How receivables finance (RF) can aid supply chains

'Now is the time to support supply chains with liquidity,' said Stenn Group President Kerstin Braun, who spoke at the Receivables Finance International Conference RFIx20 on 10th March in London. 

'First, Brexit and the trade war strained global trade relationships, forcing both [Exporters] and Importers to adjust their strategies, and now the even more significant Covid-19 situation is further stressing companies.'

What impact will Covid-19 have on supply chains?

The full impact of Covid-19 on the global economy is still unknown. In early March, the OECD cut its world growth forecast in half to 1.5% due to this health crisis, making 2020 potentially the weakest year for trade since 2009. 

The shutdown in China (the world's leading Supplier of goods) was a supply shock affecting sectors from automotive to pharmaceutical. Now that Covid-19 has spread to more than 100 countries, a demand shock has emerged as businesses and consumers cancel travel plans, avoid public places, and stay home. 

A prolonged Covid-19 scenario will devastate many sectors including tourism, hospitality, aviation, luxury goods, automotive, consumer products, electronics and others.

But that doesn't mean that global trade is stopping. Manufacturers in China are ramping up production and getting their goods onto outward-bound cargo ships as soon as possible. Speed is crucial to staving off threats from competitors in other countries and regions of the world.

On the other side of the transaction, Importers face their own risks. The tariff war and now Covid-19 have caused Importers to look closely at diversifying their supply chains away from a dependence on China. However, moving to another provider country such as Vietnam or India can be time-consuming and expensive, with no guarantee of better goods or lower costs.

The current stress on global trade can weaken company cash flow as Export orders and fulfilment are interrupted and consumer demand drops. Companies already highly leveraged may be unable to extend their bank credit lines. This is where specialist trade financing can come into play. This flexible liquidity solution can be a lifesaver when Exporters are stressed and need working capital to fulfil orders.

SME suppliers require instant cash

Smaller businesses without access to banking services form the backbone of China's economy and they are taking a severe hit from the Covid-19 outbreak.

85% of 1 506 SMEs surveyed in early February expect to run out of cash within three months, according to a report by Tsinghua University and Peking University. Default is a possibility for Exporters without working capital alternatives.

Supply chain support

The shifting global trade landscape means that new trade relationships are being forged. But with new trading partners also comes potential business risk. An Exporter may be eager to close a deal but unwilling or unable to grant generous open account credit terms to a new Buyer. Likewise, banks may not be able to support new markets for their clients. An internal Stenn study showed that one-third of mid-market companies in the UK, US, and China feel that their banks could serve more jurisdictions and provide faster service. This is where a non-bank finance provider can help.

How receivables finance can help

Receivables finance (R/F) solves a classic dilemma in international trade. The Supplier prefers payment at the time goods are shipped. This provides upfront cash to pay employees and purchase raw materials for the following order. It can also eliminate the risk of the Buyer not paying down the road. 

However, the Buyer prefers to pay later and often demands open account terms of 30, 60, 90 days or longer.

R/F bridges this gap. In a typical finance transaction, the finance company purchases accounts receivable and advances the full invoice amount, less a slight discount, to the Supplier at the time of shipment. The Importer pays the full invoice amount to the finance company at the due date.

R/F is especially beneficial during periods of uncertainty, as is the case today.

• It's flexible - Suppliers only use it when needed, and there's no long-term commitment.
• Suppliers can be up and running in only a few days.
• Finance works alongside current bank relationships, and no security is required.
• With non-recourse financing, the finance company assumes all risk of non-payment.

This year is proving to be an unprecedented situation for global trade, with liquidity crunches and shifting trading relationships. Finance providers like Stenn have one driving purpose - to help companies conduct cross-border business. Companies should consider whether AR finance can provide working capital liquidity and help get global trade back on track.

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