Trade Finance Solutions: Bridging the Gap for Manufacturers
Manufacturers all over the world work on a credit basis, which causes challenges for their cash flow. While producing to fill an order, the manufacturer incurs the full cost, including materials, labor, and other inputs. Once production is finished, they ship it out, and it takes between 10 and 90 days to reach the buyer, who can take up to 60 days to pay the amount they owe. This could result in a gap of up to 150 days, which, for many small and medium enterprises (SMEs), can greatly impair their cash flow. On top of this, there is also the risk of the buyer’s delayed payment, non-payment, or insolvency.
Trade finance solutions exist to help mitigate the considerable financial risk SMEs face in the manufacturing industry. The welfare of SMEs is incredibly important for the wider economy, as around 90% of businesses worldwide are SMEs, and they are responsible for more than 50% of employment, per The World Bank. According to recent statistics, large buyers in the U.S. take an average of 54.7 days to pay their invoices, and another chunk of buyer payments are considered late. This has a huge negative impact on a manufacturer’s cash flow and could create a domino effect that threatens their solvency, as a study revealed that 82% of SMEs fail due to poor cash flow management.
How does trade finance work?
Once a manufacturer sends out a consignment, they provide the trade finance company with the invoice, and the trade finance company immediately pays them the amount, eliminating the waiting period for the money. The trade finance solutions company will then collect the payment from the buyer. Credit protection is also included in many trade finance packages, ensuring suppliers get paid even if their customers become insolvent.
By using trade finance, manufacturers can bridge the gap in their working capital cycles, allowing them to support long payment terms with their buyers, as well as meet their financial obligations, such as paying their suppliers on time.
Solving cash flow issues for manufacturers
Solving cash flow issues can have a huge beneficial effect on manufacturers’ growth. Having access to the money immediately will allow them to take more orders, grow their production capabilities, and expand into more markets. Trade finance solutions also provide peace of mind to SME manufacturers, as they don’t need to worry about the buyer becoming delinquent on their payments or unable to pay if insolvency occurs. SMEs operate on a tighter budget than large companies, and missed payments from buyers can be very devastating to them.
Many times, companies having cash flow problems approach a bank for a business loan but are turned away for various reasons. Trade finance solutions providers act as an alternative source of collateral-free financing by buying their receivables and providing cash in advance.
The importance of trade finance in the industry
Aside from facilitating SMEs’ cash flow and enabling them to grow their businesses, trade finance also places importance on sustainability. By combining global scale with local expertise across key sectors, trade finance services can serve their clients with confidence while focusing on establishing a long-term relationship with them and helping with their future financial needs.
Analyst comment
Positive news: Trade finance helps mitigate financial risk for SMEs in the manufacturing industry, which is important for the wider economy as SMEs account for a significant portion of businesses and employment worldwide. By bridging the gap in working capital cycles and providing credit protection, trade finance allows manufacturers to support long payment terms, meet financial obligations, and solve cash flow issues. This enables manufacturers to take more orders, expand production capabilities, and enter new markets, while also providing peace of mind and alternative financing options.
Market outlook: With trade finance addressing cash flow challenges for SME manufacturers and enabling growth opportunities, the market is likely to see increased demand for trade finance services. This can lead to the development of innovative solutions and partnerships between trade finance providers and manufacturers. Overall, the market for trade finance is expected to grow as SMEs seek alternative financing options to support their operations and expansion plans.
