Trade-cycle financing refers to an
assortment of financing solutions targeted towards companies that import and/or export. Every company has a
unique sales cycle; each distinct phase
places different challenges on a company’s
finances.
“All companies have a trade cycle specific to their industry and company operations,” explains Caroline Brown, first vice
president of Comerica Bank. “The cycle
involves the purchase of raw materials, the
manufacture of goods, an inventory period,
the shipment of product, and, ultimately,
the collection of funds and receivables.”
Smart Business spoke with Brown about
trade-cycle financing, how a company can
benefit from this type of financing and
what types of payment mechanisms are
available.
What is trade-cycle financing?
Trade-cycle financing is a type of financing solution that is designed for importers
and exporters. It can help them in financing inventory, whether it be for domestic or
international purchases. This method of
financing allows banks to customize
financing over a certain period of time,
which can vary from company to company.
How can a company benefit from this type of
financing?
Primarily, a company can benefit from
increasing its working capital. Importers
and exporters can use funds from trade-cycle financing to support the purchase of
raw materials, inventory and manufacturing costs.
Trade-cycle financing can also cover
expenditures all the way up to the collection period. During this phase, there may
be a lot of cash outlays — with staffing,
materials and other costs, depending on
the complexity of the product — and no
funds coming in. Using trade-cycle financing to secure additional working capital
can be extremely beneficial for a company
under these circumstances.
What payment mechanisms are available?
Primarily, the payment options are cash
in advance, letters of credit, documentary
collection and open account. The decision
of which payment mechanism to use
depends on a number of different factors:
the negotiation between buyers and sellers; the relationships that have been established; potential collateral sources; and
how customized the product is. Another
consideration is the value of the product: A
company may be more willing to take a
risk on a relatively inexpensive product
versus one that is quite expensive. The
country involved with the transaction is
also important, as some countries have
specific commercial risk and others have
more political risk. Depending on all of
these different criteria, the terms of the
sale might vary.
What risks are involved with trade-cycle
financing, and how can these risks be mitigated?
The risks vary depending on if you’re an
importer or an exporter. For example, if
you’re an exporter who has manufactured a product, the safest way to sell is on a
cash-in-advance basis. In this case, you’re
receiving funds before the product is ever
shipped. However, the risk is you’re going
to limit your sales and growth opportunities. If you’re an importer, the safest term
would be open account sales because
you’re not required to pay for a product
until you have received it, inspected it, and,
oftentimes, even sold and collected on it.
What role does insurance play with trade-cycle financing?
Insurance is another way that companies
mitigate their risk. With foreign receivables,in addition to political risk, there is a
risk of nonpayment. Insurance can help
banks finance receivables for up to as
much as 180 days. Cargo insurance covers
the risk of your product being damaged or
lost. Insurance can also be used as a
financing tool and to handle in-transit
inventory where a product may be manufactured, housed or even drop shipped in
another country.
How can a company determine if it is qualified for trade-cycle financing?
The profile of a trade-cycle-finance customer is an established company with two
to three years of successful business operations. It should have a proven track
record and be able to show financial
strength, profitability and a positive net
worth. Also, it should have a predictable
and well-defined trade cycle because a
lender is lending on the specific period of
time that it takes to receive the order to the
time money is collected. Importers or
exporters looking for additional working
capital should contact a trade specialist to
help them find the right product.
CAROLINE BROWN is first vice president of Comerica Bank.
Reach her at (562) 590-2525 or [email protected].