Increased efficiency can make up for capital scarcity
With capital hard to come by via traditional loan channels, corporates are having to find new ways to meet their needs. The most successful companies might be those that use capital most efficiently, in terms of convincing banks to lend to them and in getting the most from available resources.
“Companies can benefit from speeding up their cash-conversion cycles,” says Bart Ras, global head of business development for trade and receivables finance at HSBC. “In a world where credit is harder to come by, companies that learn to use the same dollar multiple times in a given period, rather than allowing capital to get tied up, will be at a distinct advantage.
“Capital is still available for corporates if they can demonstrate an ability to recycle it. This is a new paradigm, based on using capital more efficiently and effectively. Banks are generally willing to take more risk on a client as long as that client uses the capital efficiently.”
By speeding up the rate at which working capital is recycled, banks can finance more business without taking on additional risk. For the client it offers the ability to achieve the same goals but for a smaller overall cost.
This is happening with the development of new products and the electronification of the trade finance business, trends that are occurring simultaneously and feeding off each other, to some extent.
“If we can make more progress dematerializing documentation, that, alongside the use of BPOs [bank payment obligations], will become a very powerful tool,” says Manoj Menon, global head of trade services, innovation and customer proposition at Royal Bank of Scotland.
“Not only does the seller receive early payment but the buyer gets the documentation immediately, meaning the cargo can be discharged straight away.”
The top-tier banks are pressing ahead and increasing the efficiency of their own trade finance offerings. The electronification of the business and the use of templates are just two ways even traditional products, such as letters of credit or standbys, can be made more efficient, says Jeremy Shaw, head of trade finance for EMEA at JPMorgan.
However, it is up to clients to ensure their own internal processes are efficient enough that they can share in the benefits, he says.
Businesses should be aware of innovations that are occurring across their industry sector and beyond, and should be bold in applying the best of what others have implemented in their own businesses.
For example, a growing number of companies are merging the physical supply chain and financial supply chain functions of their businesses, which have often been treated separately. HSBC’s Ras says this is proving to be beneficial in enhancing the efficiency of managing the supply chain.
Ray Zabarte, head of trade finance product management at Barclays, says: “We are seeing a trend towards the use of more without-recourse open-account arrangements, which allows exporters to monetize the risk on their balance sheet and remove that exposure altogether.
“This is because it improves working capital efficiency. Clients will pay for that, usually via a discounting or a risk charge, but they get to have the cash on the balance sheet sooner.”
Ras adds: “Banks have traditionally worked with clients by telling them what financing solution would work best for them, but that is starting to change as banks listen more and work to understand their clients better.
“Banks are moving towards a Treasury view of the world, to be more relevant to their clients.”
For bankers, this is evidence that the bank-client relationship has transcended its traditional parameters to become something more akin to a partnership, though others might see it as the result of increased competition.
Meanwhile, traditional trade finance products, such as collections, commercial letters of credit, guarantees and standbys, are in decline as open-account business gains ground, according to the latest survey of trade finance practitioners by the International Chamber of Commerce (ICC).
Respondents to the survey reported declines of 5% each for guarantees and commercial letters of credit, 3% for collections and 2% for standby letters of credit between 2011 and 2012.
This, the ICC explains, is the result of global recession creating a buyers’ market, forcing exporters and sellers to compete more aggressively for sales by negotiating on trade and payment terms. Changes to the global economy are influential too.
“Growth requires a different mindset compared to a stable or a shrinking market,” says Ras. “It will change the most optimal cash-conversion cycle level for our clients, influencing decisions on DPO [days payable outstanding], DSO [days sales outstanding] and even what are the right inventory levels.”