A well thought-out working capital solution during uncertain times
The supply chain challenges due to Covid-19
Needless to say, many corporates have been impacted by the roller coaster ride in commodities prices and disruption in supply chains during the last year. If you look at crude oil and copper prices in the past 12 months, unless you are a speculator who loves big waves, this fluctuation has caused trouble to many corporates in their supply chain management. For example, the oil price was averaging around $40 per barrel (WTI Oil) during 2020 as compared with $60 or above in 2019.
Almost everyone has felt the disruption in supply chains one way or the other. The significant drop and surge in demand for certain products, reduced productivity, storage restriction, suppliers having difficulties accessing liquidity and buyers asking for longer payment terms to get through these trying times, have all been – and still are – haunting for many corporates to some extent. In fact, there are cases of major metal mines and oil refinery closures even now due to the lack of liquidity.
Sophisticated solutions in the most critical times
It might no longer be sufficient for corporates to rely on traditional trade finance to meet working capital needs. Using more sophisticated working capital solutions to lock-in the commitment from a strategic supplier or to provide a funding solution to trusted but financially weaker suppliers could have helped not only the corporate’s own working capital needs but also to stabilise the upstream supply. There would also be a benefit of balance sheet optimisation.
A very important corporate client of Santander Asia has been sourcing and importing agricultural products from Latin America. The heightened financing cost and liquidity crunch in this region were hurting exporters during the planting season. A structured prepayment solution was developed in time to meet the needs at both ends.
That was a strategic move by the importer to secure stable supply and maintain its market position. Exporters welcomed this alternative non-financial debt funding source with open arms - it is also cheaper than its local cost of borrowing. It was entirely up to the importer to fund the prepayment alone, or – as in this case – Santander can provide the majority of the funding as well as mitigating the exporter’s performance risks for the importer, leveraging the extensive customer network of the bank.
The corporate then further sells the agricultural products in South-east Asia in open account terms due to a positive historical relationship. However, the sharp changes in commodity prices meant the company faced much higher buyer non-payment risk as buyers were also facing declines in profit due to weaker consumer demand.
Clearly, the seller also has cashflow difficulties due to this vicious cycle. A structured receivables solution will be suitable in this case to take on the buyer risk, and at the same time provide funding to the seller. Most importantly, it can provide balance sheet treatment in the critical quarter and year-end results period. Using a combination of advanced trade solutions thus gives corporates extra strength to weather an uncertain future.
This example is just one of the many cases illustrating how corporates could blend a mix of trade and working capital solutions within their business strategy. Traditional trade finance has been in place for many years and some people might still think this is the responsibility of the finance team. However, many successful cases have told us that a corporate that makes good use of supply chain and structured trade finance solutions has found itself in a stronger position in terms of its cash generating capabilities and its stronger relationship with suppliers and buyers.
These are exactly what every corporate needs, especially during challenging times, although they needs to be planned ahead of turbulent markets to ensure the financial tools are in place throughout the financial cycle.