Credit Manager Magazine 9/2021

47 CREDIT MANAGER MAGAZINE WRZESIEŃ / SEPTEMBER 2021 count payment terms that leave time for re- ceipt, distribution, and the sale of goods. This time lag prompts the need for credit facilities of up to 120 days, which is a market of over $10 trillion annually according to the Bank for International Settlements. In a typical invoice financing transaction, the supplier sells invoices to a finance company at a discount at the time of the shipment of goods. The supplier receives payment up- front after the documents have been signed and, in cases of non-recourse factoring, pay- ment is guaranteed because the risk of buyer non-payment due to bankruptcy is trans- ferred to the financing company. Invoice financing is a standard solution for domestic trade in many countries and is gaining more attention in cross-border trade. Figures from FCI, the largest industry group for the open account receivables finance in- dustry, show that international factoring vol- umes grew 5.4% from 2018 to 2019. While global factoring volumes dropped in 2020 as a result of the pandemic, we are already be- ginning to see a return to a state of normalcy. In particular the North East Asia region has become an active trade finance centre and is at the forefront of the upward trend for in- voice financing. One reason for the return to stability and growth is that invoice financing is a quick and straightforward solution to implement, and can be used in conjunction with bank loans. It is also flexible, allowing the supplier to control the injection of working capital by choosing when and which invoices to sell. Three Ideal Scenarios for International Invoice Finance While many companies rely on account re- ceivables financing for their everyday work- ing capital needs, three instances stand out as especially conducive to this form of trade liquidity. 1. Rapid growth Fast-growing companies often have capital needs that surpass their bank lines of credit or loans. For these firms, accounts receivable are an asset that can be quickly converted to cash with no impact on the bank relation- ship. Invoice financing is the most straight- forward way to get supplemental financing to accept and fill more orders. This is especially true for companies operat- Stenn International Ltd. is the largest and fastest-growing online platform for financing small andmedium sized businesses engaged in international trade. Stenn is based in London, pro- vides financing services in 74 coun- tries and is backed by financial gi- ants like HSBC, Barclays, Natixis and many others. “Non-bank players like Stenn are able to step in and offer options to companies left behind by banks.” ing in sectors with high seasonal needs like apparel and holiday products. Seasonality can cause large fluctuations in a company’s cash flow, inventory and profitability, dis- torting the financial ratios that banks use to make lending decisions. Invoice financing provides supplemental working capital dur- ing these peak times. 2. Turnaround situations Almost all international companies have ex- perienced a turnaround situation in the past year because of the pandemic. Disruption – quickened on many fronts by COVID-19– is here to stay and has become a new economic driver. Businesses in “turnaround” are those busi- nesses returning to growth after a period of poor performance caused by an external shock such as a pandemic, or a recession or internal restructuring of finances or manage- ment. Firms in turnaround find themselves at an impasse: even though prospects are good, the company’s financials might not merit a full bank loan program. But financing is often needed to take advantage of growth opportunities. Invoice financing can be a lifeline for compa- nies in these situations. This is possible be- cause in invoice financing, the finance com- pany bases its credit decision on the financial health of the buyer, not the exporter. Invoice financing can give businesses a vital injec- tion of funds during a time of recovery when many other options are unavailable. 3. Trade to countries outside of bank jurisdiction Since the 2008 financial crisis, banks have been stepping back from cross-border trade activities. The pandemic has also increased the strain on cross-border trade measures. Regu- latory constraints have grown, the paperwork burden is costly and cuts into profits, and geo- political risks have become more volatile. This environment gave rise to the $1.5 tril- lion trade finance gap, which has acutely impacted firms in the middle market. These companies turn to invoice financing when their bank cannot support sales to a particu- lar jurisdiction. Non-bank players like Stenn are able to step in and offer options to com- panies left behind by banks. Invoice financing has found its place as a vi- able option for exporters of goods. With no BUSINESS long-term contracts and no requirement to factor all invoices, factoring became another option in the working capital toolbox, along- side services from traditional banks. For small and medium-sized businesses looking to expand and operate on the global stage, international invoice financing is one of the best options to consider, especially in this post-pandemic economic climate. [1] World Trade Statistical Review, 2019 World Trade Organization [2] World Trade Statistical Review, 2020 World Trade Organization [3] $1.5 Trillion Global Trade Finance Gap Frustrat- ing Efforts toDeliver Crucial Jobs andGrowth - ADB, 2019 Asian Development Bank [4] World Trade Statistical Review, 2018 World Trade Organization [5] Annual Review, 2020 FCI [6] Annual Review, 2021 FCI [7]AccountsReceivableFinancingforSuppliers:5Be- nefits, 2019 Stenn [8] Stenn Joins American Apparel & Footwear Asso- ciation, 2020 Stenn [9] How to use turnaround tactics to deal with dis- ruption, 2021 World Economic Forum [10] Responding to COVID-19: Cross-border trade measures and Insights, PWC