07 January 2019
One minute guide.
This phrase describes how many buyers would like to source goods. They would like the exporter to ship first, allowing the buyer to pay later.
But this can be problematic for many reasons:
By shipping first, the exporter has the credit risk of the buyer who may not pay
The exporter has already incurred costs and has to fund these whilst waiting for payment
The exporter's local bank may have a pledge over the goods which he is reluctant to release before the buyer's payment comes.
PrimaDollar's trade finance allows supply chains to work on a "ship now, pay later" basis.
Using our supports, exporters have been able to:
Win bigger orders
Gain better margins
Avoid taking buyer credit risk
Keep their local bankers happy
Avoid breaching foreign exchange controls
Buyers working with PrimaDollar have been able to support their supply chain at a low cost without using bank lines or compromising on their covenant compliance.
A buyer who gets credit is able to manage his cash flow better.
This means that the buyer can commit to larger orders straightaway because he has more liquidity, and is not limited in his order volumes by working capital, banking lines and financial covenants. Better margins arise because orders are larger, reducing the unit costs of production and logistics.
Everyone wins from this process.
There are different phases in most supply chains running from purchase order to the date when goods are fully sold. Here is a simplified example from the garment industry:
Day zero: purchase order, raw materials purchased
Day 90: goods are made and loaded on the boat
Day 120: cross-docking completed and goods are in the shops for sale at full price
Day 150: first discount process to shift stock
Day 180: goods sold out after final discount
Someone has to fund this process from day zero to day 180, with the total amount of finance required increasing over time as goods reach the shops and then declining as goods are sold.
The different parties involved in the supply chain have different access to finance, and different costs of money. Partly this is driven by risk allocation between the parties and any financier involved, and partly by the financial standing of the parties themselves.
There is no free lunch. All the financing costs in the supply chain are paid for in the price of the goods.
The answer varies from buyer to buyer, industry to industry, supply chain to supply chain.
But it is possible to identify an optimum financing model for each situation, which may also change from season to season and from year to year. The PrimaDollar team has the ability to assist with this analysis.
The three main factors are:
the marginal borrowing cost of the buyer and the exporter.
the opportunity costs of using credit lines to support the supply chain.
the presentational and accounting benefits that can flow from how and where the supply chain is financed
This last point is important, especially to buyers. Free operating cash flow is a driver of equity valuation and trade finance, intelligently deployed, can help buyers to manage the presentation of their business.
Trade finance should usually be part of the optimum supply chain finance solution.
Many exporters have fully pledged their collateral and have limited ability for additional borrowing. This means they cannot easily provide buyer credit.
At the same time, many buyers are motivated to preserve banking lines and show positive operating cash flow to boost shareholder value.
On the buyer side, these are not completely economic questions - but judgments - and can lead buyers to consider requiring their exporters to use export finance even if it is marginally more expensive than their own borrowing costs.
Moreover, the optimum model can change from time to time - and PrimaDollar trade finance can be stepped into and out of supply chains as needed without commitment costs and facility fees.
With 10 offices on three continents, talk to us: click here to connect to your local office. You can also read further articles on our site:
One minute guide. What is it? Export finance helps exporters to offer credit to their buyers. This means that they can offer "ship now, pay later" terms to buyers - and this is what buyers want. Export finance
One minute guide. Who is PrimaDollar? PrimaDollar is a UK-based trade finance platform working with exporters and importers on a global basis. What does PrimaDollar do? PrimaDollar
One minute guide. What is it? Dual factoring is the process of coordinating two factoring companies so that one of the companies can purchase an invoice from an exporter in one country and relying upon the other factoring company to collecting the amount due