Now that new tariffs have taken effect, a big question being asked is –
“Who’s paying them?”
Small businesses in the U.S. have reportedly been hit hard by the tariff announcements. Many of them import goods from overseas and are the ones responsible for paying the tariff costs, which are essentially taxes placed on foreign products brought into the import country. Big-box retailers like Walmart don’t face this same financial burden. They have the competitive advantage and the leverage to pass tariff expenses onto their overseas suppliers if necessary.
Amid new trade policies, buyers and suppliers are reviewing the terms of their trading partnerships. Some are negotiating proactive solutions in response, including how to address payment and any new added costs from tariffs.
Whether it’s the overseas supplier who will have to absorb tariff prices or the importer who ends up covering them, trade finance can be used to protect and improve cash flow for both buyers and sellers across the international supply chain. It’s also a means for buyers and sellers to negotiate more favorable payment terms with one another, so all players can proceed with strong, stable cash flow when doing cross-border business.
Win-win tool for dealing with tariffs
For businesses trading internationally, sorting out payments during the tariff rollouts is likely a top priority. Small, midsized and larger companies are all involved in this new trade playbook and are all part of getting a product to market.
In this trading web of exporters, importers and other supply partnerships, someone will have to either absorb, pass on or split tariff charges.
Just like it has been during other supply chain events, including COVID-19 and geopolitical disruptions, trade finance can be a solid tool to help companies bridge cash flow between raw material procurement, production and payment receipt. It can be used to finance longer payment terms between the buyer and seller, so that sellers get funded right away while the buyer can pay at a later date.
Fun fact: Trade finance already supports 80-90% of global trade, according to the World Trade Organization. This financing ensures that both parties in a commercial transaction have the cash they need, especially if prices spike, like in the case of tariff charges.
Financial flexibility during times of transition
Tariffs are determined by the country of origin and the type of product being imported.
Right now, a lot of companies are talking about the uncertainty tariffs are causing for their business. Some however have anticipated tariffs and have already adjusted their business strategies accordingly, including price adjustments with suppliers, inventory stockpiling, diversifying their sourcing and supply chains, and focusing on additional markets outside U.S.
Those companies that haven’t already gotten the ball rolling on these adjustments are likely in the process of considering their options now that tariffs have shaken up trade norms.
As companies reassess their tactics, trade finance is a flexible solution that can adapt to a business’ evolving needs.
If a company, for example, shifts sourcing from one country to another, or partners with retailers in new markets, then a trade finance firm can help facilitate seamless transactions between buyer and seller – including the payment terms between the two.
The mechanics behind trade finance
Trade finance is a set of financial tools that improve cash flow, mitigate trade risk, and unlock business growth.
One type of trade finance is known as export factoring. Using export factoring, companies can sell their receivables or invoices to a financial intermediary. The financial intermediary then provides up to 90% of the invoice amount to the company upfront and in cash.
The concept behind export factoring is that businesses choosing to use it can get paid right away, rather than having to wait months to collect payment from their buyers.
For reference, recent data showed that a large U.S. buyer takes an average of 54.7 days to pay their invoices. Businesses can be strained financially if they have to wait that long to get paid.
Aside from the immediate liquidity export factoring provides, non-recourse export factoring also includes credit protection that ensures you get paid even if your customer defaults. Collection services are also part of export factoring arrangements, where the trade finance company acts as an extension of a business’s “back office”. With collections services, the trade finance company handles payment collections and supports exporters as they navigate and work with buyers in foreign markets.
Supply chain finance is another type of trade finance, but it is often initiated by the buyer, rather than the seller. Through supply chain finance, a retailer can offer its vendors early funding, equipping them with the cash to maintain operations and keep up with orders.
Like export factoring, supply chain finance helps suppliers get paid faster while giving buyers longer windows until payment is due. This dynamic ultimately allows buyers and sellers to have more cash on hand, a crucial element for general working capital – and with the handling of tariffs.
The upshot
As the tariff and international trade landscape evolves, trade finance, and the age-old technique of factoring your receivables to secure payment upfront can prove to be the right antidote to optimize cash flow.
No matter where the tide turns next, trade finance tools offer a potential safety net for companies engaged in international trade.
disqus comments