As domestic and international trade continue to grow, companies are starting to consider the benefits of alternative sources of trade financing, according to David Hu, Managing Partner, IIG Trade Finance LLC.

"The cost of capital for banks, the traditional providers of trade finance, has increased tremendously. They also have other issues, such as the setting of LIBOR, which is being questioned right now. With the increasingly tighter capital requirements of Basel III, banks will have to tighten the profile of their borrowers. Thus, in order to make a decent return on their equity, they will have to increase their margins. Many companies, especially those who have had their operating margins squeezed in recent years, will not be able to pay the higher spreads," explained Hu, a speaker at the GFMI - Trade, Commodity and Supply Chain Finance: Liquidity, Funding and Risk Conference, taking place in New York City, June 10-11, 2013.

Hu said: "Although we are in a low interest rate environment, companies need to be realistic about the new real cost of borrowing, as opposed to what nominal interest rates seem to indicate. This is why alternative sources of finance may become more attractive."

Working capital optimization requires the joint effort of the provider of financing and the borrower, Hu advised. "The borrower must be transparent in how it operates, the flow of goods and its supply chain, and be willing to provide all of the information the financier needs to analyze the risks involved. That is the approach of IIG, which is more than just checking the credit risk of the company. There may be other transactional risks that require tailor-made solutions. Only a true partnership between borrower and financier will lead to the optimal structure of the transaction."

In the future, the vast majority of trade finance will still be provided by banks, Hu says, but there will be additional alternative providers, such as IIG, especially in the industrialized world. "There is going to be more factoring and more asset based lending sources that may come from non-banks. Insurance companies are starting to look at investing in qualifying receivables, which is a slightly different version of factoring, while many banks are also starting asset based lending."

Hu concluded: "We expect further growth of trade between emerging market economies, which will bring about additional financing needs. Whether banks or alternative sources will be able to provide it, I am not sure. The crisis has been so damaging that the return to "normality" will take some time."

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GFMI is a marcus evans company. The Trade, Commodity and Supply Chain Finance: Liquidity, Funding and Risk Conference will take place in New York City, June 10-11, 2013. For more information, please visit the event website.