Global Trade • March/April 2022 • THE RESILIENCE FACTOR

READING THE SUPPLY CHAIN TEA LEAVES TO MITIGATE DISRUPTIONS IN 2022 & BEYOND

It’s 2022 and we are still talking about supply chain disruptions–slow deliveries, worker shortages and trucking and logistics issues. The problems experienced in this industry have made front-page headlines for longer than most executives had anticipated, but they did not start with a worldwide pandemic, and disruptions in one form or another will certainly continue even when the pandemic is over.

In 2021, supply chain disruptions cost the United States an average of $228 million with a serious impact on other countries globally. Credit insurance company Euler Hermes also reported that logistics bottlenecks are impacting 25% of global trade volume. In fact, KPMG says there is a likelihood emerging that logistics disruptions will continue well into 2022 and beyond.

Supply chain disruptions wreak havoc on small businesses and massive corporations alike, but how strong have the effects of supply chain disruptions been? According to Zippia Research:

Globally, 12% of retailers reported heavy supply chain disruptions due to COVID-19. This is a surprisingly low number, as 32% of global retailers reported experiencing few outages. However, maintaining stock items was a much bigger issue, as 28% of respondents underwent shortages, out-of-stocks, and tried to find alternative sourcing options.

Between 2019-2020, overall supply chain disruptions increased by 14%. In 2019, there was an average of 3,700 supply chain disruptors. However, this number increased to 4,200 in 2020.

Supply chain disruptions can cause a massive 62% loss in finances. Two other aspects of business that can be greatly affected by supply chain disruptions include logistics and reputation, which see an average 54% hit.

Supply chain disruptions are a given and will continue to aggravate businesses large and small in the future. This makes it even more important for businesses to build resilience into their supply chains to mitigate the financial impact.

One commonly overlooked aspect to supply chain disruptions is the financial consequences to small and medium-sized businesses (SMBs), which in the best of times have difficulty competing with their larger counterparts. Access to financing, liquidity, cutting red tape in exports and imports, and visibility with shipping have always been an issue for SMBs, and a digital trade finance solution could very well be the answer to their challenges.

In normal situations, small exporters invest upfront in raw materials, labor and manufacturing to produce their goods. Sometimes buyers pay upfront, and occasionally they pay when they receive the goods. In the best-case scenario, the timeframe between shipping and receiving can take several months, and exporters—who are only paid once their buyers receive the goods—could wait 30 to 150 days for payment.

During supply chain disruptions, the timeframe between the exporter and the buyer can increase exponentially–even upwards of 450 days. This increases payment delays and can cause serious financial problems for SMBs trying to compete with large retailers.

For example, we worked with a leading agricultural commodity firm with multiple locations across the U.S. that experienced considerable growth. But increasing its exports became challenging as the company’s bank excludes foreign accounts receivable from its borrowing base, limiting the firm’s ability to offer credit terms to international buyers.

This issue reared its head again in 2021 when the firm received a large and time-sensitive growth opportunity with its long-time buyer in Denmark. Before working with us, all payments had to be made upfront in full before shipment could take place, restricting the international collaboration being explored between the two organizations.

After signing with us, the U.S. exporter is now able to offer its buyer up to 120 days post-shipment credit terms. The solution provides the company with the additional working capital and credit protection it needs to capitalize on a large growth opportunity with its Danish buyer. The deal is also mutually beneficial: The exporter can continue to pay its farmers in cash, while its buyer can access credit terms that bridge the container shipping period.

International trade plays an essential role in boosting consumer choice, providing new employment opportunities and generally raising living standards. It remains a global tragedy that regulatory and financing issues continue to hamper the ability of organizations to seize their international opportunities across a range of industries—from manufacturing to agricultural commodities.

The latest deal between our company and this U.S.-based agricultural commodities client underlines the important role that financing plays in facilitating international trade. Although the hurdles can sometimes appear insurmountable, with the right support, a mutually beneficial solution can usually be found that serves the interests of businesses (and consumers) all over the world.

According to an Asian Development Bank (ADB) study, rejection rates for trade finance reached record highs in 2020, with the gap between demand and supply currently at $1.7tn–a 15% rise compared to the previous estimate of $1.5tn in 2018.

The ADB’s latest research reiterates findings from previous studies that the trade finance gap disproportionately affects smaller enterprises, which are also strongly affected by the supply chain disruptions. Approximately 40% of rejected trade finance requests were from SMBs.

These challenges only intensified during the COVID quarantine, when many banks closed their branches to reduce physical contact dangers. More than 55% of SMB operations suffered harsh consequences following the COVID-19 outbreak, particularly in China, the EU, and the United States.

However, there are solutions available where invoices can be paid to help buyers and sellers outlast disruptions. Optimizing the inflow and outflow of cash year-round requires modern financing solutions, such as digital trade finance, to adjust to unique working capital cycles. Maximizing cash flow is one of the best ways to free up the working capital necessary to expedite business activities.

In addition, digital trade finance offers buyers and sellers flexible payment solutions that optimize balance sheets. It removes the paperwork, hassle, and red tape that hampers those involved in international trade, giving them the working capital and risk protection they need to thrive.

Case in point: We provided a new financing line for a global apparel group headquartered in New York that has factories in South Asia and China and delivers a range of garments to some of the biggest buyers in the world, including Primark, TJX and Asos.

The firm acts as a full-service agency for its clients, taking them right through the clothes lifecycle from design to sourcing, production and shipment.

Like many companies, the NYC exporter has a peak season, where they sell the most goods. For them, it was around August/September, shipping goods to their customers in the run-up to the Christmas season.

However, their buyers would pay 90 days after the goods were shipped, putting considerable stress on the exporter’s cash reserves. In 2021, the pressure was particularly severe as disruptions in the shipping industry and COVID-19 insecurity meant buyers were buying more than ever to ensure they had adequate stock to cover this crucial selling period. This added to their already unfavorable position. What’s more, their existing lender, a domestic bank, wasn’t able to cover their export business. This meant they had to dip into their capital to finance this segment of their business.

With our solution, the client was able to set up a new financing line in a very short space of time to fund their peak shipments. Through the use of our digital trade finance platform, we were able to pre-underwrite this client based on the data points we had in our system, they were able to conduct the trade with no physical documentation required, and they could manage the entire process on our platform, including tracking their shipments. Most importantly, they were paid as soon as they shipped the goods, allowing them to fulfill additional orders and grow their export business.

While many U.S. companies have good relationships with their local banks, they aren’t able to get proper cross-border or international funding. They need help from companies that have an international aspect to their businesses. This client specifically needed competitive pricing and an international footing with local offices over the world that could handle transactions in multiple currencies.

Another issue for SMBs can be managing their trade documents–packing lists, warehouse receipts, certificates of origin, export licenses, etc., and knowing where their goods are in real-time in the shipping process. Effectively managing the shipping documentation process will save SMBs time in delivering cargo and eliminate potential delays in shipments–ultimately saving money as well.

Every country has unique policies, regulations, taxes, duties and shipping documentation requirements that can make international shipping complex and time-consuming. SMBs should take the time to conduct the proper research and seek out answers to shipping documentation requirements, but many do not have the resources to manage trade documents and track visibility. Only 6% of companies report full visibility on their supply chain and 69% of companies do not have total visibility. Digital trade solutions can help SMBs overcome these issues.

One of the most pressing problems digital trade solves is a dramatic decrease in paperwork through Digital Economy Agreements. DEAs help SMBs gain access to digital trade opportunities—such as electronic invoicing, cross-border data protection, and digital IDs—ultimately connecting overseas business partners more efficiently and helping companies improve productivity and reduce expenses. They also offer more security since they are less susceptible to fraud.

Another important consideration for SMBs is Supply Chain Visibility. SCV is essential to any business by providing near-real-time data about logistics and supply chain operations. That data helps companies understand where their goods are in the shipping process, alert partners, customers and manage liquidity.

Small and medium-sized businesses are critical players in the future of the global economy, but they face most of the challenges in securing financing. Unfortunately, many companies have already succumbed to bankruptcy due to pandemic-related systems and supply chain financing failures.

Digital trade finance facilitates international trade for SMBs by maximizing their working capital and can help a company secure additional financing in a matter of days. More importantly, digital trade finance creates a foundation for economic growth by offering tools that can help businesses reduce their credit risk, forecast cash flow, allocate working capital and explore a broader customer and supply base—possibly discovering new channels to buy or sell goods.

Now, business owners are strategically preparing for continued disruptions by turning to digital trade financing solutions. With these services, companies can minimize their risk exposures while supporting supply chain resilience.

Exporters and importers across the globe are beginning to recognize the advantages of adopting a technology-based infrastructure. Bridging this digital divide will support economic recovery after the pandemic and ensure that trade is less vulnerable to future disruptions.

Nelson Holzner is the CEO and cofounder of MODIFI, a global fintech company that helps SMBs finance and manage their international trades. He is a serial entrepreneur with more than 20 years of professional experience in top international firms, start-ups and high-growth companies. As a founder and former CEO of BillPay, Nelson guided the company to over €3bn (or $4 billion USD) in factoring payments, which he later sold to Klarna, one of the most valuable fintech companies in the world.