The backbone of global trade
In light of the very exciting upcoming release of our trade finance solution, we thought we’d take some time to help MENA shippers, suppliers and buyers alike, and other ecosystem players better understand the financing landscape within the context of supply chain and trade. Before we dive into what trade or supply chain finance is, what the facilities and instruments look like, how they are intertwined and deeply ingrained in freight and what all of this means for MENA shippers, it’s important to first understand the scale and vitality of these two little-known financial services ecosystems. The supply chain financing market attained $1.31 trillion in transaction value in 2020 and continues to grow at a ~17% CAGR (compound annual growth rate). The WTO (World Trade Organization) estimates that “some 80% to 90% of world trade relies on trade finance”, emphasizing just how essential the financing ecosystem is to supply chain and cross-border trade as a whole. With this in mind, let’s take a look at what this means for you as a shipper moving freight into and out of the MENA. Considering this is a quite complex topic to demystify, we’re going to break it down for you in the simplest yet most informative manner possible. Let’s kick things off with a primer… stay tuned for the BIG announcement and future companion pieces on everything you need to know about supply chain finance, how it can bolster MENA freight and benefit shippers.
The brief primer on trade finance 📩
- Trade finance (TF) is an umbrella term that represents the financial instruments and tools used to facilitate international trade and commerce; this includes lines of credit, bank guarantees, loans, factoring, shipping insurance and more
- Supply chain finance (SCF) is a subset of trade finance that refers to alternative modes of financing aimed at lowering the cost of short-term capital for buyers and sellers in a supply chain-linked transaction
- Most common SCF solutions
- Invoice factoring - a seller of goods offloads their receivables to a financial institution at a marginal discount, allowing the seller to offer credit terms to their customers. For example, a retail wholesaler in the UAE could continue to offer credit terms to retailers by selling their invoices to a bank. The bank pays for the wholesaler’s invoices up front at a discount and goes on to collect the pending payments from the retailers once due while pocketing the difference.
- Supplier financing (i.e. reverse factoring) - a buyer takes advantage of their credit rating to extend early payments to their suppliers at a nominal or favorable rate. For example, a renowned international grocery chain in the UAE is looking to purchase a large volume of produce from a small produce grower in Italy but doesn’t want to pay up front. This small business can’t afford to provide any sort of payment terms and doesn’t have the track record to finance their receivables. Here, the grocery company can leverage their credit rating to have a bank pay the produce grower in advance, in essence paying off the grocery company's payables. The bank then collects the full amount due from the grocery chain upon maturity, incurring a small surcharge along the way.
- Inventory financing - similar financial instrument to supplier financing and is sometimes used interchangeably. It often serves the same purpose as the former, the only key difference being that the emphasis is placed on the inventory itself rather than the supplier. This type of financing is more commonly leveraged when the buyer does not have the clout to extend their own credit rating to extend financing to their suppliers in the traditional format. Instead, this product uses alternative credit risk assessment tools and has paved the way for more creative, data analytics and tech-driven solutions in supply chain financing space.
- There are a number of other more complex SCF instruments whereby a buyer can partner with a financier and use their own liquidity to generate returns by extending credit to suppliers… think overcoming low or negative interest rates in this economy
- SCF frees up liquidity and expands working capital for beneficiaries to reallocate funds into their business
- MENA buyers or importers that struggle to extend payment terms to their buyers, often because of a lack of cash on hand, can now leverage invoice factoring to do just that without having to worry about collections
- MENA buyers can also help their suppliers or manufacturers abroad get access to more cost effective financing that guarantees payments are received immediately with reverse factoring
- SCF solutions, supplier and inventory financing in particular, are structured in a way that strengthen the supplier-buyer relationship, by nudging and incentivizing the beneficiary to extend favorable credit terms to their trade partners
- PalletPal is launching the alpha version of our Trade Finance solution in June 2022, with the release of two SCF facilities first - invoice factoring and supplier financing
- Our goal is to help MENA shippers, buyers and suppliers alike, get the financial support they need to keep fueling our vibrant and ever-changing trade economy 🚀
Stay tuned for more on supply chain finance with PalletPal
Our bread and butter has always been supporting shippers in MENA to move cross-border freight seamlessly. Bigger picture… we are your partners in managing your supply chain as efficiently as possible by giving you the tech, tools, plethora of services and a continuously expanding network of partners. Trade finance is only the natural next step for us to start realizing that bigger picture. Not only will we support you in shipping goods from say China to the UAE across the ocean or from Italy and Germany to KSA across the skies, but also in providing you with fingertip access to the financial means that empower your suppliers and delight your customers. Plenty more insights to come on supply chain finance over the coming few months. Stay tuned for the big release while we fine tune the last few pieces of our exciting new product.