Trade finance has evolved into an expansive market that combines supply chain finance, invoice finance and factoring, reverse factoring and a slew of other products – all aimed at ensuring that cash flows more easily through supply chains. At the same time, there is an alarming lack of trade finance available to businesses around the globe, a gap that analysts say disproportionately affects small businesses and hampers their ability to expand across borders.
Late last year, the Asia Development Bank calculated a $1.5 trillion trade finance gap in existence today. Worse, soon after, the ADP released a report that found FinTech – and that expansive market of alternative trade finance players – has yet to make a meaningful impact on the lack of capital available to global traders.
With such a wide opportunity for financiers to meet demand in global supply chains, and with cash flow management an ongoing headache for supply chain participants, it’s no wonder that FinTech and supply chain management solutions providers have begun to work together.
The latest collaboration in this field was announced earlier this month, as FR8Star and Triumph Bancorp revealed their partnership. FR8Star bridges freight shippers to carriers while facilitating payment between partners. Its deal with Triumph means shippers can now access a factoring solution, giving them more time to pay invoices without forcing carriers to struggle with longer payment terms.
“Many of our enterprise customers have been asking us for longer payment terms,” explained Matt Kropp, co-founder and CEO at FR8Star, in a recent interview with PYMNTS. As a middle-man in this operation, however, FR8Star looked toward a third-party financial player, rather than holding up its own capital to finance transactions.
It’s a delicate balance in the logistics and supply chain management space to ensure players get paid quickly, are able to float capital and aren’t causing payments bottlenecks down the line. According to Kropp, in this industry, “cash is always king.”
“A lot of shippers only get paid by their customers only after they have delivered the merchandise – and even then, often with payment terms,” he explained. “Since transportation charges become due before they get paid themselves, it does put stress on a shipper’s cash requirements.”
Factoring, he continued, is “an easy solution for a straightforward problem.” Shippers can take time to pay invoices, while carriers have their outstanding receivables financed more quickly.
Factoring has emerged as a key component of the freight, logistics and supply chain industry. According to a report from the International Factoring Association published last year, the trucking, rail and freight market uses factoring more than any other industry, with more than a third of all invoices processed for external financing stemming from freight factoring companies in particular.
“Financing is often performed on a load-by-load basis so the carrier does not have to wait to be paid by the client,” explained Factoring Directory, which covered the survey in a report. “The flexibility of transportation factoring works well with this industry’s business cycle, which can be hard to predict and uneven.”
But factoring is not without its drawbacks. Kropp noted that this solution works “as long as the shipper is creditworthy,” while recent analysis from United Capital highlighted another challenge to this market: fraud.
According to the publication, citing data from the 2013 IFA Business Profile & Performance Survey, fraud was the third most common reason for account debtor non-payment. That would peg the value of fraud in the U.S. factoring market at about $230 million.
Kropp noted, however, that “invoice factoring helps align everyone’s incentives at a reasonable overhead and cost.” Combining the factoring service with a third-party player like FR8Star, he added, means invoice disputes and other issues that could block cash flow can also be mediated more quickly.
Kropp pointed to research FR8Star released earlier this year alongside Comdata, which found that faster payments are among the biggest needs of today’s truckers and carriers, with 40 percent of truckers surveyed reporting that they have been paid late, while 29 percent have experienced non-payment altogether.
Coupled with the freight industry’s history of legacy processes and technologies, cash flow continues to be a struggle for carriers and shippers alike.
“For more than 50 years, loads have been primarily booked through traditional brokers via phone, fax and email,” said Kropp. “This antiquated process for finding and booking loads is tedious and can take a lot of time.”
Shippers are forced to spend time on manual tasks, such as phone calls, to try to cover the loads that need moved. The emergence of online platforms like FR8Star, he added, can be compared to “a new breed of broker” that operates a central clearing house and technology to facilitate load shipper/carrier matching, documentation, contracts and payments.
Adding a factoring solution into the mix means addressing yet another point of financial friction for this piece of the supply chain, Kropp said.