What is it?
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, if no support is provided, 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.
Why is this important?
PrimaDollar’s trade finance allows supply chains to work on a “ship now, pay later” basis.
Our export finance allows exporters to:
- Win bigger orders
- Gain better margins
- Avoid taking buyer credit risk
- Keep their local bankers happy
- Avoid breaching foreign exchange controls
Our Supply Chain Trade Finance allows buyers to implement enterprise-wide finance for their emerging market suppliers, getting them paid at shipment:
- No more LCs
- Lower intake prices as exporters get financed from shipment
- Using our staged payments (X% a shipment, y% at delivery, Z% later), the risk of over-payment to a supplier is reduced.
- Integrated support for credit notes within the platform
- Integration of shipping documents alongside commercial documents – leading to process and cost savings for the buyer.
Bigger orders at better margins for all – how?
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 for exporters because orders are larger, reducing the unit costs of production and logistics.
- Better margins arise for importers because exporters are funded by a stable low-cost program controlled by the buyer – and this reduces the financial costs that exporters can face; this feeds through directly into lower intake prices.
Everyone wins from this process.
What is the working capital need?
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.
Does it matter who bears the cash flow cost of supply?
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.
Is there a theoretically optimum answer?
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.
How does trade finance fit into this picture?
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
How can I find out more?
With a global network and global coverage, talk to us.