Bangladesh Trade Finance Article

UK's PrimaDollar offers funds to apparel makers

30 November,2018 | Tim Nicolle

This article was originally published in print and on line by The Daily Star, the leading English language newspaper in Bangladesh.

Garment factories, especially the small and medium-sized units, which are facing a financial crunch have good news as foreign financing companies are coming over to invest in the sector.

One such company is PrimaDollar which is based in the UK and operates around the globe. It has already created a good customer base in Bangladesh starting operations a little more than a year ago.

Tim Nicolle, chief executive officer of PrimaDollar, visited Bangladesh recently and shared his ideas of business, the future of his business and the country's prospects in apparel business. Below are excerpts from an exclusive interview with The Daily Star (TDS).

TDS: Would you please explain your business model in Bangladesh?

Nicolle: PrimaDollar is an impact financier. Of course, we aim to make a profit, but we also want our funding to deliver wider social benefits. We help factories in emerging markets to be successful internationally by helping them with their local cash flow.

There is a cash flow gap. Buyers typically want to purchase goods on credit. They want to receive goods and pay later. But factories need money upfront to buy materials and pay wages.

This is a problem for four important reasons:

1) Competition: Factories which do not have access to finance lose business to competitors which do. (For Bangladesh, this means factories in other countries like in China, Thailand, Vietnam and India where local banks are less regulated);

2) Small and medium enterprises (SME): If small and medium sized factories are not helped with finance, they will end up subcontracting for bigger factories (who can give buyers credit); it is essential that SMEs can deal with customers directly; SMEs are the engine of future economic growth;

3) Foreign exchange regulations: If the goods are exported and the buyer does not pay, this is an offence under the foreign exchange regulations (for both the supplier and the local bank involved);

4) Profits: Many larger factories now have no choice but to accept the pricing that they initially offered; after years of investment, they are in debt to the bank, and cannot tolerate any period of idleness in the lines.

Relying only on big buyers is not good for margins – the profit is in mid-sized buyers. But mid-sized buyers definitely want to pay later and also want to work without letters of credit (LC) and this is risky.

Many big factories are now facing the challenge of (a) diversifying their client base and (b) how to work with mid-sized buyers and give them credit. Otherwise they cannot improve their margins.

So we do three things enabling factories and buying houses to give what the buyers want, which is a purchase order without LC and giving the buyer time to pay (60, 90 or 120 days).

TDS: How will Bangladesh's garment sector benefit from such an innovative business model?

Nicolle: Our model in Bangladesh is no different than what are in other emerging markets of manufacturing countries but the need for our services in Bangladesh is much higher.

Bangladesh is one of the largest consumers of LC in the world. This is the custom and practice for international trade and local banks (and factory owners) are used to asking for LCs (and getting it) from their buyers.

Moreover, the price advantage that Bangladesh enjoyed (lower labour costs) is disappearing. Bangladesh has great skills and wonderful people but it needs to find a way to be easier and more convenient for buyers.

TDS: When did you start business in Bangladesh? How many clients do you have now in Bangladesh and how many were there last year?

Nicolle: We have been trading now for 12 months. We financed around 90 shipments in our first year, working with over 40 different buyers and suppliers. We are achieving a high level of rolling trades now, with suppliers sticking with us for repeat business. So it is working nicely.

We have developed a new financial product that is cheaper, quicker and simpler than LC. This is the future. Our new system saves maybe $1,000 for every $100,000 of export volume.

TDS: So far, I can understand your business model is working just like back to back LC. What are the differences between your business model and back to back LC in garment business in Bangladesh?

Nicolle: LC just got more and more complicated, technical and difficult. All this hassle translates into costs -- a lot of buyers' time eaten up in filling forms and abiding by procedures, fees to international banks (offshore), a lot more risk and plenty of worry over settlement arrangements. It is time for something simpler.

Our system provides the same protections and benefits to the local bank and factory owner. But we can deliver these results cheaper, simpler and quicker than the LC system.

TDS: Why did you start business in the garment sector, particularly in Bangladesh?

Nicolle: Like all good businesses, it starts with an idea. Then you look for the problem for which the idea is a solution.

Firstly, we looked in detail at international trade finance. We concluded it can be reformed.  International banks charge a lot for what they provide and we can take out those costs for the exporters.

Secondly, any start-up company, especially if the idea is new, should focus on markets that are growing. A growing market provides an opportunity to sell and win new business without having to replace an existing provider.

Thirdly, we looked at global trade patterns and we can see that China is becoming expensive, and that certain products are shifting to South Asia. These are products like garments, leather goods, furniture, light manufactured items and household goods. There is a high labour content in production and setting up a factory does not need a lot of capital (relatively).

Fourthly, from all this data we picked garments and Bangladesh. It is the standout opportunity for us and it is the standout opportunity for you as well.

TDS: In case the garment buyers make a delay or try to cheat you of your money, how would you realise those from the buyers? When you face such a loss, how will the garment manufacturers get payment from your business?

Nicolle: We pay factories against shipping documents -- often against copies of documents where we have an arrangement with the local bank working in the shipping process. So the factory does not wait for the money, and face no risk from us.

Getting the buyers to pay is trickier but that is our risk. There are several techniques that we use to persuade buyers to pay promptly, and we have never yet had a default.

Typically we are working in supply chains that repeat business every month. So buyers rely upon us (as well as the factory) to ensure that shipping documents are being cleared.

We use credit insurance when we are unsure of the buyer's standing or when the level of business is low. The credit insurer is very powerful and no buyer wants us to inform an insurer that he is late in payment. This works very well.

TDS:  How is the central bank helping you in your business in Bangladesh?

Nicolle: The central bank is not there to help us. It is there to protect the interests of depositors in regulated banks, and to protect the foreign currency receipts of the country. So we have not asked for any help.

We have asked the central bank to look at our technology and to assess whether our working models comply with the relevant regulations. They have kindly done this; and following their review, they also have made themselves available to local banks having questions.

TDS: What is your observation with regard to the garment business in Bangladesh in the near future as many other competitors are also struggling to do better in this kind of business?

Nicolle: There is good news and there is bad news.

The good news is that China is sitting there approaching an annual garment export of $200 billion and is still expensive.

The bad news is that Bangladesh is no longer incredibly cheap. Wages have risen and the Bangladeshi garment industry is the most regulated in the world – so there are now cheaper places to go.

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