External Shocks and Shifting Supply Chains: How Receivables Finance Can Help

12 de marzo de 2020

“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 10 March in London. “First, Brexit and the trade war strained global trade relationships, forcing both manufacturers and importers to adjust their strategies, and now the even more significant Covid-19 situation is further stressing companies.”

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 main supplier of goods, was a supply shock impacting 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 be devastating to sectors including tourism and hospitality, aviation, luxury goods, automotive, consumer products, and electronics.

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

On the other side of the transaction, import buyers are facing their own set of risks. The tariff war and now Covid-19 have caused importers to take a close look at diversifying their supply chains away from a dependence on China. However, moving to another provider country such as Vietnam or India can be a time-consuming and expensive process, with no guarantee of a better goods or lower costs in the end.

The current stress on global trade can weaken company cash flow as supplier orders and fulfilment are interrupted and consumer demand drops. Companies that are already highly leveraged may not be able to extend their bank credit lines. This is where specialist trade financing such as accounts receivable (AR) finance can come into play. This flexible liquidity solution can be a lifesaver in situations where exporters are stressed and need working capital to fulfil orders.

Support for cash-strapped suppliers

Unbanked smaller businesses form the backbone of China’s economy, and they are taking a serious 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 suppliers without working capital options.

Support for moving supply chains

The shifting global trade landscape means new trade relationships are being forged. But with new trading partners also comes potential business risk. A supplier may be eager to close a deal but unwilling or unable to grant generous open account credit terms. 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 like Stenn can help.

The case for AR finance

AR finance 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 next order. It can also eliminate the risk of the buyer not paying down the road. However, the import buyer prefers to pay later, and often demands open account terms of 30, 60, 90 days or longer.

AR finance bridges this gap. In a typical AR finance transaction, the finance company purchases accounts receivables and advances the full invoice amount, less a small discount, to the supplier at the time of shipment. At the due date, the importer pays the full invoice amount to the finance company.

AR Finance 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.
  • AR finance works alongside current bank relationships and no security is required.
  • With AR financing that is non-recourse, the finance company assumes all risk of non-payment, providing peace of mind during risky times.

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 take a close look at whether AR finance can provide working capital liquidity and help get global trade back on track.