Considering the recent market volatility in both equity and crypto markets triggered by changes in monetary policy of the Fed, we thought it would be best to get back to basics and discuss the current state of affairs as it relates to trade finance as an asset class.
Receivables Characteristics:
- Short term and self-liquidating, receivables have a low correlation to traditional markets.
- Underlying commercial trading activity supports the ultimate repayment of receivables to continue operations – higher recoveries vs other unsecured obligations
Challenges in the current market
Supply Chain Disruptions and Working Capital
Supply Chain disruptions on a global scale continue to create challenges for companies involved in cross border trade. Disruptions in the flow of goods will have an impact on working capital for SME’s and large multinationals alike. However, SME’s are disadvantaged because they lack the commercial leverage to extend payment terms to its suppliers to help manage the cash conversion cycle.
Reuters Reports “shipping something from a warehouse in China to one in the United States currently takes 74 days longer than usual” Savvy treasurers and procurement teams are taking a hard look at optimizing their relationships with counterparties to alleviate the cashflow impacts of these disruptions. For importers, longer shipping times increase the operating cycle, capital is tied up in inventory longer while in transit. We are even seeing suppliers pushing for buyers to take delivery on EXW basis meaning inventory owned by buyers is sitting in yards in China waiting to ship. On the flip side, buyers are pushing suppliers to deliver on a DDP basis so that suppliers bear the burden of holding the inventory in transit.
Opportunities in the Current Market
Banks shy away from SME’s because of their size, granularity and operational inefficiencies, coupled with regulatory hurdles imposed following Basel III and its impact on the cost to their capital.
We seek to finance those SME’s that exhibit the characteristics of a well-run business like solid margins (pricing power), positive cashflow generation (for repayment), prudent management of the balance sheet (reinvestment of profits in the business, adequate and manageable debt levels).
Enabling these SME’s to shrink the cash conversion cycle is key to managing not just the current supply chain disruptions, but their cash management goals as a whole.