Innovative trade financing will play a key role in the recovery of SA’s economy

“The global economy is starting to recover, slowly in some areas and more speedily in others such as Asia, consumers will eventually return to spending, and South African exports and imports should start to pick up next year. Traders will see activity levels increase and there will be a return to demand for inventory financing” says Andy Bryant, spokesperson for Chester Finance.

“With the strong Rand, this exchange rate makes it very appealing to import into South Africa. And with tremendous de-stocking having taken place over the last year, inventory levels will have to rise again in order to meet recovering consumer demand. As the recovery unfolds there will also be opportunities for the import of new product ranges or for agency relationships that were cancelled by overseas principals during the recession to be re-established. Capital expansion projects that were put on hold will be revived and should provide opportunities for many of the businesses involved in these large developments.”

But financing the recovery in demand could be problematic. Bryant explains that some businesses have taken pain in their balance sheets and traditional financing is more difficult to obtain when the financial position looks significantly worse than a year ago. “A period of declining sales has meant debtors’ books, which usually provide security for trade financing, have come off significantly.”

Bryant says that in the recovery, some businesses may find themselves growing at a rate beyond their current capital resources. “Their commercial banks are generally not willing to provide funding against inventories and overdraft limits may already be stretched. Businesses may be compelled to offer exceptionally large settlement discounts to customers to create cash flow each month and this will impact margins as well as potentially place the business in a weaker position vis-a-vis their customer. To overcome such challenges, trade finance may offer an elegant solution.”

Bryant explains that trade finance is funding designed to assist the purchase of inventory (or stock).  “It is typically a layer of short-term finance over and above conventional banking finance which gives a business a higher degree of flexibility to manage growth, through the purchase of additional inventory.  Funding periods are, as far as possible, tailored to match a company’s cash flow cycle to alleviate the strain caused by increased turnover, and will unlock growth in sales.”

During the downturn, manufacturers were manufacturing ‘to order’, cautious of overproducing. Into a recovery, they will need to change this strategy and manufacture ‘for stock’ to ensure they can meet rising demand, and this approach will certainly require increased investment in working capital. The same principle would apply to importers who would have to move away from narrowly importing according to orders – for example, factories which during recessionary times were willing to reduce quantities, may now want to revert back to previous minimum orders, hence requiring their supplier importers to invest more in stock..

A change in payment terms in the recovery may also drive increased demand for trade finance. Many suppliers to SA importers relaxed their payment terms, for example allowing payment on open account or upon shipment simply to ensure they got the business. In the recovery they may revert back to previous terms such as deposit on order with the balance pre-shipment. This would put a strain on the working capital cycle of importers. Another phenomenon could be that in an inflationary input environment where commodity and raw material prices are rising, additional working capital may be required while price increases are being passed on to customers. “All these different aspects of the recovery will undoubtedly drive the need for effective and innovative trade finance” concludes Bryant.