Trade cycle financing, which refers to a
variety of financing solutions, provides importers and exporters with a number of beneficial features. It allows for
financing inventory both domestically and
internationally. It allows the full sales cycle
to be financed at one time, or it can be separated by different stages, such as manufacturing inventory and collections. Credit-worthy clients can receive financing which
may be used for domestic and international transactions.
“Trade cycle financing is managing cash
flow for a given period of time, and it can
be related to an importer or an exporter,”
explains Tim Murphy, first vice president
for Comerica Bank. “It allows a bank to
assist customers in managing the purchase
and sale of their inventories over a defined
period of time.”
Smart Business spoke with Murphy
about trade cycle financing, what it is
geared toward and how a company can
benefit from this type of financing.
Who is trade cycle financing geared toward?
It is geared mainly toward importers and
exporters, who traditionally have a fairly
well-defined period in terms of the financing they need.
We measure the full trade cycle, which is
from inventory purchase to manufacturing
to collection time. Once we’ve understood
the cycle and understand the client needs,
we finance the cycle on an ongoing basis.
Trade cycle financing can also work well
for distributors, both domestically and
internationally. This method of financing is
not geared toward a new company that
needs to build inventory.
How can a company benefit from this type of
financing?
It is a cost-efficient method of financing.
Customers only borrow what they need for
a given purchase or for a given supplier.
This keeps their landed costs lower. It also
allows them to get a better handle on their
international banking charges.
Most companies that use trade cycle
financing do not have the goods very long
in their possession; some just drop ship the
goods and never even touch them.
What payment mechanisms are available?
A number of different financing methods
can be used: letters of credit, open
account, cash in advance and purchasing
or selling on collections. All of these tools
can be adapted into trade cycle finance.
For example, if you sell on a collection
basis, we may be able to advance or discount that collection. Or if you’re buying
on open account, we may be able to refinance that purchase from overseas.
What role does insurance play with trade
cycle financing?
When you’re talking about trade cycle
financing, there are really two types of
insurance. The first is cargo insurance,
which covers the merchandise from warehouse to warehouse. This protects both the
bank that may be lending on the goods as
well as the buyers and the sellers.
The second type of insurance is a policy
for commercial and political risk. Some
policies allow financial institutions to
assist their clients in the purchasing of finished goods or raw materials and shipping
to or from their overseas locations. This
can be a big advantage because they are
able to finance almost all of the costs. Let’s
say a client needs to buy raw materials for
his factory in Mexico. He will submit all of
his purchase orders and the bank will
finance those purchase orders up to 180
days. This allows him to take the raw material to his plant in Mexico, manufacture the
product, sell the product, get paid for the
product and then repay the bank. The
advantage to the client is that he’s only
made one advance and his reporting is
minimized.
How can a company determine if it is qualified for trade cycle financing?
If a company is truly an importer,
exporter or distributor, then it probably
qualifies. Most banks would like to have at
least three years’ worth of financial statements for a new client. What we’re looking
for is a defined trade cycle where we can
determine when the client needs to buy,
who they’re selling to, and how long the
period is. Trade cycle financing is not for
the purpose of building inventory.
TIM MURPHY is first vice president for Comerica Bank. Reach
him at (562) 463-6530 or [email protected].