For UK exporters Brexit is just one of the pressures making life difficult; that said it’s still a major one. British companies seeking new trade opportunities are going to have to expand their export market horizon, which means navigating unfamiliar – and potentially riskier – markets.
In many respects this is an exciting development. New markets in Asia, Africa and the Americas tend to have a positive view of “brand Britain” and are also the markets likely to record the highest gross domestic product (GDP) growth in the coming decades – see the current forecasts for India as an example. Taking advantage of these markets, however, raises the spectre of risk – whether in terms of unstable politics and macro-economics, concerns regarding transportation, or, most crucially, worries over credit risk and the timeliness of payments. Evidently, UK companies will need help when seizing the opportunities that lie ahead.
The trade finance gap
There’s the next problem. The usual agencies that companies look to for assistance with respect to trade and exporting matters – their house banks – are rapidly retreating from this space. Since the 2008 global financial crisis, banks have found themselves increasingly burdened by regulatory requirements, which include the Basel III framework on capital adequacy and know-your-customer (KYC) guidelines.
The accumulated impact of these constraints has been the loss of bank appetite for trade finance, as well as ongoing de-risking concerning international banking counterparties.
This has, in turn, created a trade finance gap, which in 2016 the Philippines-based Asian Development Bank (ADB) – the regional development organisation formed 50 years ago – quantified as US$1.6 trillion; up US$200bn on the previous year. If seizing opportunities for trade in the emerging markets needs financing, one thing is clear: it is less and less likely to come from the banks.
Yet every challenge is a potential opportunity and this most certainly is one for non-bank alternatives and specialist financers. With the UK government’s export aspirations set high – at £1 trillion by 2020 – British companies’ access to finance is crucial. While the banks are steadily retreating, specialist financing is increasingly bridging the gap.
With a flexible and bespoke approach, specialist financing is increasingly operating in the mainstream. According to an industry report from the UK’s innovation foundation Nesta, the country’s non-bank finance market grew from £267m (US$) in 2012 to an impressive £3.2bn by 2015. More and more frequently, non-bank financers are the institutions providing UK companies with the support they need.
When it comes to trade, specialist financers are not only more flexible – being largely unhindered by regulations – but are also able to offer detailed knowledge of local markets. Importantly, they are highly ambitious and keen for a slice of the trade finance action.
Naturally, specialist financers can easily assist exporters through conventional routes – such as issuing traditional documentary credits – but then again, these are the very processes causing nervousness at the banks, not least because of counterparty concerns in emerging markets.
So, where specialist financers can really add value is through innovation and imaginative structuring. For example, a strong evaluation of the underlying trade and an appreciation of the intrinsic values of shipped goods can be used by UK companies to efficiently navigate new and likely trickier export markets.
Certainly, specialist financers are more imaginative and flexible regarding security. While banks assess a transaction – especially one with unfamiliar goods in new territories – in terms of the counterparties, specialist financers often view transactions in terms of the underlying commodities. This allows them to offer imaginative structures, such as inventory or accounts receivable financing. This, in turn, helps exporters to look beyond the credit risk on a deal and realise the intrinsic value of the underlying trade.
On top of this, specialists are increasingly offering facilities in currencies other than sterling, such as the US dollar (USD), the euro (EUR) and even more exotic currencies, such as the renminbi (RMB). This area of innovation makes borrowers less vulnerable to currency fluctuations; meaning that, even here, specialists can compete with the banks.
Lastly, using a specialist financier can help diversify sources of funding even when bank finance is available. Given banking constraints this is important as bank lines can be cut, often without warning and with no reason given.
Far from being rivals to banks, specialists view themselves as complementary. Indeed, many banks are keen supporters of the specialist financier’s role in helping them with their clients’ needs even once they have hit client credit limits. Also, many pension funds and asset managers see specialist financers as a route into a low-risk, high-reward asset class. All of which allows specialist financers to increasingly support larger transactions and further establishes their influential position in the trade finance market.
So for UK exporters looking to explore new and potentially riskier markets, the tailored approach of a specialist financier – involving a transactional view – may be the way forward, allowing them to combine the resources of the banks with new pools of funding.
A US study, based on the quick service restaurant chain Chick-fil-A, offers conflicting evidence on whether a TMS is the best option when upgrading from Excel-based forecasting.
The EU's updated Payment Services Directive (PSD2) is expected to heighten competition among the banks, open markets to non-banking challengers and foster vigorous innovation across the financial sector.
The geopolitical shocks of 2016 saw businesses understandably concerned about how the new reality of resurgent economic nationalism might affect cross-border trade and capital flows. Yet as this article explains, there’s no need for overreaction.
Banks which start to prepare now for the region to join the move to immediate payments can secure a major competitive advantage.