Logistics Success: Take it to the Bank
Global economics plus smart financing equals huge opportunities. But overseas trade presents many logistics risks that can cause lending institutions to hesitate in financing all the working capital needs of their clients. The success of a transaction depends on a well-oiled logistics process, with the job finished only when the goods satisfactorily reach the customer’s warehouse or selling floor.
A traditional lender may be uncomfortable with its ability to understand the intricacies of an international trade transaction and its inability to control the collateral until repayment. After all, most bankers want to fund deals involving a minimum of risk, and like to think they deal solely in documents, not goods.
In an increasingly competitive global trading environment, however, bankers need to think more like logisticians and traders than traditional bankers. For a small to mid-size importer to best position itself with such a banker, it must grasp the relationship between logistics and financial success. What can be done to achieve this positioning? First, the importer must convince its lender that the two parties share a primary goal: the totally satisfactory delivery of goods.
Also important, a company’s senior management must thoroughly understand the logistics mix, even if this means observing containers unloading at a faraway port, or showing up at a customer’s loading dock at 6 a.m. Managers who do so are more likely to understand logistics realities, and gain the trust of their banker.
Periodic first-hand monitoring implies that company executives understand the relationship between customs, freight forwarding, and regulatory requirements, a deal’s costs, and a bank’s financing criteria. Company executives are also well advised to speak knowledgeably about potential supply chain problems, different transport modes and their effect on delivery outcomes, and the impact of trade regulations on the balance sheet and operating statement.
If the importer has close ties with a first-rate logistics provider, it should provide detailed information about that provider to the banker. If not, it should be willing to be guided by the banker, who may have a logistics partner through a wholly owned subsidiary, or strategic alliance. Open lines of communication between lender and importer regarding a logistics services supplier will lead to faster, more economic, and more efficient solutions to unforeseen events.
When a banker knows that the client understands how logistics affects a trade transaction’s success, and the client is dealing with an equally trade-savvy financier, that banker is more likely to create a flexible financing solution. Such a trade finance package should provide contingencies and safeguards, especially in situations regarding unconventional collateral, an untested supplier, a new customer, or new technologies. The banker will strive to mitigate risk, even improvising in mid-transaction to get the deal done.
While it’s important for the importer to demonstrate logistics competence to its banker, the banker must also understand the promises and pitfalls of logistics. How does an importer know if its banker is knowledgeable about logistics? The importer might ask the banker to explain the key risks involved in an international transaction and how to mitigate those risks. If this stumps the lender, the importer might consider looking elsewhere for financing!
In terms of appropriate financing for a small to mid-size importer, a particularly good match may be purchase order financing because the lender maintains physical control of the goods (the underlying collateral). The banker evaluates the incremental sales a company could undertake if additional credit were available and accepts confirmed purchase orders and/or customer letters of credit as additional collateral. The banker gains the confidence to lend against these off-balance-sheet assets by looking at credit requirements in terms of performance risk rather than balance sheet analysis. The banker works with the client to fully understand all of the transaction’s logistical and documentary requirements, in order to structure a financing solution.
When both importer and banker understand the critical role logistics plays in trade success, the need to evaluate risks and put mitigants in place to minimize them, and that logistics is a banking function, then the potential for continuous, customized financing is greater. The banker may be more willing to offer flexible and/or non-traditional financing, and the importer will have the capital available to finance transactions.
Together, their partnership will lead to a series of global business success stories.