Yang and Clement of Rosenthal & Rosenthal Explore Trade Finance

After more than a year of massive supply chain disruption, it is no longer about waiting for things to get back to normal. Instead, importers and exporters should be looking for solutions that can aid them in the short and long term. Trade finance/export financing is one such solution. Ying Yang and Peter Clement of Rosenthal & Rosenthal discuss this financing instrument, how it can benefit importers and their factors, and where the marketplace is going in 2023.

Let’s start with the basics. What is export financing/trade finance?

Ying Yang: Trade finance is a broad term and could mean different things to different individuals. Essentially, trade finance provides working capital solutions to help companies at various stages of the trade cycle, from facilitating inventory purchases to funding and collecting accounts receivable. It is generally a much more flexible financing instrument and can also be highly specialized. The purchase order (PO) finance offering at Rosenthal serves as a short-term financing instrument to allow companies to purchase raw materials or finished goods that have purchase orders or known sales opportunities. It is a non-dilutive option for business owners who do not want to give up equity and it works in conjunction with an accounts receivable lender, whether with Rosenthal’s own factoring and asset-based lending divisions or third-party lenders and banks.

Peter Clement: Export factoring is an important financial product — particular in the current environment — that allows a business to sell its foreign accounts receivable to a third party in return for working capital, credit protection, ledgering and collection services. Under the transaction between both parties, the factor would pay the amount due on the invoices minus its commission or fees.

What are some of the benefits of export factoring and/or international trade receivables financing, both for exporters and importers as well as their financing partners?

Yang: PO finance is a great tool for companies that are experiencing rapid growth, are highly seasonal or are undergoing a turnaround. The incremental working capital generated by a PO financing solution can cover up to 100% of the cost of inventory and may also fund labor and overhead for certain light production/assembly situations. Funding a PO finance transaction can also be facilitated rather quickly to help businesses capitalize on additional sales opportunities in this highly competitive world. The short-term nature of the instrument is an equity alternative solution that can complement a company’s existing financing facility.

Clement: A strong export factoring program is a liquidity and risk mitigation tool that allows sellers to get paid at shipment on international sales. Sellers, referred to as exporters, can receive up to 90% of the invoice value in some cases, less a small discount at shipment of goods. The export factoring program Rosenthal provides can purchase invoices on a non-recourse basis, meaning the sellers don't bear the risk of buyer non-payment. The importer or buyer benefits from open account terms that allow for payment at a later date.

We’re seeing more and more companies coming to us looking for support on their sales programs overseas. A recent success story involved a U.S. manufacturer whose existing financing partners deemed foreign receivables as ineligible assets. Rosenthal’s six-figure export factoring program was used to free up working capital to support sales expansion into the Asia-Pacific region. In this example, Rosenthal converted once ineligible foreign accounts receivable into working capital and provided liquidity to both parties in the trading relationship.

Which industries are best suited for export financing/trade finance? Why?

Yang: Importers/exporters, distributers/wholesalers, light manufacturers/assemblers in most industries could all be good candidates. Our clients represent a wide range of industries, including food and beverage, health and beauty, fashion and accessories, furniture and furnishing, toys and consumer electronics, as well as various industrial products and supplies.

Clement: While export factoring is industry agnostic, it’s best suited for short-term sales on open account terms. There are several industries that have shown significant growth using export factoring since 2020, including chemicals, electronics, frozen food, lumber, packaging, pharmaceuticals and services.

What are some common challenges with export financing/trade finance and how can they be overcome?

Clement: Selling in the global marketplace poses many challenges, as various currencies, trade policies, languages and other barriers threaten to slow the pace of business. Although generally not available in developing countries, export factoring is a popular solution and a viable alternative to export credit insurance, long-term bank financing, expensive short-term bridge loans and other types of borrowing that create debt on the balance sheet.

How did the supply chain fair during the last quarter of Q4 and how is it shaping up in early 2023?

Yang: The supply chain challenges we saw and experienced in 2022 are not expected to improve significantly in 2023, so companies should prepare for more of the same. While slowdowns from the pandemic have eased a bit, inflation concerns are still looming, and labor and raw material shortages continue. And while port congestion has improved, there are still inefficiencies there that are driving up the cost of freight and shipping. All of these factors have created an immense amount of uncertainty among importers around the world and we don’t foresee that changing much, at least in the first half of this year.

Clement: I think Ying accurately summarized the existing supply chain environment when it comes to imports into the U.S. While the supply chain hasn’t entirely returned to normalcy, our clients actively exporting have reported an improvement on the U.S. outbound supply chain over the last two quarters and heading into 2023.

How have supply chain disruptions of the last year-plus affected the trade finance/export factoring sector?

Yang: We saw a build-up of inventory on our clients’ balance sheets last year as they placed greater amounts of purchases in anticipation of ongoing supply chain shortages and shipping delays. All the while, retailers are being conservative in their forecasts and placing the burden of carrying costs on our clients. There were also businesses that missed an entire season due to lack of inventory or availability of components. As the pandemic-related government funding dried up, we experienced an uptick in borrowing needs from clients to bridge the working capital gap. These challenges actually pushed Rosenthal to become even more creative and flexible in the ways we lend to clients and also reminded us to be more focused and diligent in managing those relationships.

Clement: Considering the global multi trillion-dollar trade deficit, the need for an efficient and/or standard trade finance system has been evident for some time now. We’ve seen a significant increase in trade finance platforms entering the market to streamline processes against further trade disruptions, but the SME market has been relatively slow to digitalize its standard processes.

Supply chain disruptions have certainly caused some slowness when it comes to importer or buyer repayments, which in turn, has made our risk department even more diligent when assessing credit risk.

How can trade finance/export factoring help businesses dealing with long wait times and other negative effects of supply chain disruption?

Yang: We noticed that companies that face longer lead times have tapped into PO finance for the first time, as they’re more cash constrained than ever. PO financing provides cash funding, credit enhancement and documentary letters of credit directly to the suppliers, which allows businesses to allocate their resources to other areas of operation. The enhanced liquidity from PO financing as a short-term solution can be a more attractive and less expensive option than raising permanent capital.

Clement: In one word, liquidity. Export factoring provides sellers with payment upon shipment, enabling the business to maintain its cash flow cycle as it would during normal times. Otherwise, the longer the goods are in transit, the longer it takes for the importers or buyers to pay, thus putting a strain on other areas of operation, such as accounts payable and payroll.

When do you expect the supply chain to return to some semblance of normalcy?

Yang: To me, normal is no longer a relevant word. The effects on the global and local supply chain landscape and the ways companies have adapted at the peak of the supply chain crisis with post-pandemic disruptions are constantly evolving at a more rapid pace than ever before. I expect, or rather optimistically hope, to see more technological innovations that would provide companies with meaningful tools to manage the unpredictable nature of the supply chain.

Clement: What is today’s definition of normalcy? Perhaps when we see an end to the war in Ukraine, lower fuel costs and interest rates.

What is your outlook for the trade finance/export financing sector for 2023?

Yang: Trade finance has traditionally thrived in a downturn market. And while there are some bright spots in certain growing industry segments, such as food and beverage, the anticipated growth also comes with additional challenges that are heightened by the impact from inflation, interest rate hikes, labor shortage and supply chain uncertainties. For growing companies like these, trade finance is a meaningful tool to fund their next big orders. At Rosenthal, Q4/22 was very busy and we expect this trend to continue in 2023.  

Clement: I’m going to address this question from a North America perspective. Q3 and Q4 were very busy with regards to export factoring inquiries. We’ve seen an uptick in activity from two different avenues: businesses that are trying to grow or find a competitive advantage by selling abroad and those businesses struggling to find export trade financing solutions via traditional banks. It’s also been our experience that more and more businesses are struggling to meet their banking covenants due to the impact that COVID, supply chain issues and labor shortages have had on their sales. It’s Rosenthal’s opinion that more businesses will continue to seek non-bank financing solutions and we expect a very active 2023.