I feel sorry for the small importer. In tough economic times, with consumer demand in the pits and banks refusing to extend credit, it struggles to survive. Then, when conditions start to improve, it gets shouldered aside by larger companies, who snap up all the available capital and make it hard to secure the cash needed to get production rolling again. It's a lose-lose situation.
The Great Recession of 2008 presented importers of all sizes with their biggest challenge in decades. Thanks to a combination of weak consumer spending, a moribund housing market and the machinations of Wall Street's financial wizards, credit dried up completely for a time. But the lack of trade financing was especially devastating for smaller entities, who had few cash reserves or alternatives to traditional sources of capital.
In recent months, things have begun loosening up, and commercial banks appear to be lending again. But if you're not a blue-chip company or Fortune 500 powerhouse, prepare to stand in line.
"I still think banks are fairly guarded in terms of the smaller customer," says Chris Vukas, vice president of marketing and technology with UPS Capital, the financial services arm of UPS. "For middle enterprises and global multinationals, there's certainly liquidity out there." As markets bounce back, he adds, "the smaller importer is going to be really squeezed for cash flow."
Some banks might be losing interest in helping the small importer at all. In the wake of the latest credit crunch, where the liabilities of financial institutions far outstripped assets, new rules for solvency could require higher ratios of capital to lending. Banks might decide that the relatively modest profits derived from servicing smaller traders aren't worth the trouble.
As banks raise the bar for trade financing, importers must ensure that they're working with the most reliable suppliers. They'll need to consider everything from the vendor's financial condition to the impact of natural disasters on the flow of raw materials and components. Vukas says some buyers are beginning to scrutinize potential suppliers in an eBay-like environment, a strategy that could further squeeze small companies with already-thin margins.
To a certain extent, every supply chain is a series of power struggles. Sometimes the supplier is big enough to dictate terms, erecting yet another obstacle for the small importer. Amerinada Distributors, LLC is a U.S.-based wholesaler of supplies and accessories for hydroponics. It sources 60 percent of its inventory from one Chinese supplier, which demands payment at the time of order fulfillment. But Amerinada doesn't get paid by the retailer until it delivers the order, so its working capital is tied up during the weeks-long ocean voyage across the Pacific.
Of course, having a solid team of suppliers can help a company in convincing a bank to plug the cash-flow gap. But not every importer can deliver that level of assurance. "Traditional lenders can't see that earlier side of the supply chain," says Vukas.
One option that's gaining popularity is providing collateral in the form of product in transit. The setup only works, however, if an importer knows precisely where its goods are, and when they'll arrive. Track-and-trace technology, offering real-time status updates, has made that level of detail possible.
Enter UPS Capital, which has been using in-transit inventory as the basis for trade financing for just over a year. Vukas says the product was slow to catch on in the U.S. because many businesses were held back by the recession. Now, with consumer demand on the upswing, inventories begging for replenishment and cash-conversion cycles getting stretched, the idea is beginning to gain traction. Amerinada, he says, was an early convert. The company's revenues more than doubled in 2010.
To obtain that kind of financing from UPS Capital, an importer must use the parent company's transportation services from origin to destination. Acting as a non-vessel-operating common carrier, UPS creates the documentation, negotiates the bill of lading, ensures that the containers are loaded on board the ship or plane in Asia, and oversees their progress into the U.S. via the vendor's designated customs broker and ground network. In return for that commitment by the importer, UPS Capital provides financing while the goods are in transit.
For the moment, retail accounts for most of UPS Capital's business in that area, although high-tech and healthcare companies are showing interest as well, says Vukas. In its early stages, the program has focused on Chinese suppliers, with ocean freight accounting for about 95 percent of all activity.
Other creative solutions are popping up to help smaller traders get access to trade financing as their markets expand. One possibility is a receivables exchange, allowing institutional investors to bid on supplier invoices on an auction site. In addition, buyers and suppliers are exploring innovative partnerships for minimizing their exposure to excess or obsolete inventory.
Vukas says providers are looking to assemble "turnkey" services for trade finance. "We can see one day where there will be a constructed application for global commerce," he says. "Where it's really going to start is with that smaller customer."
Vukas believes cloud computing can go a long way toward aiding businesses that don't want to bear the burden of supporting multiple supply-chain applications behind the firewall. He predicts that a complete offering will be in place within three to five years. "The pieces are there," he says. "It's just a matter of who can connect it all together."
- Robert J. Bowman, SupplyChainBrain
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