The world of supply-chain finance has undergone some major changes in recent years, from the standpoint of risk management. The situation has become more critical with the deterioration of economies around the world, says Becker. Companies are facing uncertainties such areas as payment for shipments, control over materials and choosing the correct shipping terms. Often key documents are required before the seller can get paid.
Access to credit is another major issue. To the extent that banks are lending at all, the criteria for qualifying for loans today are far stricter than they used to be, Becker says. The situation is especially acute for exporters who can't access financing on small orders. Banks today prefer not to go through the required due diligence for relatively small borrowers. That leaves exporters struggling to obtain partial payment from overseas buyers. Their minimum goal is to recover their costs so that they don't lose money on the deal.
Becker believes that supply-chain finance will be "slow in coming back." Banks are looking carefully at all transactions, and the documentation requirements can be immense. "They want to make sure that there's a firm source of repayment before making the loan," he says.
Letters of credit, which used to be an extremely popular mechanism for securing payment, lost favor in recent years because they are an expensive instrument for buyers and sellers alike, says Becker. Open accounts have take their place in many instances. Recently, however, there has been a "little uptick" in the use of letters of credit, possibly because of the changing economic condition of the global economy.
Cash flow is essential to companies looking to expedite payment, Becker says. Companies are offering discounts to customers in exchange for earlier payment. "I counsel my clients that you should not be the buyer's bank," he says. "Keep the cash flow moving." Whether smaller suppliers are willing to accept the buyer's terms depends on a number of factors, including the creditworthiness of the countries involved.
