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Trade finance should be tied more tightly to cash management, say experts Print E-mail
Thursday, 13 August 2009

By Tom Groenfeldt

Since improving trade finance processes can have a big impact on capital, it should be tightly linked to cash management, according to SEB, which in 2006 moved its trade finance group into Global Transaction Services, alongside cash management and custody.

One client SEB worked with is now saving 4.2 million kroners a month from improvements to its trade finance processes. That's enough to get the attention of a company treasurer, and that's just the bank's target with its trade finance sales offerings.

Traditionally, says Lars Millberg, global head for trade finance at SEB, corporations have left the details of trade finance to offices and factories around the region or around the world, since that was seen as the best way to deal with the paper-intensive business. But increasingly banks and companies are taking advantage of simple technology, such as scanning and emailing documents, to change the way they do business.

The solution isn't always obvious to prospective clients. Patrik Zekkar, head of trade finance for Sweden, recalls visiting a Danish company which explained it needed to conduct its trade operations through a bank which had a local branch, so it could send documents over by courier. The document exchange process took about three days. Zekkar explained that SEB could do the same processing electronically in an hour and a half.

Several of SEB's trade finance professionals came out of cash management, an area where Nordic companies are some of the best in the world. But most of the companies haven't understood how much capital they are wasting in trade, especially trade with emerging markets. SEB has developed a survey with 40 to 50 questions to help companies uncover weak processes that are slowing their cash flows. From the information the bank and the client can develop a business case for making the investment to improve processes.

"We want the issues on the table of the treasurer, not just the risk manager," explains Millberg. "Before, everyone was happy if the risk was covered at a decent price and they allowed the process to be inefficient."

By mapping letter of credit processing among 50 customers, the bank found the average time to get corrected documents which trigger release of funds was 41 days; the best company did it in 10.

"Since we understand how the leaders conduct their trade finance, we can use their competence to find the weak spots at other firms," says Zekkar.

The people responsible for letters of credit measure their work by risk management and document quality; they have little awareness of working capital issues. With electronic channels, trade finance can easily be centralized, which makes it easier to follow standard processes, enables companies to bargain for better rates from their banks and reduces the number of bank interfaces a corporation has to manage.

"You don't need to have your trade finance people spread out all over the world," explains Zekkar. "You can have them in one place monitoring transactions with Europe and with emerging markets from China to Brazil."

One client averaged 33 days to complete a letter of credit; it had an 89 percent error rate in the first submission, 43 percent in the second round, and even after the documents were completed it waited another 16 days to prepare an invoice, package materials and prepare the certificate of origin, work that should not have consumed more than 2 days.

How much does 14 days cost in a company's capital? The answer in this case was 2.2 million kroner a month.

"That was enough money to get some people very, very upset in treasury." But the logistics department was rated as doing just fine - it met its key performance indicators (KPIs) in shipping on time and within budget, but the high error rate in documents and the resulting payment delays weren't part of its evaluation.

"We can have totally automatic solution where we don't even touch the documents," says Zekkar. "The customer makes the changes when we ask for them and then we send the file on to the other banks."

By centralizing trade finance and tying it to cash management, companies can track which counterparties are slow to pay; some emerging market banks take five to seven days.

"You should have a credit policy when you select your counterparty," says Millberg. "But the time you open a letter of credit it is too late. SEB understand that it needs to transform the world of trade into a language of capital tied up in processes and employee FTEs, language that a CFO or treasurer can understand."

Fortunately the global financial crisis has focused more attention on both risk management and cost reduction. While corporate policy may require letters of credit for certain types of transactions, a subsidiary may have decided to use an open account because it knows the buyer well and has a long relationship.

"You may know a buyer in Venezuela, but you don't know Hugo Chavez," says Zekkar, alluding to the potential political risk. SEB aims to make supply chain financing less cumbersome so companies can understand it and use the appropriate tools.

"More people are feeling insecure so they will go to secure instruments for trade," says Millberg. "If we can meet that demand with a more cash managed oriented approach it will be a tremendous success."

After Zekkar moved from cash management to trade finance, he recalls, he revisited corporate treasurers to ask them about trade. Most had no ideas of their trade finance operations; it wasn't their responsibility.

They might be exporting $70 billion a year to emerging markets, but they didn't have a view of the cash flow tied up in the process, he says. "If you are selling to Bangladesh, why should it take you 45 more days to get paid than if you are selling to Norway? There is a tremendous amount of savings lying on the street."

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