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Talk:Supply@ME Capital
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=== Working Capital is the Starting Point for Trade Financing === The working capital ratio (current assets/current liabilities) indicates whether a company has enough short-term assets to cover its short-term debt. Balanced cash management in a business is essential because insufficient cash and no alternative funding means there are not enough funds to meet obligations such as buying raw materials or paying wages and overheads. Too much cash, on the other hand, means a company has idle funds for which it foregoes investment. Holding too much inventory has implications for the financial performance of a business in the form of costs for storage, handling, insurance, etc., and cash tied up that could be used otherwise. The right balance is a trade-off between liquidity versus profitability. As illustrated in the diagram below, suppliers need to get paid as early as possible, while buyers want to pay as late as possible. When the cash collection of suppliers slows down, suppliers have limited practical alternatives. They can extend the credit line or take out short-term debt with their local bank; they can use the accounts receivable as collateral to raise cash; or extend their payables. Depending on the size, location, and credit-worthiness of the suppliers, only limited options may be available—if alternative financing is not feasible, they may need to slow down their business. The underlying friction between suppliers’ and buyers’ objectives was severely magnified during the 2008 financial crisis. [[File:Working Capital is the Starting Point for Trade Financing.png]] Source: IMF Staff. Micro, small and medium-sized enterprises, especially in developing countries, are often faced with a mixture of structural constraints and are required to set aside large collaterals against trade loans or pay high fees. Long waiting times, the combination of costs with high coordination efforts, foreign currency risks and time restrictions, make L/Cs cumbersome especially for this group of enterprises. The availability of trade finance often depends on the extent to which the local banking sector is developed and internationally networked.<ref>Brandi, C. and B. Schmitz, (2015).</ref> L/Cs and other short-term pre-shipment trade loans and guarantees ensure payment for suppliers, on time and for the correct amount, before the actual change of ownership occurs and financial assets and liabilities are created. This is in contrast to trade credit and advances, when financial instruments are created concurrently with the change of ownership. Once the conditions of the L/C are met, the supplier receives payment, and the buyer receives the documents needed to claim ownership. Rejected trade finance requests from SMEs, and the global financial and economic crisis, exposed an incomplete trade finance market with demand exceeding supply, alarming new businesses, market observants and political leaders.<ref>See: ICC. 2017. which notes that “Fintechs, many in startup phase, have identified significant opportunities in the financing of international trade, and have the potential to play an important role … [to] close, the global trade finance gap [of $1.6 trillion] because it is increasingly clear that banks will be unable to materially do so.”</ref> SCF solutions refer to instruments allowing the largest company of a supply chain to use its superior credit rating to give its lower-rated suppliers access to financing at more favourable rates than they would obtain otherwise. Benefits include lengthening payment terms for buyers and shortening them for suppliers, thus improving working capital for both. New SCF solutions are offered by SCF providers (Fintechs) or directly by banks that have SCF in their service portfolio. SCF is enabled through integrated technology platforms – SCF portals– that make it possible to extend payment terms to buyers while accelerating payment to suppliers (see Figure 3). Suppliers of all sizes upload their invoices directly to the portal or send their invoice using specific accounting software. The buyer approves the invoice for early payment by the SCF provider and the full invoice amount less a financing fee is transferred to the supplier’s bank account. At maturity of the invoice period (with or without extension), the buyer will pay the due amount directly to the finance provider (if the supplier has sold the invoice) or to the supplier’s bank account (if the supplier has not sold the invoice). Programs are connected with multi-funding sources to deal with multiple currencies and jurisdictions as well as to work with non-investment-grade or unrated companies. Globally operating banks see SCF as an important new area of their activity and focal point of current research and development. It is expected that the Internet of Things (IoT) and smart contracts will allow real-time tracking of goods which could become a powerful big data source for real-time data. In developing economies, supply chain financing could enable financial intermediaries to provide funding to SMEs without having to accept their risk, basing the risk assessment on the creditworthiness of the onboarding buyers. The African Development Bank estimated that Africa has an unmet demand for trade finance of more than US$90bn and Asia of $425bn annually.<ref>6 See African Development Bank. Second Trade Finance in Africa Survey Report: Trade Finance in Africa: Overcoming Challenges. Cote D’Ivoire. 2017.</ref> [[File:Supply Chain Financing.png]] Source: IMF Staff. Special cases of SCF are (i) loan or advances against inventory – an asset-based financing instrument where the finance provider obtains title over the goods as collateral (e.g., Finetrading); (ii) inventory repurchase (repo) agreements, or buy-back agreements where the buyer/supplier temporarily “sells” its inventory to a financing entity, and “buys’ it back after a predetermined time; however, the inventory stays on the balance sheet and the funds received are recorded as liability until the repurchase takes place within the pre-agreed upon period. Finetrading, in contrast, is not considered a financial transaction because the Finetrader acquires the goods and not the claim. Finetrading combines ‘Finance’ and ‘Trading’ especially by SMEs. The Finetrader takes ownership and pre-finances the goods on behalf of the buyer for a defined financing period. For the buyer, the benefits are reduced inventory and improved working capital, while the supplier gets paid immediately. Finetrading is a trade finance tool typically provided by intermediaries other than banks. '''Secondary markets''' Because of the difficulties SMEs often face with obtaining credit through regular channels, securitization (in addition to SCF) could enhance the financial base by enabling risk-transfer from banks to a wider pool of investors beyond the banking sector. Depending on the size of the market, SCF and securitization may also contribute to a decrease in financial stability. Currently, there is no comprehensive global dataset separately covering trade finance statistics. trade finance encompasses a wider range of instruments at the financiers’ disposal (see Figure 4)—these financial instruments require additional breakdowns to the standard financial account classifications and components. Traditional L/Cs are not included in the macroeconomic statistics because they are considered contingent instruments, therefore off-balance sheet and not recorded as financial assets. Therefore, extensions are required to the current macro-statistical frameworks to facilitate an accurate measurement of domestic and cross-border trade finance. Most Used Instruments in Traditional Trade and Supply Chain Finance [[File:Most Used Instruments in Traditional Trade and Supply Chain Finance.png]] Source: Source: ICC Global Survey on Trade Finance 2018 The G20 acknowledged that international statistics produce insufficient data on trade finance and asked to “coordinate and establish a comprehensive and regular collection of trade credit in a systematic fashion.” To fill the data gap during the latest global financial crisis, the IMF and the Bankers' Association for Finance and Trade (BAFT) conducted four ad hoc surveys of banks between 2008 and 2010 on volume, prices, and drivers of trade finance.<ref>Asmundson, I., Dorsey, et al. Trade and Trade Finance in the 2008-09 Financial Crisis. IMF WP/11/16 <nowiki>https://iccwbo.org/publication/global-survey-2018-securing-future-growth/</nowiki>: 251 banks participated in the 2018 Global Survey, from 91 countries.</ref>
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