As competition seeps across borders, suppliers are grabbing at the chance to enter new markets, especially those with massive potential to fuel growth, like the U.S. But there’s something happening in B2B payments today, says Seabury TFX CEO Robert Lin, that makes it especially hard for overseas manufacturers to bear the financial burden of launching operations.
It’s the rising prevalence of “Delivered Duty Paid” — the kind of deal that sees suppliers responsible for the costs of trade without seeing payment until a buyer actually receives the goods.
The CEO described this industry shift in B2B trade like a ticking clock: Traditionally, suppliers would start the clock on payment terms when goods were shipped out; today, however, trade deals are increasingly delaying the start of that stopwatch until goods have landed on U.S. soil.
“What was a 30-day payment term becomes 60 days or 120 days,” Lin said.
These extended payment terms could be due to open account trade.
In a recent move that may shake up the supply chain finance sector, the International Chamber of Commerce and the Bankers Association for Finance and Trade (BAFT) released updated standard definitions for the industry to help both banks and nonbank players more efficiently provide cash management solutions and mitigate risk in this space.
In a document outlining these definitions, the BAFT explained that open account terms allow trading partners to independently work out payment terms; according to the report, more than 80 percent of trade volume across the globe is conducted with open terms.
“The transition to a situation where the vast majority of trade takes place on open account terms and where traditional trade finance has seen a relative decline requires trade financing to evolve,” the report concluded. “Supply chain finance is the preeminent example of this evolution and a direct response to this near-global shift to open account terms.”
This type of transaction creates a wider gap between when a purchase is made and when a supplier’s invoice is settled, Lin explained, and presents an opportunity for supply chain finance firms, like Seabury TFX, to step in.
But there is more to helping out a supplier dealing with longer payment terms than simply fronting them cash to manage finances. According to Lin, there are other forces changing the way the global B2B trade ecosystem functions.
For instance, corporate buyers are demanding suppliers to maintain local inventory, meaning manufacturers have to also bear the cost of keeping their product on the books.
With that phenomenon in mind, Seabury TFX recently launched a partnership with KW International, a logistics company that provides Seabury TFX with insight into KW clients’ inventory levels in providing them financing to manage such costs.
It’s another level of intelligence, Lin said, on top of corporate financials, parent company financials, transaction data and sales history that Seabury TFX aggregates to underwrite customers.
“We’re very heavily data-driven,” the CEO stated. He added that, in his years in this industry, he’s seen letters of credit begin to fade, but the paper check persevere — fluctuations that suggest the supply chain finance sector is in need of some more sophisticated technology to keep up with trends that favor corporate buyers, not their suppliers.
And if you think this is a problem just for overseas markets like Asia, think again.
“It tends to be across the board,” Lin said of corporate buyers forcing longer payment terms on partners, “even for a U.S. manufacturer or a U.S.-based supplier.”
Cross-border B2B trade, however, naturally makes for some suppliers dangerously exposed to added risks. Following a collaboration with KW, Lin said that Seabury TFX may soon integrate its foreign exchange trading platform into the mix.
But with such a financial burden, is it really worth it for overseas businesses to claim a piece of the U.S. market?
Opening up operations in such a major global market means the possibility of major growth; according to Lin, U.S. corporations may be more inclined to do business with an overseas supplier that has already gained some local traction, reducing some of the risk that can come with bringing a foreign manufacturer on as a business partner.
The BAFT seems to agree. “The potential positive impact of [supply chain finance] on economies across the globe is beginning to be appreciated,” the entity said in its report, adding that the world market is heightening its efforts to promote global trade to “enable economic development and poverty reduction.”
For the Seabury CEO, however, the chance for suppliers to launch into the U.S. has benefits a bit more immediate.
“Overall, these businesses are aware that this is sort of the price of doing business,” Lin said. “It’s viewed as a badge of honor.”