off” basis, rather than through ongoing banking relationships.

These non-bank outfits are staffed and led by savvy trade finance veterans who have brought their know-how to new and expanding institutions. And, significantly, institutional investors as varied as Merrill Lynch and Middle Eastern finance groups have injected funds into these institutions; a sign that trade finance has come of age. New funds are expected to come on stream.

Then, too, savvy traders are catching on fast to the sheer variety of resources out there. More now turn to independent finance companies for the working capital they need to fulfill purchase orders. And, many exporters have begun to use private credit insurance—rather than U.S. Export-Import Bank programs—to support their equipment deals with extended payment terms.

A growing number of exporters are also using the IC-DISC, the tax incentive that boosts returns for closely-held companies, and some have begun to work with foreign banks, and occasionally even with foreign investors, that have unique networks and risk-taking ability to do deals.

The new trade finance supply chain links money, technology, and more middle-market players

The tempo of innovation in global supply chain finance these days runs so fast that no sooner are the latest strategies digested than another set is waiting to be explored.

The central ambition of automated cross-border payments remains: improving the efficiency and lowering the costs of making payments, exchanging trade documents, and distributing information among buyers and sellers and their financial institutions.

But the systems, web portals, and software now work so well that buyers and sellers are able to partner more closely in lowering costs throughout the chain: buyers offer early payments, suppliers offer discounts and, in turn, agree to cut their prices when sales contracts are renegotiated.

As the innovations pile up, supply chain finance has become “a pyramid of capabilities,” says Viktoriya Sadlovska at Boston research firm Aberdeen Group. Level 1 in the pyramid is the basic electronic document preparation and exchange, the matching and reconciliation of purchase orders and invoices, and the actual payment.

Level 2, a step up, means managing early payments and invoice discounts in an automated fashion (using pre-determined criteria), while Level 3 makes possible rapid, on-demand access to third-party transaction financing from banks and finance companies, and the injection of credit insurance to cover risk. These can provide working capital and invoice discounting for suppliers, and inventory financing for either party.

Level 4, now emerging, offers online analytical tools that enable buyers and sellers to forecast their transaction costs more precisely, evaluate their supply chain partners’ performance more thoroughly, and, thus armed, adopt a more strategic, longer-term approach to those relationships and their mutual benefits.



Several broad trends

Behind the growing dynamism are several broad trends, including closer links between banks and information technology companies, a continuing refinement in bank strategies, and building more customers among large exporters (not just large importers), and among middle market firms (not just big corporations).

The bank-IT industry convergence has been accelerating. Even the largest lenders now rely heavily on the technology of third party suppliers. And technology groups, whose strength is in platforms and software (and often in building physical supply chain networks) are now bringing in lenders to furnish credit at every step in the chain.

Global Supply Chain Finance Ltd., in Zug, Switzerland, for example, offers a platform that analyzes credit exposure, rates buyer risk, brings in credit insurance, and has strategic partnerships with major lenders (Citibank, IBM Global Finance, Siemens Financial, Calyon) to deliver credit on $12 billion in annual receivables, according to CEO Kendall Stevens, an ex-banker.

TradeCard, in New York, a pioneering technology firm, works with JPMorgan Chase Bank to move funds globally, but has strategic links with a dozen lenders in Asia, Europe, and the U.S. to deliver on-demand credit throughout the chain.

And, TradeBeam, in Santa Mateo, California, a trade management software-services group, has moved into arranging credit, discounting payments to suppliers, and building partnerships with banks (#1: Bank of America), notes John Vincze, Executive VP.

Ariba, Inc., in Sunnyvale, California, with a huge sourcing-supplier network, got into finance in 2006, “a natural outcome,” says Drew Hofler, senior manager-financial solutions. It has teamed up with Orbian, a big payments processor, which finances receivables.

Meanwhile, the major banks keep fine-tuning their strategies and building joint approaches. JPMorgan Chase, a leading player, bought Vastera, a logistics management provider that helps traders improve supply chain operations and enhance compliance with government rules. The bank thus offers an increasingly larger package beyond just finance.

At London-based HSBC Bank, supply chain managers have been recruited from industry to support tailored services for open account transactions in specific sectors, says Paul Robinson, manager of supply chain business.

And, institutions have teamed up through SWIFT, the international banking telecom system, to launch the Trade Services Utility, which offers a common messaging program and industry standards. It is meant to boost the banks’ role in open account transactions, now rapidly replacing letters of credit (in which banks long played the major role).

At the same time, the universe of traders in the new world of automation and targeted credit is changing. Importers have been the dominant customers, but now banks, such as JPMorgan Chase, and technology groups, such as Global Supply Chain Finance Ltd., are actively working with exporters, especially major high tech companies.

In addition, customer size has begun to shrink: large corporations remain the major users, but middle market firms have begun to join up. wt

Sidebar: Expert Advice: What Exporters Need to Know

Keeping up with the arsenal of export finance resources can be a full-time pursuit, so it’s not surprising that many smaller and mid-size firms have a knowledge gap. World Trade has called on some savvy veterans for help.

Financing With Private

Credit Insurance

Gary Mendell, Meridian Finance Group

Equipment exporters have a growing number of options using private sector medium-term credit insurance, says Gary Mendell, head of Meridian Finance Group, in Santa Monica, California, a specialty insurance broker and trade finance resource.

“Most insurance companies prefer individual medium-term deals of at least $10 million. In order to address exporters’ needs for financing smaller transactions, we take a programmatic approach, and bundle multiple deals, as small as $500,000, with a single insurer that agrees up-front to the coverage parameters for the portfolio,” says Mendell.

Working With Foreign Banks

Stephen Sohn, Global Services Inc.

American banks, while adept at using Ex-Im Bank programs to cover foreign risk, are typically uncomfortable with taking that risk themselves in situations where Ex-Im is unavailable. This is particularly the case where the borrower is a sovereign government or a municipality, as in an environmental project, says Stephen Sohn, Managing Director of Global Services Inc., in Westport, Connecticut, which structures and arranges export and project finance.

 “But, there are plenty of foreign banks out there to work with, groups who are willing to take that risk, and most of them have an office in the U.S., which makes them easily accessible,” he notes. Another option: expatriates of the buyer’s country, although “locating them is a trick of the trade.”

Benefiting From Tax Incentives

Jerry Ogle, Ogle & Company

A growing number of smaller and mid-size firms are now using the only available U.S. export tax incentive, what is called the IC-DISC, but “it still remains a significant overlooked opportunity for large tax savings,” says Jerry Ogle, head of Ogle & Company, an international tax advising firm in Bradenton, Florida.

The IC-DISC is a separate corporate entity, a sister company to the exporter, which does not pay taxes itself, but pays dividends to its shareholders (usually the same as the exporter, and individual dividends are taxed at 15%).

Getting The Most Out of Government Programs

Peggy Houlihan, Houlihan International

Smaller companies that master Washington resources -- U.S. government programs and international development bank projects – enjoy a significant advantage in closing deals, says Peggy Houlihan, head of Houlihan International, in Reston, Virginia, an international finance and business development consultant.

A major trend has been greater support for small business at the Ex-Im Bank and the Overseas Private Investment Corporation (OPIC). Another is new initiatives to promote and finance renewable energy and environmentally beneficial projects.

American exporters discover forfaiting

When the international forfait market reached the U.S. in the early 1990s, the term sounded strange (after all it’s French), and the financial technique was unfamiliar (though a few discovered they had, in fact, used it earlier, but didn’t know its name). Still, it was a welcome fresh resource to do stand-alone, “one-off” deals, and an alternative to U.S. Export-Import Bank programs.

“Classic forfait,” as some now call it, is a combination of a financial structure and an international network of investors, primarily banks, who originate, buy, and sell the trade obligations involved. It has financed the sale of capital equipment (say, food processing machinery or tractors), mostly with medium-term repayments (typically five years and semi-annual installments), using promissory notes or bills of exchange.

And, since each installment has a life of its own, it can be traded, which creates the market or network. The risk in each transaction is most often covered by a guarantee from a bank (called an “aval”) in the buyer’s country. The exporter gets paid up front, after a discount.

That is where the word forfait comes in. Once the exporter is paid, its involvement in the financial transaction is over; if the buyer fails to pay, the lender (or investor) has no recourse to the exporter. It has forfeited (a forfait, in French) its right to do so as part of the way that a forfait deal is structured.

A transformation

These days, the forfait market is being rapidly transformed, and American exporters are reaping the benefits. Behind the new dynamism is an old reality. As Greg Bernardi, who heads the U.S. operations of London Forfaiting Company, puts it: “Forfaiting is a niche product that fills a void, its use depends on the current needs.”



Recently, its geographic focus has been redefined. In the 1990s, much of the business involved sales to Latin America, where banks used it often to sell off trade deals and improve their liquidity. Today, with a commodities boom, Latin American banks and their larger customers are rolling in liquidity, so the flurry of deals in the region dwindled.

The market, says Bernardi, now supports a growing volume of U.S. exports to key emerging markets in East Europe, the Middle East, Africa, and Asia, while Latin America is less buoyant.

And the payment terms have changed: the traditional use of forfait in medium-term deals has given way to a broader range of transactions, from 180 days to seven years, he notes. Plus, the reliance on bank guarantees has been trimmed, as more deals are being done, minus a guarantee, with corporate and government buyers.

 What’s more, the specialist groups involved have replaced their reliance on a one-product strategy with a full arsenal of trade finance techniques. And, new groups have opened up shop.

London Forfaiting Company, in New York, for example, has been in expansion mode since early 2007. It now not only offers classic forfait, but just as actively delivers Ex-Im Bank-backed deals, taps into the private credit insurance market, and is building an export factoring business in short-term transactions.

International Assets Holding Corporation, in New York, which delivers a broad portfolio of emerging markets finance, was partly founded by Scott Branch, a forfait veteran. But it then brought in John Cherkezian, another veteran, to expand its trade finance, including forfait and Ex-Im deals.

Rosemount Capital Management, also in New York, was founded late in 2005 to tap institutional capital to fund trade finance in the U.S. and abroad. It handles forfait, export credit agency deals, and syndicated trade loans, and structures trade-related inventory finance.

James Klatsky, veteran and co-founder, emphasizes that a major trend is the growth in the capacity of the market, which has expanded along with the volume of global trade.

Significantly, the arrival of institutional funds is the tell-tale sign that trade finance has come of age. Rosemount brought in units of Merrill Lynch and Massachusetts Mutual Life Insurance Company. Tricon Trade Management, Bermuda-based with a Toronto office, created the Tricon Forfaiting Fund, which has attracted Islamic investors (it’s Sharia-compliant). It is also putting together a more standard investor group.

And, other new investor-based trade finance funds are now in the wings. wt

Sidebar: Forfaiting, pronounced 'for-fading'

Forfaiting, or Medium-Term Capital Goods Financing, means selling a bill of exchange, at a discount, to a third party, the forfaiter, who collects the payment from an overseas customer, through a collateral bank. Forfait financiers characteristically purchase the debt instruments from exporters without recourse. This means that in the event that the borrower defaults on the debt, the exporter will not be held liable.