Greasing the Supply Chain

An increasing number of businesses are using trade finance products not just as a risk-mitigation tool as they wait for payment from foreign customers, but also as collateral to obtain more funding from banks.

Cash-strapped companies still recovering from the recession may not be able to wait 40 days for payment, so they'll use a letter of credit to get a working capital loan from a bank, says Enrico Camerinelli, an Aite Group senior analyst based in Milan.

The role of trade finance products as a means of increasing liquidity has prompted more banks to integrate trade finance into their global transaction services, along with cash management, payments and foreign exchange products, Camerinelli says. "Now that liquidity is harder to come by and the economy is less predictable, letters of credit and other trade finance products play a bigger role and they are very much integrated in the other products and services to corporate clients."

Maureen Sullivan, the North American trade sales head for global trade and supply chain solutions at Bank of America Merrill Lynch, says many customers are grappling with inefficient processes around the management of payables and receivables, which can lead to cash getting trapped in their supply chain. Her group sees an opportunity to promote tools for optimizing cash management, whether it involves smoothing out the processing of payables, accelerating receivables or supporting working capital needs. "During the financial crisis, our clients learned the hard lesson of what happens to your supply chain if it lacks liquidity," Sullivan says. "We can help improve liquidity that leads to stability in their supply chain."