Supply Chain Finance
Your company is part of multiple supply chains, networks extending all the way back to the raw materials that go into the products you buy and all the way forward to the ultimate end-users of the products you sell.
Arranging international trade finance begins with an understanding of your position in the supply chain relative to your customers and suppliers.
U.S. companies may face working capital challenges when importing goods from suppliers in other countries. Not so much if the suppliers offer payment terms long enough for the goods to be shipped, delivered, processed, and sold by the U.S. company. But many foreign suppliers don’t extend payment terms that long and some require cash upon shipment or even prior to shipment.
Even importers with bank credit lines may not be able to borrow under these kinds of scenarios because U.S. financial institutions typically won’t lend against inventory that’s not located in the USA . . . which isn’t the case for goods purchased from abroad until they arrive here 30 to 60 days later.
Meridian may be able to arrange supply chain finance for creditworthy U.S. companies’ purchases from overseas suppliers. Creditworthiness is assessed based on audited (or equivalent) financial statements, industry, time in business, prior borrowing/repayment performance, and other criteria.
Supply chain finance for U.S. importers comes in two forms: supplier credit or buyer credit.
Supplier credit is essentially non-recourse factoring of the overseas supplier’s receivables. Some overseas suppliers may be prepared to offer U.S. importers open-account payment terms if they know they’ll be able to sell/discount their accounts receivable without recourse immediately following shipment (i.e., presentation of their invoice and bill of lading).
Buyer credit is an unsecured trade loan. The overseas supplier’s invoice gets paid at whatever time (before, upon, or after shipment) is instructed by the U.S. importer, who then has up to 120 days to repay the loan. Buyer credit is considerably more expensive than supplier credit.
The minimum transaction size for either of these kinds of financing is $250K. There’s no practical maximum deal size, other than as limited by the U.S. importer’s creditworthiness. Payment terms are typically not longer than 120 days. The transaction currency must be USD.
Financing international trade before you ship goods to your customer—whether it’s called purchase order (PO) financing, work-in-process (WIP) financing, supply chain finance, or something else—requires persuading your supplier(s) to extend you payment terms and/or convincing a lender of your company’s ability to repay a loan.
For creditworthy exporters, pre-shipment financing is available from diverse banks and asset-based lenders—either transaction-by-transaction or as a revolving loan—based on the merits of the exporter’s company alone or via supply chain financing or with an export working capital guarantee from Ex-Im Bank, SBA, or other federal/state agencies.
Ex-Im Bank and SBA guarantees, as well as other kinds of pre-export or supply chain financing, are available when a foreign buyer will be paying via a letter of credit. Or on open-account credit terms IF the exporter or the lender has an export credit insurance policy to protect the invoice against non-payment risks once the order has shipped.
Meridian specializes in brokering export credit insurance. We also arrange post-shipment trade finance for exporters and their foreign customers. We don’t offer pre-export financing but we’re very familiar with all the programs. If you’re in need of working capital financing: we can preview your company’s eligibility, help you structure your transactions optimally for supply chain finance, and connect you with the best banks or non-bank lenders for your requirements.
Once your company has exported the goods, arranging post-shipment financing relies mostly (although not entirely) upon the creditworthiness of your foreign customer(s); i.e., your accounts receivable . . . which will be attractive to your bank/lender only if they’re covered with export credit insurance.
With export credit insurance, financing your foreign receivables may be simpler than arranging other kinds of working capital financing . . . even under government programs. If this is the case for your company, you’ll want to structure the timeline of your export transactions to emphasize receivable financing over inventory or transportation financing.
For example, rather than invoicing a customer with 30-day payment terms from the date the goods arrive in their country, if the transport time is 60 days then you may want to consider invoicing them with 90-day payment terms from the shipment (bill of lading) date. Same timeline, but with a shift from transportation financing to A/R financing.
Meridian may be able to help you (re)structure the way your company exports in order to reduce risk and enhance your ability to arrange competitive supply chain financing. Our staff has experience not only in supply chain finance and credit insurance but also exporting, importing, manufacturing, logistics, and international distribution.
Beyond protecting post-shipment accounts receivable against non-payment, export credit insurance can provide risk mitigation for exporters and lenders prior to shipment.
Whether or not an export sales contract provides for insurable post-shipment payment terms, a transaction can be covered against pre-shipment contract frustration due to (a) the bankruptcy or insolvency of a buyer or (b) order cancellation caused by government actions or political events in the buyer’s country.
Some exporters invoice their foreign customers on open-account terms for pre-shipment milestone or progress payments, often with a due date following delivery. Such receivables can be insured as long as the foreign buyer acknowledges them as stand-alone debt obligations, not tied to other contract performance by the exporter.
If your company is not exporting but you’re selling to US resellers who export your products, you still may view these supply chain transactions as international sales because the end-users of your products are in other countries and because getting paid by your US customers may depend on their getting paid by their foreign customers. To cover your domestic sales to export resellers, your company can obtain a domestic credit insurance policy or require your export resellers to get their own export credit insurance.
Some large exporters with many US suppliers participate in supply chain finance programs with Ex-Im Bank, SBA, or other government agencies. Since the products these exporters purchase domestically will ultimately be exported, government agencies may be prepared to extend the benefits of their exporting programs to non-exporting domestic suppliers. Even if your company is not a direct exporter, under these programs you may be able to obtain trade credit insurance, guarantees, or working capital financing for your pre-export sales to these domestic customers.
If your foreign customers—whether manufacturers or distributors—are not stocking inventory of your products, then your company may be making uneconomical just-in-time production runs, stocking too much inventory just in case you receive an export order, or losing business to competitors whose products are stocked in-country.
When you’re trying to popularize your products or your company’s brand in foreign markets, you need to consider the credit requirements of all the links in the supply chain: importers, wholesalers, retailers, end-users. You want your products to be displayed on store shelves and to be locally available when consumers there are ready to buy them.
The way to negotiate in-country supply chains for your products is by offering competitive payment terms to your foreign customers. Credit makes it more economical for them to order larger quantities . . . enabling you to get better pricing from your suppliers, make longer manufacturing runs, and transfer inventory carrying costs overseas.
Larger credit limits and longer payment terms engender more risks for your company if a foreign customer were to default, but you can protect your foreign receivables against nonpayment with an export credit insurance policy.
Exporters and their foreign customers concoct all kinds of deals. Meridian sometimes receives inquiries for supply chain finance with parameters we’ve neither seen before nor even could have imagined, yet we’ve gone on to arrange trade credit for the transactions.
Call or e-mail us with the highlights of your prospective export sales and we’ll respond quickly with proposals or suggestions of how to restructure them to make supply chain finance more feasible. If Meridian can’t do the job we may know who can, in which case we’ll be pleased to hook you up with other resources.