Trade finance: who needs banks?

by William A. Laraque

Europe is about to eat the American lunch when it comes to international trade competitiveness.  The European maneuver element has once again bypassed our trade fortresses and has enveloped our forces and our government supported assets, and they are positioned to garner a disproportionate share of markets and profits as a result.

A significant allocation of U.S. government resources concentrates on providing export credit insurance to U.S. companies in order to mitigate the risk of non-payment on the part of foreign buyers.  This concentration of resources ignores the fact that much of international trade is no longer conducted in the “classical” manner involving letters of credit.  Enter Supply Chain Finance.

Something like 85% of cross-border trade is now done on open account.  There are several reasons for this, the principal one being that large buyers in developed countries are extending their liquidity to sellers in developing countries.  They do this by paying invoices early, thus adding to the working capital of these sellers to assure a reliable source of products.  This process is to a degree self-sustaining and may not require bank financing.  By common agreement, buyers and sellers can trade on a business-to-business basis.  Reverse factoring, forfaiting, and other means of discounting invoices, all provide alternative financing tools where lenders are required.

This trend is also accelerated by electronic invoices: the electronic presentment and matching of purchase orders to these invoices (for which there is one European standard) and the subsequent payment and settlement by automated matching.  The SWIFT Trade Services Utility and Bank Payment Obligations have greatly facilitated this process.  The entire process is known as supply chain finance (SCF).

As is the case with many innovations, an American pioneered this process with TradeCard in 2000.  European companies like Coface and such banks as HSBC have pioneered the provision of these services.  The upshot is that numerous European companies are about to unleash on U.S. importers and exporters alike, services and software to support trading in these novel ways.

GraceOne can assist importers and exporters finance their trade in these innovative ways.  Ask us about SCF, forfaiting, export credit insurance and other tools.