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How Small Business Should Think About Financing in 2019

How Small Business Should Think About Financing in 2019

It’s no secret that over half of small businesses close their doors within the first five years. One of the critical problems that often occur has little to do with the innovation, ingenuity, or work ethic of the small business owners themselves, but rather the lack of access to sufficient capital to cover the ebbs and flows of their operation and its associated costs. 

Scaling any idea or enterprise, to me, is less often about “entrepreneurship” —and other catchy terms we can print on a business card— and more about meeting the demands of others, like payroll and customer expectations. Simply put: small business owners need capital resources— they need cash. 

Historically, small businesses have had limited options to access capital: savings, friends and family, credit cards, traditional bank loans, or the occasional SBA loan. Enter the financial crisis of 2008-2009, which ushered in a new regulatory environment that contracted these historic capital resources, thereby creating the market-driven need and demand for non-traditional banking options.

Consequently, we find ourselves operating in a new era, one in which enterprising nonbank funders have brought novel and different capital products to the small business market. This has been largely accomplished through an ambitious mix of fintech and financial innovation. These previously unavailable financing options give small businesses more resources to consider than ever before. Now their next step is to explore them and consider how their small business might decide on the best option for their specific needs. 

As we contemplate these innovations, here’s a quick list of some of the best financing options available to small businesses in 2019:

Business Term Loans: Best for businesses looking for working capital, equipment purchases, or to purchase inventory or other fixed assets. For short-term loans, it can often be matched to a specific project and repaid to coincide with the completion of that project in 6 to 12 months. For longer-term loans, the repayment can be stretched out to 3 to 10 years, but these often require higher levels of collateral coverage or a personal guaranty by the business owner. 

Pros: Great product for larger one-time investments with targeted cash loans

bflow that payments can be matched. 

Cons: Larger dollar amounts and a longer payback term will require increased time, energy (think: bank meetings and interviews), and documentation. 

Equipment Financing: Best for one-off purchases like restaurant equipment and machinery. 

Pros: no upfront spend; if the business owner has impaired credit the fact an asset is involved as collateral can make it easier vs. purchasing the equipment; and tax-deductible.

Cons: Overall cost is usually more expensive in the long-run; cost inclusive of fees if the lease is terminated early can be substantial; and must take into account all terms and conditions that can be complicated (who handles and addresses a break-down in the equipment? etc).

Small Business Administration (SBA) Loan: Best for business owners who need capital for a variety of longer-term business expenses. It is government guaranteed so the process can be daunting and is processed through a bank that has an SBA loan program. 

Pros: Cost and longer-term repayment; great product for owner-occupied real estate.  

Cons: Requirements are strict; process is time-consuming (60 to 180 days); high upfront fees; and requires strong personal credit scores.


Business Line of Credit (“LoC”): Best for businesses with more volatile sales and cash flow. Flexibility to drawdown and repay based on the needs of your business.  Often secured by accounts receivable and inventory. Some LoC’s offered by FinTech operators do not require business collateral but do require a personal guaranty.  

Pros: Can access quickly (assuming facility is in place) to solve urgent issues or expenses; and great for managing working capital needs and the business’ short-term cash flow needs.  

Cons: Reporting can be much more intensive vs. other products available; upfront and ongoing fees can be expensive, especially if the LOC is rarely drawn down.


Revenue-Based Financing: This is a financing option where the repayment schedule is tied to the future revenue of the business. The genesis of the product is that the funder operates as more of a partner and is taking some level of “equity-risk”. If the revenue decreases or the business fails, the repayment is either stretched out or in the case the business fails the funder has no recourse. Small businesses can utilize this product for project financing, working capital, growth investments, or short-term needs. 

Pros: Quick access; repayment risk mirrors the revenue; no business or personal recourse except in the case of fraud.  

Cons: Products are generally 12 months or less; more expensive given level of risk with limited recourse; reporting can be intensive as changes to payment schedules requires bank and financial verification.

Invoice Factoring: The business can turn its unpaid invoices into immediate cash. The invoice factoring company collects directly from the customers and distributes capital to the business, net of its fee. 

Pros: good for managing cash flow; typically a short-term financing product (30 to 90 days).  

Cons: cost can be expensive, especially if repaid much quicker than anticipated; can be disruptive notifying customers to change their payment instructions to the factoring company; requires technology integration or higher level of reporting and the business’ customers will be dealing directly with your funder if they delay payment – not you as the business owner.  

Angel Investors/ Venture Capital: Best for small businesses who want to scale quickly. 

Pros: entrepreneurial background provides increased insights and foresight vs. dealing with alternative finance providers, banks, or the government; larger investor network to leverage for additional funds or additional business; and capital remains in the business (vs. interest costs). 

Cons: Higher rates of returns expected (typically at least 5x their investment); requires giving up equity in the business; process will be intensive; typically reserved for high visibility, disruptive companies pursuing large addressable markets on a national or global scale; and will require operating agreement additions to governance to protect their investment in the case of underperformance.

Bootstrapping: Best for businesses with principals that have savings or expendable income who want to preserve equity ownership and cash in the business. 

Pros: maintain ownership position and keeps all cash generated either in the business or available for dividends. 

Cons: Growth limited to the owner’s cash position; risk missing market opportunity because thinly capitalized; challenging if a short-term need requires more cash than available.

While the pros and cons of this list provide a guide to financing in 2019, any financing decision should ultimately come down to your assessment of the cash flows of the business (today and in the near term), demonstrated capacity to handle credit, costs versus profit opportunity (positive ROI), and repayment thresholds. 

The good news is, enabling technology allows small business owners to access various forms of capital quickly and efficiently. There is no day like today to explore options to fund entrepreneurial dreams. 

 

Vincent Ney is a founder and CEO of Expansion Capital Group, a business dedicated to serving American small businesses by providing access to capital and other resources so they can grow and achieve their definition of success. Since inception, ECG has connected over 12,000 small businesses nationwide to approximately $350 million in capital 

intermediary banks

Connecting the World: The Importance of Intermediary Banks

Whether you are initiating electronic international payments through a fintech solution or buying physical currency, the chances are high that a bank will be involved. The relationship between banks, as well as the role of intermediary banks, often eludes the general public, who are content with the process as long as it works.

However, understanding how the sausage is made can provide valuable insight into the way you conduct your business. Let’s take a closer look at intermediary banks and their subsequent relationship with currency exchange.

What is an Intermediary Bank?

In layman’s terms, an intermediary bank is where funds are transferred prior to reaching their destination, the payment bank. 

To transfer money, banks must hold accounts with each other in the same way that a typical client would. However, there are too many banks for one to hold accounts with all the others, so instead, they strategically choose where to open accounts. The result is a fragmented network of financial institutions. 

When a bank needs to send money to a location where their bank does not hold an account, the bank instructs an intermediary bank to act as a “middle man” to pass on the funds on their behalf. Funds can transfer between multiple intermediaries, especially if one of the banks is not networked with many larger banks. If the payment bank is across an international border, the intermediary bank may also act as the currency exchange provider.

The Role of Currency Exchange

Currency exchange refers to the use of one currency to purchase the same value in another currency. It’s required any time one entity wishes to pay another in a currency different from their default option.

Each country has either a “fixed” or “floating” exchange rate. A “fixed” exchange rate—also known as the “gold standard”—means that all the country’s money has a physical equivalent in gold or another precious material. “Floating” exchange rates may not have a physical worth, but are influenced by the market and politics, as is currently the case with the Great British pound’s relationship with Brexit.

Breaking Down the Cost

For businesses, currency exchange is vital to a true international payment process. Some vendors may wish to be paid in their customer’s default currency, which would not warrant an exchange. U.S. businesses may experience this when working with vendors in countries like China or Japan, who often prefer payments in USD. This happens when a vendor finds it cheaper to open accounts specific to currencies other than their own in order to avoid exchange fees.

Some vendors have opened multi-currency accounts, which enable vendors to accept and store more than one currency in a single account. Because this method is still gaining traction, it’s good practice to ask if vendors have multi-currency accounts before sending them money. If they don’t, and their account cannot support your currency, the payment bank will likely reject the funds.

Other hidden costs to consider when working with international payments are:

The exchange. If your origin currency is weaker than the payment currency, your money may lose some value in the trade. However, the market is continuously shifting, so the exchange will also gain value at times. The more international payments you make, the likelier that this cost will even out over time.

Intermediary bank fees. Some intermediary banks shave off a fee for their services, which is usually taken from the sum – the net amount is deposited into the vendor’s account. Not all intermediary banks will charge this fee, and it’s not immediately obvious which banks will do so.

Payment bank fees. Similar to the intermediary banks, certain payment banks also charge a fee for processing international payments. Again, not every bank charges this fee, but those that do will deduct it from the payment sum before depositing the net amount into the vendor’s account. Vendors can discuss this charge with their bank if it occurs.

Disrupting the Status Quo

With all these nuances to keep in mind, it can feel like involving a fintech will only add another cog to an already-overwhelming process. However, a fintech can determine the most efficient route through an intermediary bank, and assist in locating missing payments. If funds are returned for any reason, fintechs also act as a holding account while you decide if you want to exchange the funds back or resend them. Following a process like this ultimately saves time, money, and hassle.

If you’re on the fence about using a fintech for international payments, keep in mind that you aren’t losing out by mitigating an overly complicated bank processes. You’re merely side-stepping the complications in favor of usability.

___________________________________________________________________

Alyssa Callahan is a Technical Marketing Writer at Nvoicepay. She has four years of experience in the B2B payment industry, specializing in cross-border B2B payment processes.

supply chain finance

5 Companies to Consider for Supply Chain Finance

Supply chain finance is a set of technology-based business and financing processes that link the various parties in a transaction—buyer, seller and financing institution— to lower financing costs and improve business efficiency. Short-term credit that optimizes working capital for both the buyer and the seller is provided by what the hip kids refer to as SCF.

There are several SCF transactions, including an extension of buyer’s accounts payable terms, inventory finance and payables discounting. The SCF solutions differ from traditional supply chain programs to enhance working capital, such as factoring and payment discounts, by connecting financial transactions to value as it moves through the supply chain. Also, SCF encourages collaboration between the buyer and seller, rather than the competition that often pits buyer against the seller and vice versa.

Tom Roberts, senior vice president of Marketing at PrimeRevenue, warned Global Trade readers in September 2016 that a multinational bank may not be the way to go when it comes to SCF. “First, both global supply chains and multinational banks are highly susceptible to changes in the economic and geopolitical landscape,” Roberts wrote. “Supply chain finance programs that are locked into a single source of funding are held hostage to that funder’s risk tolerance. It’s a dangerous game, especially as the global coverage of multinational banks continues to be a moving target.”

No one bank—no matter how global—has the processes and systems in place to serve all currencies and jurisdictions, he also noted. “If a company needs to add a supplier that can’t be funded by their multinational bank, they have to not only source alternative funding, they have to handle the back-end systems integration required to facilitate the trading of receivables. It’s a resource-intensive approach that many companies simply can’t afford.”

The best-in-class supply chain finance programs are typically based on multi-funder platforms, rather than closed, bank-proprietary platforms, according to Roberts. “While it may seem counter-intuitive to simplify supply chain finance by adding more players, it’s not,” he wrote. “With the right processes and systems in place, a multi-funder strategy can increase program participation, secure more competitive pricing and discounts, and ultimately increase cash flow predictably and sustainably for both buyers and suppliers.”

What follows are Global Trade’s picks for places to consider for SCF.

Raistone Capital

Located on Madison Avenue in New York City, Raistone Capital started as a division of Seaport Global, a full-service, independent investment bank. Today, Raistone Capital has access to significant levels of institutional capital and the ability to deliver on customer’s needs, “whether it’s $50,000 or $300,000,000+,” according to the company. Raistone even created invoiceXcel (iX), a complementary financial solution so banks “can continue to serve clients in this ever-changing regulatory environment by providing additional capital offerings to customers—such as supply chain finance and accounts receivable finance.” 

Flexport

Headquartered in San Francisco—with global offices in several major U.S. cities as well as Hong Kong, mainland China, Germany and Holland—Flexport offers clients lines of credit ranging from $100,000 to $20 million to finance inventory, freight and duty and so that customers can accelerate product expansion and revenue growth; enable strategic decisions that reduce landed costs; and minimize supply chain disruption. Best of all, it costs nothing to connect with a Flexport Capital expert to discuss how your supplier terms, customer terms, and capital structure can be optimized to support your working capital goals and business growth. 

PrimeRevenue

Giving the expertise Tom Roberts has already shared via Global Trade, how could we in good conscience skip over his Atlanta-based company that also has offices in Hong Kong, Australia, London, Frankfurt, and Prague. Billed as “the leading provider of working capital financial technology solutions,” PrimeRevenue helps more than 30,000 clients in 70+ countries optimize their working capital to efficiently fund strategic initiatives, gain a competitive advantage and strengthen relationships throughout the supply chain. Established in 2003, PrimeRevenue boasts of now having “the largest and most diverse global funding network of more than 100 funding partners.” They support 30+ currencies on a single cloud-based, multi-lingual, cross-border network, facilitating a volume of more than $200 billion in payment transactions per year.

Trade Finance Global

London-based TFG assists companies with raising debt finance, accessing many traditional forms of finance while also specializing in alternative finance and complex funding solutions related to international trade. “We help companies to raise finance in ways that are sometimes out of reach for mainstream lenders,” according to the company, which taps into more than 250 lenders with unique focuses on different products and/or geographies. And TGF boasts of being able to “quickly get to the key decision-makers of financiers, to make sure your application gets through to the right person.” That ability is built on reputation alone, as TGF is 100 percent independent and not tied to any lenders. Instead, they find the most appropriate SCF solution for the individual customer.

Bank of America Merrill Lynch

Okay, much of this article details why a multinational bank may not be the best option when it comes to SCF, but Charlotte, North Carolina-based Bank of America Merrill Lynch, which also has central hubs in New York City, London, Hong Kong, Minneapolis, and Toronto, does have a solid, end-to-end SCF program. Bank of America Merrill Lynch boasts of having a number of tools to help: segment suppliers and analyze rates; design an optimal marketing program; and educate suppliers on program benefits.

“Bank of America Merrill Lynch made sure that the resources needed—support staff, legal, credit and such—all worked towards achieving the efficient deployment of the program,” says Philippe Andre Marcoux, credit and treasury manager at SCF customer Uni-Select Inc., a large multiservice corporation that distributes motor vehicle replacement parts, tools equipment and accessories. “Communication between Bank of America Merrill Lynch, our suppliers and ourselves was the driving force behind the successful implementation. Tools to evaluate the benefits to our suppliers and ourselves were key in convincing our team to participate.” 

Want In On The Fintech Trend? 4 Options For Funding Your Startup

Fintech companies are becoming significant players in the U.S. economy, with firms such as Credit Karma, Tradeshift and Plaid enjoying extraordinary success as they use technology and innovation in an effort to transform the financial services industry.

In 2018, for example, fintech investments in the U.S. reached $11.9 billion, a new annual high, according to CB Insights.

But despite the favorable trend, fintech startups also face the same reality that all startups do – raising the capital to launch a business is no easy feat.

The good news for fintech entrepreneurs, though, is that we are well past the time when investors might have viewed fintech as a fad that would pass.

“I think that most investors have come to understand that fintech is here to stay,” says Kirill Bensonoff (www.kirillbensonoff.com), a serial entrepreneur and an expert in blockchain.

“Finance is getting more and more high tech each year.”

Still, coming up with sufficient capital to start any business – whether it’s from your own savings, a loan from a relative, or cash from an investor – can present a formidable problem.

“One lesson I’ve learned over the years is that successful entrepreneurs must be persistent,” Bensonoff says. “You will face challenges and one of those could be raising capital. Perseverance will get you through.”

Options for raising that capital include:

-Venture capital. Venture capitalists might be inclined to invest in your startup in exchange for an equity stake if they think there’s a chance they can score a big return. But they will need convincing. “The failure rate for new businesses is high, so it’s only natural for investors to be skeptical about whether you can pull it off,” Bensonoff says. “Any investment is a risk, and venture capitalists know that. But smart investors want it to be at least a calculated risk, not a roll of the dice.”

-Crowdfunding. If venture capital is not an option, crowdfunding could be the next best bet, Bensonoff says. Online crowdfunding platforms allow you to make your pitch in one spot where a myriad of different potential investors can see it. Examples of startups that used crowdfunding are Oculus and Skybell.

-Angel investors. An angel investor is an accredited investor who uses his or her own money to invest in a small business. Not just anyone can be an angel investor, though. They need to have a net worth of at least $1 million or a minimum annual income of $200,000. Bensonoff himself has served as an angel investor for some companies.

-Self-funding or “bootstrapping.” For those who want to bootstrap their fintech company, relying on their own money rather than the investments of others, there are options. Some people tap into savings or retirement accounts. Many keep their day jobs and make their startup a side business until it takes off. “Bootstrapping has always been an important approach to my life,” Bensonoff says. “I had to rely on my own money and hard work to succeed, and I had to remain frugal. When bootstrapping becomes a way of life, it opens up new opportunities.”

In Bensonoff’s view, raising capital to launch a fintech company isn’t any harder – or easier – than raising money for any other type of business.

“I think a good company in any sector gets funded,” he says. “So for entrepreneurs who want to plunge into the fintech sector, the key is to develop something that’s useful and satisfies an economic want.”

About Kirill Bensonoff

Kirill Bensonoff (www.kirillbensonoff.com) has over 20 years experience in entrepreneurship, technology and innovation as a founder, advisor and investor in over 30 companies. He’s the CEO of OpenLTV, which gives investors across the world access to passive income, collateralized by real estate, powered by blockchain. 

In the information technology and cloud services space, Kirill founded U.S. Web Hosting while still in college, was co-founder of ComputerSupport.com in 2006, and launched Unigma in 2015. All three companies had a successful exit. As an innovator in the blockchain and DLT space, Kirill launched the crypto startup Caviar in 2017 and has worked to build the blockchain community in Boston by hosting the Boston Blockchain, Fintech and Innovation Meetup.

He is also the producer and host of The Exchange with KB podcast and leads the Blockchain + AI Rising Angel.co syndicate. Kirill earned a B.S. degree from Connecticut State University, is a graduate of the EO Entrepreneurial Masters at MIT, and holds a number of technical certifications. He has been published or quoted in Inc., Hacker Noon, The Street, Forbes, Huffington Post, Bitcoin Magazine and Cointelegraph and many others.

blockchain

SMALL AND MEDIUM-SIZED GLOBAL TRADERS ARE BANKING ON BLOCKCHAIN

This is the second in a three-part series by Christine McDaniel for TradeVistas on how blockchain technologies will play an increasing role in international trade.

Give Me Some Credit

Every business requires capital to operate. To sell products to customers overseas, many companies also need trade financing and insurance from third-party lenders. About 80 percent of all global trade is transacted through third-party lenders and cargo insurers, but the process is complex, can be costly and many banks find it too risky to support small and medium-sized enterprises (SMEs).

Blockchain has the potential to increase transparency, speed and accuracy in assessing risk across the trade finance process, which in turn could expand the supply of credit available for international trade transactions – good news especially for SMEs that face significant hurdles accessing credit. Here’s how.

Pay Me Now or Pay Me Later

Buyers who import goods from sellers in other countries generally want to pay upon receiving the merchandise so they can verify its physical integrity on arrival. Exporters, on the other hand, generally prefer to be paid as soon as they ship the goods. Trade finance can bridge this gap.

Exporters and importers engage third-party lenders and insurers who will guarantee payments on the basis of collateral and indemnify the exporter, importer and related parties in the event that the merchandise is damaged, stolen or lost while in transit. In this way, trade finance provides the credit, payment guarantee and insurance needed to facilitate an international trade transaction on terms that will satisfy all parties.

80% of trade relies on finance

Steps on the Trade Journey

Intermediaries such as freight forwarders typically manage the physical journey of merchandise, from the original producer to the border, across the border (maybe several borders), and to the final buyer.

Each step must be verified: when was the merchandise transported from the factory or farm to a warehouse, when was it moved from the warehouse to a container, when was the container loaded onto a ship, when did the ship get underway, when was the container unloaded from the ship at port, and when was the merchandise transported from the port to the end consumer.

Different trade finance instruments, such as lending, letters of credit, factoring and cargo insurance cover legs of the journey. A letter of credit is a guarantee from a bank that a buyer’s payment will be received and be on time or else the bank will take responsibility for the payment. Factoring is accounts receivable financing to accelerate cash flow. Cargo insurance insures the merchandise while en route.

Without Finance, Trade Would Sink

The World Trade Organization estimates that 80 percent of global trade relies on trade finance or credit insurance. The global trade finance sector (i.e., the global volume of letters of credit) is worth roughly $2.8 trillion. Demand for trade financing exceeds availability, resulting in the underutilization of existing capital. According to the Asian Development Bank, the global trade finance gap — the difference between the demand for and supply of trade finance — has reached $1.6 trillion.

SMEs Face a 50 Percent Rejection Rate

The shortfall in supply reflects the complex and risky nature of trade finance which often involves multiple parties. Before banks will issue letters of credit in trade finance, they require potential customers to present a solid credit history and a strong balance sheet, conditions that tend to favor larger institutions.

SMEs typically experience more difficulty navigating the trade finance process and dealing with the cost and complexity of banking regulations than larger companies. In 2014, SMEs had trade finance requests before financial institutions rejected at a rate of over 50 percent. In comparison, the rejection rate for multinational corporations was only seven percent.

Links in the Trade Finance Chain

According to the United Nations, there are typically eight major steps required to obtain a letter of credit, although in practice the Credit Research Foundation lists more than twenty. Each step of the process is dependent on the previous steps, and some steps involve sending the same document back and forth for verification purposes. The administrative burden is greater for SMEs than for large firms.

survey of 2,350 SMEs and 850 large firms conducted by the U.S. International Trade Commission in 2010 showed that lack of access to credit is the major constraint for SME manufacturing firms seeking to export or expand into new markets and it is one of the top three constraints for SME services firms.

rate of rejection for trade finance

How Blockchain Can Help Ease Trade Finance

Requirements to authenticate each transaction in the trade finance and insurance process can engender large amounts of paperwork and cause delays at each step. Every handoff must be approved and verified.

Instead, blockchain uses digital tokens that are issued by each participant in the supply chain to authenticate the movement of goods. Every time the item changes hands, the token moves in lockstep. The real-world chain of custody is mirrored by a chain of transactions recorded in the blockchain.

The token acts as a virtual “certificate of authenticity” that is much harder to steal, forge or hack than a piece of paper, barcode or digital file. The records can be trusted and greatly improve the information available to assure supply-chain quality.

Using blockchain as a digital ledger for these handoffs would allow involved parties to instantly track and receive secure information about the traded goods. Parties can monitor the entire shipping process and verify the completion of each step in real time. This increased transparency and ease of monitoring reduces the risk that a borrower presents to a potential lender or insurer.

Banking on Blockchain

A number of financial institutions are piloting the use of blockchain-enabled trade finance platforms.

Bank of America, HSBC, and the Infocomm Development Authority of Singapore collaborated in 2016 to develop a trade finance application designed “to streamline the manual processing of import/export documentation, improve security by reducing errors, increase convenience for all parties through mobile interaction, and make companies’ working capital more predictable.” Using the application, each action in the workflow is captured in a distributed ledger and all parties (the exporter, the importer, and their respective banks) can visualize data in real time, offering transparency to authorized participants while ensuring confidential data is protected through encryption.

Barclays used blockchain in 2017 to issue letter of credit that reportedly guaranteed the export of $100,000 worth of agricultural products from Irish cooperative Ornua to the Seychelles Trading Company, noting the parties were able to execute a deal in four hours that would usually take up to 10 days to complete.

A group of European banks launched a trade finance blockchain platform in July 2018, initially focused on facilitating small and medium-sized businesses trading within Europe. In September 2018, the Hong Kong Monetary Authority announced plans to launch a trade finance blockchain platform. Twenty-one banks are participating in the platform, including large institutions such as HSBC and Standard Chartered. The Hong Kong Monetary Authority is also reportedly working with its counterpart in Singapore to develop a blockchain-based trade finance network to settle cross-border transactions.

Lessons for Trade Policymakers

As the trade finance industry begins to utilize blockchain technology, there are some potential implications worthy of policymakers’ attention.

First, the large number of intermediaries and corresponding administrative costs in trade finance tend to fall particularly hard on SMEs and the relatively higher cost of each transaction makes SME financing less attractive to banks. If blockchain can reduce the costs of trade finance, more small and medium-sized businesses could trade globally.

Second, although blockchain technology does not alter the fundamental credit risk of borrowers, the increased transparency and access to information it delivers could improve the accuracy of banks’ risk assessments. If perceived risk is greater than actual risk, a nontrivial number of loan applications may be denied even though those loans have the potential to be successful. If blockchain brings greater confidence and issuance of good loans — that is, those that are paid back — the transactions they support would bring value to the economy.

In these important ways, blockchain can increase transparency across the trade finance process and decrease risk for all parties, in turn expanding the supply of credit available for international trade transactions.

ChristineMcDaniel

 

Christine McDaniel a former senior economist with the White House Council of Economic Advisers and deputy assistant Treasury secretary for economic policy, is a senior research fellow with the Mercatus Center at George Mason University.

This article originally appeared on TradeVistas.org. Republished with permission.

ROSS APPOINTS 21 MEMBERS TO TRADE FINANCE ADVISORY COUNCIL

On March 7, U.S. Secretary of Commerce Wilbur Ross announced the appointment of 21 members to the Trade Finance Advisory Council (TFAC), which is his principal advisory body on matters relating to access to trade finance for U.S. exporters.

“The ready availability of trade finance is a crucial ingredient to the success of U.S. exporters across virtually every economic sector,” Ross says in the announcement. “The TFAC provides industry stakeholders a critical voice in government, allowing the department to better assist American exporters.”

During its first two-year term, the TFAC provided detailed policy and technical recommendations to enhance private and official financing options for U.S. companies. The first meeting of the TFAC’s second charter term was on March 27 in Washington, D.C.

The appointees for the TFAC’s second two-year term are:

  • Alan Beard, managing director, Interlink Capital Strategies, Arlington, VA
  • Alisa DiCaprio, head of Trade and Supply Chain, R3, New York, NY
  • Anurag Bajaj, regional head of Transaction Banking and global head of Correspondent Banking, Standard Chartered, New York, NY
  • Chapin Flynn, vice president of Enterprise Partnerships, Mastercard, Wayne, PA
  • Craig Moore, founder of Mooring Tech Inc. and co-owner/founder of Old Fourth Distillery, Atlanta, GA
  • Craig Weeks, independent consultant, Weaverville, NC
  • Daniel Pische, senior vice president of Trade Finance, First American Bank, Chicago, IL
  • David Herer, CEO, ABC-Amega Inc., Buffalo, NY
  • David Shogren, president, U.S. International Foods LLC., St. Louis, MO
  • Dominic Capolongo, executive vice president and global head of Funding, PrimeRevenue, Inc., Atlanta, GA
  • Gary Mendell, president, Meridian Finance Group, Santa Monica, CA
  • Ken Rosenberg, senior vice president and manager for International Banking, Bridge Bank, San Jose, CA
  • Kenneth Wengrod, co-founder/president, FTC Commercial Corp., Los Angeles, CA
  • Kevin Klowden, executive director, Center for Regional Economics, Milken Institute, Santa Monica, CA
  • Madison Spach Jr., partner, Spach, Capaldi and Waggaman, LLP, Newport Beach, CA
  • Michael Finkelstein, CEO and founder, The Credit Junction, New York, NY
  • Qingyuan Zhang, director of Global Trade Finance, John Deere Financial Services, Johnston, IA
  • Richard Brent, CEO, Louroe Electronics, Van Nuys, CA
  • Stephen Simchak, vice president and chief international counsel, American Property Casualty Insurance Assn., Washington, D.C.
  • Steven Bash, senior vice president and International Banking Group manager, City National Bank, Los Angeles, CA
  • William Glassford, senior vice president, Zions Bancorporation, Salt Lake City, UT

To learn more about the TFAC, visit www.trade.gov/TFAC.

SURVEY SAYS …

The International Chamber of Commerce (ICC) Banking Commission’s 10th annual Global Survey on Trade Finance reveals that digitalization of the sector is increasing, although obstacles remain in the path toward efficient and paperless trade finance.

The survey, which gathered insights from 251 respondents in 91 countries, indicates that a key barrier to digitalization is the lack of standardization throughout the sector.

This indicates work is still needed to drive forward the digital agenda, although progress to date has been positive.

Download the full ICC Global Survey on Trade Finance at: http://www.iccwbo.org/global-survey-report.

The move toward paperless trade finance has been a long-standing objective for many in the industry. And, as our 10th annual survey indicates, digitalization is beginning to gain significant traction. Some 45 percent of respondents to this year’s survey indicated they intend to prioritize digital trade and the development and deployment of platforms over the next one to three years.

In a related development, interest in supply chain finance (SCF) is also gathering momentum. SCF, which usually involves financing through an online platform, is providing a growing number of banks with a strong alternative to traditional trade finance. What’s more, some 56 percent of bank respondents that offer SCF stated they had already developed their own proprietary systems rather than rely on an outsourced platform.

Nonetheless, the benefits of implementing technology solutions in trade finance processes have not been felt by all banks, with only 9 percent of respondents agreeing digitalization had improved efficiency to date. Divergent standards are cited as a key reason for the lack of improvement. This is apparent within SCF platforms and their lack of common standards for exchanging data.

As a result, some 32 percent of respondents with proprietary systems reported issues due to the lack of interoperability. Nevertheless, over 60 percent of banks said they were moving toward further digitalization, while just 7 percent indicated they had no plans to implement technology solutions in their trade finance offerings.

Enduring Problem: The Trade Finance Gap

Certainly, digitalization of the trade-finance sector is aimed at improving efficiency and processes, which should allow for greater trade finance capacity. And that should help relieve one of the greatest concerns for trade finance: the trade finance gap.

The difference between the demand and supply of trade finance currently stands at US$1.5 trillion, according to figures from the Asian Development Bank. What is more, some 22 percent of respondents expect the unmet demand to increase in the next 12 months.

Nonetheless, the survey indicates a positive outlook on the current and future provision of trade finance. Two thirds of respondents declared the amount of traditional trade finance they provided in 2017 was higher than the previous year. SCF provision is also increasing, with 43 percent of respondents indicating their SCF business grew in the past year.

In total, respondents to the survey provided over US$4.6 trillion in traditional trade finance and US$813 billion in supply chain finance last year. Over the next one to three years, some 41 percent of respondents expect the trade-finance gap to shrink.

Regulation: Key Barrier to Provision

Unfortunately, regulation remains one of the major barriers preventing the bridging of the trade-finance gap. The survey revealed that regulatory compliance requirements are still inhibiting banks’ ability to provide trade finance.

Some 90 percent of respondents highlighted regulatory compliance as a major obstacle to growth. Know Your Customer and Know Your Customer’s Customer (KYC/KYCC) obligations remain an issue for trade finance providers, with 18 percent of respondents to the survey citing compliance with KYC/KYCC regulations as the reason for a decrease in their provision of trade finance. What’s more, some 40 percent of respondents revealed the requirements were already a persistent challenge for SCF delivery.

The survey also outlines regulation to counter the financing of terrorism (CFT) as a key concern. Some 56 percent of respondents have serious concerns about the impact of CFT regulations on their ability to provide adequate trade finance in support of cross-border trade.

While practitioners recognize the need for adequate compliance measures, the lack of clarity surrounding regulatory expectations has led to overly stringent, self-imposed industry measures. Fulfilling all these regulatory requirements consequently represents an unnecessarily resource and time-heavy burden for banks.

Looking Ahead: What to Expect?

Despite these issues, the survey revealed a generally positive outlook on the future of the trade-finance sector.

Some 73 percent of respondents to the survey expect trade financing to grow over the next 12 months. Banks, especially, see the potential for SCF, with 91 percent of bank respondents expecting revenue growth from SCF in the next one to three years.

Regarding the potential for future digitalization, respondents agree that continued investment is necessary, with 46 percent believing the long-term focus should be on implementing and leveraging the opportunities from new technologies.

Importantly, the implementation of common standards is necessary to increase efficiency and market capacity, while enabling cost-effective due diligence.

Olivier Paul is head of Policy at the International Chamber of Commerce.

 

HSBC Boosts International Loan Program to $5B

New York, NYHSBC Bank USA is adding $3 billion more to its international loan program, raising the program’s total funding to $5 billion, as “the demand by US small and medium size businesses looking to export or expand internationally continues to rise.”

The funding increase is the third in 15 months and will “satisfy the demand by companies who want financing to grow and compete,” said Steve Bottomley, group general manager, senior executive vice president and head of Commercial Banking for HSBC in North America.

In 2013, US exports hit an all-time record of $2.3 trillion and supported 11.3 million US jobs, directly and indirectly, according to data supplied by the US International Trade Administration.

The latest HSBC Global Connections Trade report shows that developing economies, such as China and India, present the best US trade prospects, with US export growth to average nine percent a year to each country through 2030.

Additionally, global trade is expected to grow annually by eight percent beginning in 2016 from 2.5 percent in 2013, as businesses capitalize on the rise of the emerging market consumer and developing markets stabilize their productivity levels for the future.

“US small- and medium-size businesses are key contributors to US exports and domestic job growth,” said Derrick Ragland, HSBC executive vice president and head of US Middle Market Corporate Banking.

HSBC launched its international loan program for US small and medium size businesses seeking to export or expand internationally in July 2013with $1 billion in funding.

It doubled the program to $2 billion at the start of 2014, and today’s addition of $3 billion more raises the program’s total funding to $5 billion.

The international loan program is available to businesses with at least $3 million to $500 million in annual revenue, and who are focused on cross border trading or global expansion.

Only applications for new business loans will be accepted and all of HSBC’s usual credit and lending criteria apply. The program runs through December 2015.

International trade and financing, said Bottomley, “is critical not only for U.S. companies who want to excel, but also for the wider US economy.”

Since launching the program last year, “We’ve been impressed by the pace with which businesses around the country and across industries have taken advantage of the program to capture international growth market opportunities.”

10/09/2014

New York to Form State Trade Promotion Bank

Albany, NY – The State of New York is taking a major step to provide financing for global trade-minded companies throughout the state with the announcement that it will propose the creation of a new import-export bank.

Based on the federal model, the bank, the first of its kind in the country, would initially be vested at $35 million with funds loaned to qualified companies looking to expand their overseas exports.

The bank will have to be approved by lawmakers and would include a $25 million lending program targeted toward small businesses that have difficulty accessing credit, and $10 million for grants of as much as $25,000 to help with export capacity and translation.

Governor Mario Cuomo announced the formation of the bank at the recent Global New York Summit in New York City.

The new bank, the governor said, “is part of a larger push to help companies take advantage of growing international markets. This is about job development and these companies are being sought after by every state. If we don’t give them an incentive, another state will.”

Cuomo also said he will travel on trade missions to Canada, Mexico, Israel, China and Italy over the next year as part of his recently unveiled Global NY Initiative.

Up for reelection next month, the governor Cuomo added that the initiative is meant to help change New York’s image as a high-tax state unfriendly to business and investment and draw more foreign companies to the country’s third-most-populous state.

10/08/2014