Supply chain finance provides the logistics fluidity and financial liquidity provide the oxygen to keep goods pulsating through international supply chains. Global trends, challenges, and market opportunities are shaping and impacting shipper’s need for working capital, trade credit, or marine insurance.
Canadians are not alone in needing to adapt to changing structural conditions international trade and the needs of global supply chains. Financial markets in different countries around the globe have various degrees of sophistication, credit availability and capacity to support this type of activity.
Companies that deal internationally have to be able to differentiate between the regulatory requirements for each of the countries in which they operate as well as the differing financial strength of those countries and the commercial companies that they deal with. The attendant risk and working capital requirements of their partners often lead them to seek risk mitigation, in various forms, as well as differentiated transaction structuring to minimize their working capital usage.
Many companies use a broader spectrum of products, depending on the nations in which they operate to be able to diversify their risk exposure between countries, buyers, and industries. “One solution doesn’t work equally well in all markets. For example, Asia is a large market which often requires traditional trade instruments such as ”Letters of Credit” or “Guarantees” whereas trade within North America is predominantly oriented to Open Account transactions,” according to RBC’s Chris Duggan.
Shippers capturing the full spectrum of international trade opportunities are increasingly using a variety of instruments such as Open Account, Guarantees, Letters of Credit, Documentary Collections and Cash in advance, as well as various forms of insurance, depending upon their transactional requirements according to the Royal Bank’s Chris Duggan. He also cited growth in “Approved Payable Financing” for the suppliers to large international corporates which want to make their payable structures more uniform in all of their markets as another supply chain financing trend worth watching.
Given the menu of financing tools available, making the best choice involves proactively identifying specific business needs and requirements since the devil is indeed in the details. When thinking holistically, shippers will realize that basic information such as the nature of the product, the origin, the destination, nuances in the contracts, credit history are all required by various financial underwriters.
Since underwriting requirements respond to changing market conditions and the details of the individual transaction, it can be time-consuming for shippers who don’t plan. Planning allows firms to see how the various tools could be utilized to implement their international business strategy. At the very least, by planning a better understanding of how to optimize both the availability and cost of capital to manage growth and supply chain insurance risks will strengthen a firm’s existing position in domestic markets.