Just when Canadian companies were growing comfortable with expanding overseas – and building their international trade at impressive rates – COVID-19 dealt a tough blow. ‘Symptoms’ of the pandemic, including halted production, delayed logistics and closed borders, left companies waiting for deliveries or worrying about cash flow amidst outstanding payments.
The result is that many companies are now turning to ‘tried-and-tested’ trade finance solutions, from letters of credit to standby guarantees, to manage these risks and, going forward, embedding trade finance terms into new contracts.
“Over the past 12 months, many companies have been impacted by issues like temporary factory closures overseas or goods backed up at customs,” observes Anupinder Singh, Director and Head of Commercial Trade Finance at Scotiabank. “Suddenly, they are in a cash crunch situation, and they realize how much risk they have on their balance sheet, whether as an exporter, waiting to be paid, or as an importer, awaiting pre-paid goods.”
Singh explains that, in recent years, many companies seasoned in trade came to rely on ‘open account’ arrangements, by which buyers and sellers simply make wire payments or e-transfers with their trusted trade partners. Unfortunately, the pandemic has reminded many companies of the benefits of trade finance solutions in reducing the risk.
Trade finance is basically facilitating cross-border trade and mitigating risk. A bank sits in the middle of a transaction to ensure payment is received when goods are shipped and that goods are delivered as per the contractual agreement,” details Singh. He adds that trade finance solutions can give a client payment assurance, provide financing or reduce their working capital needs. “Now, more than ever before, companies are calling us to say, ‘I have a new order, how can we embed a trade finance solution in the contract?’
Unclogging supply chain challenges:
Pointing to the diversity of companies facing pandemic-induced challenges, Singh describes a large Canadian retailer that normally made immediate payments to its suppliers when the goods were shipped to the retailer’s Canadian stores. When pandemic lockdowns forced the retailer to shutter its stores, it faced the dilemma of having paid for merchandise it could not sell.
In response, Scotiabank’s Trade Finance team recommended an Import Letter of Credit, which revised the retailer’s payment terms from zero to 180 days, providing the client with breathing room to sell its inventory. In tandem, Scotiabank provided the retailer’s suppliers with an option for early payment, rather than wait for the extended period. With this structure Scotiabank was able to ensure that there was no significant pressure on the working capital of either the Canadian retailer or its suppliers. That detail illustrates how trade finance arrangements can be structured to benefit both parties.
Scotiabank also developed an end-to-end solution for a Canadian technology firm that imported components to Canada and exported final products to over 30 countries. When the firm won new contracts from a new buyer in the Middle East, they wanted to find a solution to mitigate payment risk.
Scotiabank took the time not only to provide a solution to their immediate question, but also showcased how they could improve their working capital. The Bank recommended 90-day Usance Export Letters of Credit to provide the client with a guarantee of payment from new partners in an unfamiliar jurisdiction. And, to avoid a cash flow crunch – Scotiabank offered to discount the Letter of Credit and provide immediate payment. In addition, since the tech firm often paid upfront for its imported supplies but waited months for payment from its customers – Scotiabank suggested issuing a Standby Letter of Credit to its suppliers so they could receive favorable credit terms.
Singh describes how his team recommended risk mitigation techniques that the client had not considered in their scramble to sign the trade deal: “They originally only sought a means to guarantee payment from a new customer in an unfamiliar country, but we saw an opportunity to also accelerate their customer payment terms. We were able to assure them that, ‘Yes, you will get paid and you can get paid 90 days earlier too.’”
“That’s the beauty of trade finance,” observes Robyn Chisholm, Vice President, Commercial Banking in the B.C. & Yukon Region. “It is very customizable, in real time, to help our clients get access to their cash and provides solutions to their challenges.”
From her west coast vantage point, Chisholm sees a growing community of companies with diverse trade ambitions, in light of B.C.’s access to markets in Asia, the Americas and Europe, and emerging opportunities, like the now-in-force, Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) among Canada and ten Asia-Pacific nations.
Chisholm’s relationship managers work closely with colleagues from Trade Finance and the Payments & Cash Management team to assist both veteran trading companies and those whose core business is domestic but want to grow internationally, diversify their supply chain or shift their business risk.
Asking good questions, to smooth trade bumps:
In terms of more novice traders, Scotiabank’s Devika Vaghadia points out that, “We want to have good conversations with our clients before they get that phone call for a foreign order so that they don’t say ‘No’ to an opportunity before learning how to manage the counter-party risk and move through the transaction in the safest, most effective way.”
Vaghadia, a Senior Manager of Strategic Support with Commercial Banking, adds that, “There are so many opportunities beyond Canada’s borders – and Canadian companies have a great reputation out in the market – so why not put your name out there, knowing that your banker is there to give you guidance?”
Singh points out that, while trade finance solutions make particular sense in uncertain times like a pandemic, they are a wise option in any conditions. He recalls one company that routinely made advance payments to procure inventory in Asia, but then incurred losses when they had to return faulty or erroneous orders to their suppliers: “If they had come to us earlier, we could have embedded trade finance supports to help them mitigate those costly risks.”
To ensure you can access the best trade solutions, Singh advises companies to ask themselves three questions:
- Is my current bank providing customized solutions to mitigate all my risks, or just providing ‘off-the-shelf’ products?
- Does my bank have the on-the-ground presence and trade finance people in the right places, both overseas and at home in Canada, to deliver convenient advice and service?
- Does my bank have the tools and processes to execute smoothly, including hands-on support with traditionally paper-heavy trade documentation, and options to perform faster, streamlined digital transactions?
“Ultimately, your banker should start good open conversations and be genuinely curious about your goals and evolving business,” concludes Singh. “When it comes to trade, the challenges will always be there, but a good banker can create solutions to mitigate your risk.”