Supply And Demand Imbalance Of Trade Financing

The half of the U.S. Export-Import Bank’s lending practices has, for many, opened up a dialogue about the role of trade financing, and how companies can access the working capital they need for B2B commerce.

This week, Congress returned to session following a summer break, meaning the debate over the future of the Ex-Im Bank is sure to heat up. New analysis published this week may fuel the debate, too.

According to U.K. law firm Clyde & Co., the global economy is currently suffering from a lack of trade financing. A survey of finance providers, commodity traders, and commodity producers across the globe was conducted earlier in the season to explore the hurdles players of the global supply chain face when seeking working capital to conduct trade.

As it turns out, the volume of trade finance loans issued by traditional banks is about half of what it was before the financial crisis. And while alternative lending has emerged post-2008 to fill many financing gaps left by a retreat of traditional banks, when it comes to trade finance, the supply chain simply isn’t interested in alternative players.

A Supply And Demand Mismatch

Clyde & Co.’s new report, published Monday (Sept. 7), revealed that 77 percent of those surveyed agree that accessing trade financing is more difficult today than it was a decade ago, for a variety of factors.

In a stark revelation, the research found that trade finance is actually fairly easy to come by – just not the type of trade finance that businesses want.

Respondents’ highest demand is for upstream pre-export structured trade financing linked to specific commodities. This type of financing sees banks providing working capital to companies based on actual purchase orders and an assessment of the firm’s supply cycle. Researchers said this type of funding is most preferred because it allows corporate buyers to enter into long-term contracts with their suppliers.

While this structured financing is most desired by members of the supply chain, respondents said they have the least accessibility to it, with less than half saying they can gain this type of product.

Meanwhile, alternative financing and open account supply chain financing were cited as being the least in demand by buyers and suppliers. But according to the research, these are some of the easiest types of loans to access.

Similar disconnects were found within the market for products like invoice discounting, factoring and receivables financing; less than half of commodity traders want these types of products, yet 84 percent said they are easy to access.

Alternative lending is often viewed as a remedy to banks’ retreat of lending spaces, especially when it comes to consumer or small business loans. But commodity traders and suppliers simply aren’t interested in alternative loans.

According to Clyde & Co., 72 percent of respondents said alternative loans meet less than a quarter of their trade financing needs, and nearly two-thirds said they aren’t exploring alternative loans as an option for trade finance.

Banks Stay Behind

Members of the global trade market can access alternative trade finance, but they don’t want it. They want bank trade financing loans, but banks aren’t providing it.

[bctt tweet=”Commodities traders can access alternative trade finance, but they don’t want it. They want bank trade financing loans, but banks aren’t providing it.”]

According to the data, the dollar volume of trade finance issued by traditional banks has been nearly cut in half between now and before the 2008 financial crisis. Banks were financing about $14 trillion in trade loans pre-2008, the research said; today, that figure has dropped to about $7 trillion.

In a recent interview with Bloomberg, Clyde & Co. partner Philip Prowse described that decline as a “massive drop,” which, he said, now means “there is a massive gap for producers, suppliers, commodity traders, logistics companies and purchasers.”

Research from the Bank for International Settlements, Bloomberg said, reveals that banks once accounted for up to 80 percent of trade financing volume. Now, they account for just half.

“Where we are in trade finance today is not really fit for purpose,” Prowse added.

[bctt tweet=”‘Where we are in trade finance today is not really fit for purpose'”]

Clyde & Co. researchers highlighted that there is an argument for banks to return to the trade financing playing field to level out the supply-and-demand levels for these types of loans. For buyers and suppliers, analysts found, it’s about more than accessing money: it’s about the banking relationship.

The report concluded that the majority of respondents “are keen to turn the clock back to pre-2007 days, when it was possible to access traditional pre-export trade financing on a trade-by-trade basis. The majority also valued old-style relationship banking.”

The report offers a take on the state of corporate lending not often presented in today’s market: Alternative lending is not necessarily the end-all answer to today’s lending needs. And, unless banks can return to the trade finance market to meet the demand of today’s traders, the global economy will suffer, Clyde & Co. said.

“Whatever the answer to bridging the trade finance gap, we believe the solution is increased dialogue, closer cooperation and a willingness to innovate,” the report concluded. “It is clear that new financing relationships need to be developed if commodity trade financing is to sustain future economic and population growth.”