Who Funds Trade Credit?

I attend a lot of Conferences, and while many talk about the next big thing around technology, or einvoicing, or efficient supply chains, a real discourse on trade credit between banks and corporates generally is lacking.  This to me is a missed opportunity, because credit, particularly for the non investment grade and non rated companies, is going through significant structural changes.

Corporations have two major assets on their balance sheet to finance, Receivables & Inventory.  A Non Investment Grade corporate really has a few options to finance these assets, Self-Fund, use bank credit or use some Third Party.

Here are some interesting facts about Credit Outstanding and Industry Interactions

  • Trade finance is a large, global and interconnected industry, encompassing nearly $8tn in notional credit outstanding.
  • Most of trade credit (~$7.5tn) is not intermediated directly and remains on corporate balance sheets (in the form of trade receivables).   Corporations have hoarded an increasing amount of cash to fund working capital. The pile reached $2.2 trillion at the end of last year, up from $1.5 trillion at the end of 2007, according to data from the Federal Reserve.    Global Finance, in their Sept 2013 edition, indicated the top 25 corporates had $700 billion in cash.
  • Banks are the main third party source of financing for corporate trade, through Import and Export Loans and intermediate roughly $500bn of trade credit.
  • Insurers are the second largest intermediary ($150bn), and offer several risk-related services to corporates, banks, and brokers.
  • The Rest, funded by an assortment of Factors, Forfait, Securitization, Trade specific funds, etc. make up less than $100bn.

So you can see why there is such a Gold Rush of solutions to find ways to help finance these Receivables, particularly for smaller companies.  Smaller companies selling to larger ones have less process cost, but generally use very expensive and limited capital to finance extended customer payment terms, creating cash and cash flow problems.  Game on!

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