With globalization and increased trade flows, could available credit and capital to fuel global supply chains actually be declining? It almost sounds impossible. But financing needs have not kept up with booming global trade between countries, raising risk in the supply chain and creating situations that favor larger suppliers over smaller ones.
In his analysis, “On-Demand, Event Triggered Finance With Network Models – A Game Changer?,” David observes that, “international financing vehicles are declining, like the use of the letter of credit for both pre- and post-shipment finance. This increasingly leads to non-intermediated financing, where suppliers offer financing to their buyers in the form of open terms.”
Consider what happens as a result: “…a ‘2/10 Net 45’ payment term is an interest- free, 45-day loan from the supplier to the buyer with a 2% early payment discount offered if paid within 10 days.” In short, “traditional balance sheet lending still prevails for most businesses, and the innovation in the physical supply chain and in the ‘information supply chain’ (e.g., e-commerce tools) hasn’t yet meaningfully translated to the world of trade finance and the financial supply chain. Thus: financing all of this global trade hasn’t followed the same level of innovation!”
The need for new types of cross-border financing and capital could not be greater, especially as companies struggle to fill orders and expand into new markets. Could the solution be sitting on the balance sheets of large corporates? Of private funds? Or banks themselves? Actually, the answer is more complicated – and new types of technology are key to enabling event-triggered finance to smooth global capital flows in both the physical and financial global supply chain.
In addition to Spend Matters PRO research, David and Jason offer workshops, lectures and advisory services to corporations, banks, private funds, consultancies and technology providers that want to learn more about the trade financing ecosystem and its intersections with new technology products and platforms. Contact them directly to learn more: jbusch (at) spendmatters (dot) com or dgustin (at) tradefinancingmatters (dot) com.