Financing Chinese Suppliers – Has its Time Come?

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My colleague Jason Busch has written recently about if you should proactively Finance Chinese Suppliers  given the Chinese devaluation and increased supplier performance risk due to the lack of capital availability to non-state owned companies.  The financing issue Jason is focusing on is the availability of pre-shipment and post-shipment credit and liquidity for the supplier as the Chinese economic engine slows and the yuan is devalued to support exports.

If you a reseller or distributor without leverage, Chinese factories will want you to pay for the goods either in advance of production (or a deposit) or via letter of credit. This is as your own customers insist on payment terms of 45, 60, or even longer.

What do you do? How can you support your Chinese suppliers while managing the requirements from your own customer base?

As Jason alluded to, some companies will look for purchase order finance, but that is a hard nut to crack. See Purchase Order Finance, the Hard Nut to Crack

There is another alternative. If you are a non investment grade importer that has a long term trading relationship with suppliers in China and few issues with performance, quality or delivery risk, there are financial techniques that can help your suppliers.  Yet you would not like to shorten your open account post shipment credit terms or you would like to extend your non letter of credit terms, but don’t necessarily have the credit availability or leverage to do so.  And you want to avoid as much as possible preshipment deposits.

Capital Business Credit, a national commercial finance company that serves small to middle market clients, has developed a product they call Supplier Early Payment or SEP, which allows suppliers in China to receive customer credit protection and immediate cash for receivables upon shipment and importers can retain or receive extended open account terms and payment flexibility.  CBC Trade Finance will purchase from exporters, without recourse, for up to 100%, less discounts, accounts receivable due from small to medium importers.

For exporters in China that have material concentration risk with one buyer, this enables a way to receive early payment.  Typically programs will work with one major buyer who has multiple vendors in Asia.  The solution provides another layer of assurance to China-based manufacturers around the creditworthiness of their customer.  Many factories and suppliers in China know very little about the true credit worthiness of their U.S. customers and in today’s high risk and fast changing retail world, having immediate access on a non recourse funding can be attractive and shorten the order to cash cycle. On the other hand, given the current situation, buyers should consider the CBC SEP product which implements payables financing and invoice discounting.

How CBC controls Risk

The importer must be willing to confirm its obligation to pay for the goods without offset, counterclaim or deduction based upon prior supplier performance.  CBC Trade Finance can receive the title documents from the exporter, and can release to the importer against receipt of a trade acceptance or no offset letter. CBC Trade Finance will than immediately discount the trade acceptance for up to 100% minus discounts and pay the exporter or its supplier.

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