“Trade cycle financing is managing cash flow for a given period of time, and it can be related to an importer or an exporter,” explains Tim Murphy, first vice president for Comerica Bank. “It allows a bank to assist customers in managing the purchase and sale of their inventories over a defined period of time.”
Smart Business spoke with Murphy about trade cycle financing, what it is geared toward and how a company can benefit from this type of financing.
Who is trade cycle financing geared toward?
It is geared mainly toward importers and exporters, who traditionally have a fairly well-defined period in terms of the financing they need.
We measure the full trade cycle, which is from inventory purchase to manufacturing to collection time. Once we’ve understood the cycle and understand the client needs, we finance the cycle on an ongoing basis.
Trade cycle financing can also work well for distributors, both domestically and internationally. This method of financing is not geared toward a new company that needs to build inventory.
How can a company benefit from this type of financing?
It is a cost-efficient method of financing. Customers only borrow what they need for a given purchase or for a given supplier.
This keeps their landed costs lower. It also allows them to get a better handle on their international banking charges.
Most companies that use trade cycle financing do not have the goods very long in their possession; some just drop ship the goods and never even touch them.
What payment mechanisms are available?
A number of different financing methods can be used: letters of credit, open account, cash in advance and purchasing or selling on collections. All of these tools can be adapted into trade cycle finance. For example, if you sell on a collection basis, we may be able to advance or discount that collection. Or if you’re buying on open account, we may be able to refinance that purchase from overseas.
What role does insurance play with trade cycle financing?
When you’re talking about trade cycle financing, there are really two types of insurance. The first is cargo insurance, which covers the merchandise from warehouse to warehouse. This protects both the bank that may be lending on the goods as well as the buyers and the sellers.
The second type of insurance is a policy for commercial and political risk. Some policies allow financial institutions to assist their clients in the purchasing of finished goods or raw materials and shipping to or from their overseas locations. This can be a big advantage because they are able to finance almost all of the costs. Let’s say a client needs to buy raw materials for his factory in Mexico. He will submit all of his purchase orders and the bank will finance those purchase orders up to 180 days. This allows him to take the raw material to his plant in Mexico, manufacture the product, sell the product, get paid for the product and then repay the bank. The advantage to the client is that he’s only made one advance and his reporting is minimized.
How can a company determine if it is qualified for trade cycle financing?
If a company is truly an importer, exporter or distributor, then it probably qualifies. Most banks would like to have at least three years’ worth of financial statements for a new client. What we’re looking for is a defined trade cycle where we can determine when the client needs to buy, who they’re selling to, and how long the period is. Trade cycle financing is not for the purpose of building inventory.
TIM MURPHY is first vice president for Comerica Bank. Reach him at (562) 463-6530 or firstname.lastname@example.org.