Keeping the trade engines moving is vital to the recovery of the global economy, but even as deals are struck and sales are made, businesses aren't guaranteed the cash flow to sustain their operations.
Today, B2B payment terms are in dramatic flux, while supply chain disruptions have led to bottlenecks that leave some vendors in short supply of cash.
As such, trade finance will be an important piece of the global recovery puzzle. Connecting B2B vendors to financing on their unpaid invoices can grant them the financial stability they need to keep trade flowing, but it comes with its own set of challenges — both for the vendor and financiers.
Gianluca Pizzituti, CEO and co-founder of invoice financing platform Velotrade, told PYMNTS about the risks financiers must mitigate in the trade finance arena, the role of data in mitigating those threats, and the evolving role of invoice finance to help B2B companies endure the most volatile market many have seen in years.
Broadening Risk Mitigation
Having announced a partnership with Dun & Bradstreet, Velotrade is expanding the pool of data from which it draws to underwrite financing. Broadening the scope of information on a business is among the most important tools the trade finance arena can obtain to increase access to financing for global traders.
"Access to quality data is of paramount importance when underwriting risk," Pizzituti said, although he warned that the types of risks that must be analyzed aren't always straightforward.
The first and most obvious risk is credit risk, or the risk that a business will fail to repay financing. But, as Pizzituti noted, this "is not the only metric that should be taken into account" along the underwriting process.
There is also performance risk, he explained, which takes into account the threat of a vendor failing to deliver goods as reflected on a purchase order — whether they be non-compliant or damaged, for example.
Finally, there is transaction risk, which addresses the threat of false documentation of shipping fraud.
Expanding the scope of data is key to mitigating these risks and lowering the threat of trade finance fraud. Going even further, Pizzituti pointed to the importance of not only assessing the risks of the debtor, but of its third-party partners as well. Understanding the risks of a third-party logistics provider moving goods, for example, plays an "increasingly important role" in mitigating fraud, he said.
Bolstering Business Recovery
With a trade finance gap as large as $1.5 trillion before the global pandemic, connecting businesses to capital amid a market as volatile as the one we're witnessing today may become increasingly difficult. Financiers will have to embrace technologies like sophisticated data analytics to mitigate risk without stifling access to capital for B2B traders that need it.
It may be too early to tell, but there is evidence that demand for trade finance will rise, in part thanks to the high volatility of B2B supplier payment terms.
In some industries, like the food and beverage sector, heightened consumer demand in the early days of the pandemic meant supply chain disruptions but a steady flow of business. As a result, grocers and other large corporate buyers, in many cases, accelerated their supplier payment terms to as soon as three days.
Others, however, are extending out their supplier payment terms as long as six months.
"Especially now, during the pandemic, it's not uncommon for the debtor to ask for extended payment terms, and suppliers have little flexibility to deny such requests," said Pizzituti.
Enabling a B2B vendor to take the initiative of obtaining financing on outstanding invoices may prove a more favorable strategy than supply chain financing programs that are becoming increasingly popular in markets like the auto manufacturing sector. Supply chain financing is initiated by the buyer, with some critics arguing that the tactic merely encourages large corporates to extend payment terms.
Yet extending B2B payment terms is the reality for many suppliers around the world today, and as a result, said Pizzituti, collaborating with "reliable and trustworthy" invoice financiers is important to support the financial health of vendors.
"Invoice finance is a very effective way for suppliers to obtain fast and affordable working capital," he said. "Unlike loans, where the liability status of the borrower entity gets worsened, selling a trade receivable is a very balance-sheet effective way to obtain fresh capital by unlocking funds in the assets — the receivable — by selling them, therefore not worsening any liability ratios."