BPO: The risks of faster trade finance
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A faster way to pay suppliers marks a new era for international trade as it helps companies unlock working capital and improve cash flow. Bank Payment Obligations (BPOs) are one tool among many though, so companies should think carefully about when to use them.
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Manoj Menon, Global head of trade services, innovation & customer proposition, RBS |
The benefits of BPOs
For the seller:- Faster release of buyers funds once its shown that the seller has shipped the goods. This means faster payments, accelerated cash flow and lower Days Sales Outstanding
- Less expensive than letters of credit thanks to reduced banking and handling fees
- No presentation of physical documents required it takes less time and resources
- Provides collateral for accessing preshipment and post-shipment finance
- Can extend credit terms to a buyer since their bank is now guaranteeing their payment obligation
- Possibility of spreading the risk with multiple buyers
- Improved customer offering with more flexible options which could lead to winning additional business
- Better payment terms can be negotiated by providing a payment assurance to suppliers
- Achieve early payment to the supplier to make use of discounts or rebates
- Free up banking credit lines thanks to shorter, automated transaction cycles
- Make payments on time and avoid physical supply disruption or judicial proceedings
- Cut confirmation, vetting, presentation, and discrepancy fees
- Increase business opportunities with suppliers
Companies might want to use a BPO for their domestic or international trade transactions when they:
- Trade with long-term partners using letters of credit and want to switch to something more efficient
- Conduct open account transactions today but want to cover the risk or arrange financing
- Want to extend credit terms so they can try to create new business, or take better advantage of terms such as rebates or discounts
- Deal with trading partners who are moving away from paper or proprietary systems
- Work with new partners and therefore face a greater risk of non-payment they can use the BPO to cover that risk if they dont want to use a letter of credit
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