Geopolitical and macro-economic uncertainty, highlighted by Brexit and the Italian budget crisis in Europe, and the simmering trade war between the U.S. and China globally, has major implications for global companies. Sudden changes in tariff barriers, trade rules and the economic outlook have the potential to disrupt supply chains, considerably increase costs and significantly heighten risks for corporates.
This backdrop creates new business challenges for corporates. Trade finance has always been a crucial risk mitigation tool for companies. In the past, its main focus was counterparty risk – essentially the risk that trade partners could go out of business or fail to keep their side of a deal. Now trade finance can be leveraged in much more sophisticated ways to help mitigate geopolitical risks and help future-proof companies’ operations and treasury.
Managing unknown outcomes
No one can predict with any certainty the outcome and repercussions of geopolitical and macro-economic challenges such as the U.S. and China ‘trade war’ or Brexit. Determining the impact of longer-term challenges such as climate change, or largescale cyber-attacks, is even more difficult. These uncertainties should prompt corporate treasurers to focus on building optionality into everything they do in order to increase the flexibility of their treasury and operating model.
The need to respond to a variety of risks must be considered across all aspects of both treasury and business operations. At a basic level, some treasurers may want to duplicate account structures in another country in order to provide a certain level of assurance that business can continue should there be a major disruption. Many companies are also building up a working capital buffer for similar reasons.
Within the supply chain, companies need to reconsider their sourcing locations and how they move physical goods across the organization, from manufacturing to sales. The potential imposition of customs barriers could affect the supply chain at multiple points. To gain flexibility, corporates need to reassess their supplier base and avoid overconcentration. In some instances, there may be a need to shorten supply chains by re-shoring or regionalizing the supplier base.
In order to safeguard supply chains – and ensure the company can function in a variety of challenging circumstances – it may also be appropriate to seek ways to strengthen supplier relationships. Corporates are also considering the impact of heightened uncertainty in terms of increased FX volatility. Fortunately, a wide variety of solutions exist to help corporates manage these and many other challenges.
Strengthening the supply chain for tomorrow
One of the most important trade finance tools in today’s volatile environment is supply chain finance (SCF). For corporates concerned about access to supplies, supply chain finance strategies can help enable them to offer early payment or attractively priced finance to suppliers in order to gain preferred buyer status and guaranteed supplies. This may become even more valuable should small to medium-enterprise suppliers face increased difficulty in accessing liquidity as they did during the financial crisis.
At the same time, corporates face pressure to demonstrate to shareholders that they themselves have sufficient liquidity to cushion them in the event of disruption. They may also need to stockpile inventory to ensure operational continuity. All this can be done without straining working capital. Working capital finance can be utilized to help meet both the needs of suppliers and enable buyers to extend payment terms, increase days payable outstanding and enhance capital efficiency.
“Corporates face pressure to demonstrate to shareholders that they themselves have sufficient liquidity to cushion them in the event of disruption”
Supply chain finance also has a role to play in addressing other emerging challenges and opportunities. For example, sustainability of supply chains has climbed the agenda for many corporates as consumer tastes evolve and investors increasingly recognize that sustainable companies outperform. A food manufacturer, for instance, can use SCF to incentivize its farm suppliers to adopt sustainable practices and improve their resilience, while strengthening its own supply chain.
Meanwhile, the impact of new entrants across many industries – often driven by new technology or business models – is prompting companies to try to reduce costs, accelerate order fulfilment and improve performance. This puts pressure on suppliers, which increasingly co-locate with manufacturers to facilitate 24-hour service level agreements and rapid supply. Working capital finance can help suppliers manage the incremental costs associated with these changes.
Enabling growth in uncertain trade environments
With the growth in provision of goods ‘as a service’, increasingly customers want to pay on long terms or in installments. Companies have little choice but to accommodate such requests given increasing competition, which is impacting a wide range of business sectors and prompting a battle for sales growth. Fortunately, just as on the payables side, powerful solutions are available to help corporates manage these challenges.
Sales and receivables finance enables companies to offer deferred terms to customers in order to incentivize sales growth. This can allow corporates to extend terms without impacting working capital. These solutions not only provide direct risk mitigation, but also can potentially offer a way to reduce days sales outstanding, improve overall efficiency and enhance competitiveness.
Sales and receivables finance can also play an important role in mitigating FX exposure. Longer payment terms necessarily expose companies to FX volatility, which is increasing as a result of geopolitical uncertainty. Trade finance tools can eliminate this FX risk by ensuring corporates receive payment immediately rather than on the deferred terms offered to buyers.
“Trade finance tools can eliminate this FX risk by ensuring corporates receive payment immediately”
Other trade finance tools that may be valuable in the current environment include efficient sources of liquidity such as electronic trade loans. Developments such as U.S. tax reform have prompted many U.S.-parented companies with subsidiaries around the world to repatriate funds and transfer debt from parent to subsidiary. In some cases, this has left subsidiaries short of liquidity. Trade loans, with a simple digital drawdown option can be a cost-effective way to ensure companies have swift and easy access to the liquidity they need to weather geopolitical or macro-economic upheaval, and this further bolsters corporate flexibility.
Mitigating risk with the right partner
While the future is uncertain, corporates can access a wide range of tools to improve their preparedness and give them the operational and treasury flexibility they need to succeed in an evolving global landscape. To achieve their goals, corporates need to ensure they work with a bank that not only has cutting-edge solutions that enable them to increase their optionality, but also offers a global network that allows them to reach suppliers and buyers around the world.
During this time of rapid change, information and expertise about global trade has never been more important. Corporates cannot avoid the changes affecting the global economy such as increased tariffs. However, by working with the right bank they can become more nimble and flexible in order to take advantage of opportunities where they arise and mitigate risk as much as possible.
About the authors:
Peter Cunningham is EMEA Head of Healthcare and Consumer Sector Sales, Treasury and Trade Solutions, Citi and Natasha Condon is Head of Trade Sales Europe, Treasury and Trade Solutions, Citi.