Unlocking Liquidity with Collaborative Trade Finance

The volatile global economic environment in the wake of Covid has particularly impacted the world of trade finance and supply chain management. Physical shipping delays and surging commodity prices have compounded existing issues treasurers face, such as a lack of transparency, and slow, paper-based processes. But a new wave of digital trade finance platforms could offer a solution to corporates in these demanding times.

The past couple of years has thrown various challenges at treasurers in the trade and supply chain space, as global, political and macroeconomic events have caused extreme market volatility.

Vincent Almering, Group Treasurer, at Dutch dairy commodity trading firm Interfood Group, comments: “The macroeconomic environment creates huge implications for the treasury role. But one positive is that it gives the treasurer a seat directly at the management table, because liquidity is definitely in the spotlight. A company such as Interfood doesn’t have much excess cash balances. We mainly draw working capital under our funding lines, so whatever happens in the markets, we must monitor this very closely.”

Interfood has a turnover of about €2.5bn and approximately €500m of working capital lines. As a pure-play commodity trader, the company is relatively asset light, typically resulting in high volumes and low margin business, meaning the pressure is on for treasury to be as cost-effective as possible.

“When Covid hit and we experienced a drastic drop in demand, the volatility picked up, and the price of oil turned negative,” recalls Almering. “This led to all kinds of supply chain disruptions. Container freight was locked up in China’s ports, creating tremendous challenges. We had to reroute ships, use more trucks, and ensure we were reserving capacity on ships very early, as well as dealing with the increased shipping cost”

The Russian invasion of Ukraine at the end of February triggered a surge in energy prices, particularly for people and businesses based in Europe. There was also a massive increase in commodity prices globally, which again affected supply chains worldwide.

“Dairy prices more or less doubled and at Interfood our working capital demands also pretty much doubled,” Almering says. “As treasurers, we must maintain flexibility in our lines to absorb this type of volatility. In early March, just after the war broke out, we activated our accordion to draw around €100m of additional liquidity on our existing lines. As commodity traders, we must have some headroom, but we were surprised by how rapid the price increases were coming through.”

This additional liquidity helped Interfood sustain a high level of working capital. One month later, the treasury was even able to add an additional bank to its main revolving credit facility.

“On the supply side, we looked at getting money into the chain, and we also had to evaluate how we utilised that money,” notes Almering. “Consequently, we had to activate some factoring programmes and repo facilities, and start actively managing our cash conversion cycle. Altogether, these things worked out pretty well. Businesses have to be flexible on the supply-and-demand side of cash. We actively monitored the exposure and reduced our cash conversion cycle by about 20% in two months.”

Overcoming legacy issues

A treasurer’s ability to accelerate their cash cycle, as proved by Interfood, can be critical in ensuring that their company has the required liquidity to survive in times of market volatility. However, certain obstacles can trip up treasurers during their quest to achieve this.

Enno Weitzel, Senior Vice President Strategy and Business Development, Surecomp, notes: “Transparency is one of the key topics brought up when we talk to corporate treasurers. Transparency around all the instruments, starting from the open account invoice to the guarantee, is one need. Also, treasurers are looking for transparency around the globe. They may have pretty good system support in their headquarters, but what about the worldwide subsidiaries? As the result of merger activities, there may be various systems across the group trying to resolve the same problem.”

Paper is another sticking point for treasurers looking to drive efficiencies through their supply chain to unlock liquidity. While an invoice may often technically be digital as a PDF, the process is the same as if it were paper – it is sent out but can easily be forgotten because it’s not truly digital. A digital instrument enables stakeholders to collaborate on it and share knowledge in real-time.

“Paper and the letter of credit [LC] have an impact on the physical supply chain interruptions that we are facing,” outlines Weitzel. “Even if the ship has arrived, the container cannot be released if the papers are not there. Either corporates don’t get the goods, or they don’t get the money as sometimes the container is not on the ship in the first place.”

Almering's previous role of finance director at Interfood meant that he had hands-on involvement of trade finance products and the associated payment conditions. And he was surprised at how old-fashioned many of the processes are.

“If you look to the process of getting an LC opened, confirmed or closed, the amount of paperwork that has to be done – the finer details – can delay an LC from being put into operation,” comments Almering. “This methodology has been the same for years while other areas of finance have evolved. The current methods do work to some extent, but it’s slow and lacks transparency. With a bill of lading, a courier has to ship it to someone else, and you don’t know where it is or its status.”

Some of the issues with LCs mean that, where possible, corporates may look for other instruments to use. The challenge many come up against is that there is a trade-off to be made between efficiency and security.

“Working in commodity trading, I see fewer LCs being used,” reveals Almering. “We see more of a shift towards the use of trade credit insurance and CAD [cash against documents] by exchanging documents with the help of banks. That is less cumbersome than the complex LC business, but it has a lower level of security. However, it should still be sufficient if the bills of lading are retained and treasurers have an efficient process on the collection side of these documents.”

Weitzel notes that the additional security offered by LCs still makes them attractive, particularly in volatile times.

“If you take a five-year view, there is a steady decline in LCs, but there are times where we see a spike in usage – rising uncertainty and crises are always a trigger for a pick-up of LCs again,” Weitzel explains. “It’s a lever situation – you can choose more security, which comes with more complexity and higher costs. There are times when parties prefer that higher level of security over everything. Major disruptions such Covid and war mean we are seeing more LCs used again.”

Despite this, some trends in trade finance instrument usage can be observed. For example, there is a growing, if steady, adoption of EBLs as corporates try to move away from paper.

“During Covid, we have worked with temporary reliefs that allowed the use of digital tools, which previously had not been permitted,” notes Weitzel. “For example, it was acceptable to use digital signatures and to skip the need for a physical archive. The challenge today is that the old norms are starting to reassert themselves. The lawyer or compliance officer asks for wet ink or the paper copy of the original document, for example.”

While this outcome may be frustrating for treasurers, the fact that the temporary digital solutions implemented during the pandemic’s peak proved to work offers a glimpse into the future of trade finance. But to become permanent, these processes will require legal backing and the support of the entire financial community.

“There are solutions around, and there are rather niche closed user groups where this can be seen working, but we need to support these initiatives on a broader level, embedding them in national law,” comments Weitzel. “There’s the initiative around the Model Law on Electronic Transferable Records [MLETR], which essentially establishes that digital instruments are as good as paper for whatever reason or use. Then there’s the active collaboration between corporates and financial institutions. As a tech provider, we at Surecomp see our role in enabling and facilitating efficient collaboration between corporates and all their financial institutions.”

Delivering digital efficiency and transparency

Treasury technology firms and fintechs often aim to create transparency and enable faster communication between the different parties in the trade finance process. Usually, this is via a platform. At Interfood, the treasury team has used two platforms in the past for this purpose but the desired results weren’t achieved.

“One platform we used was from an external fintech provider, and the other was supplied by one of our lending banks, which had an online platform that we could use for collection purposes and follow-up,” recalls Almering. “But we realised neither of them were end-to-end. The platform just captured part of the process which still involved paper, was not fully integrated, and was slow. Service can be even more important than the price we pay for confirmations or LC document collections because speed is of the essence.”

While those platforms did not capture the type of service level that Almering and his team were looking for, more recent developments in the market aim to close that gap and offer a more holistic platform approach to trade finance. Surecomp is one example of this movement, with TMI reporting on the launch of its RIVO platform in May 2022.

Weitzel explains: “As a fintech, the most important element we put into the RIVO development was open-mindedness. We place ourselves in the shoes of the corporate treasurers who used our existing systems and the heads of trade at the banks that use our system. We looked into the market and thoroughly assessed what is already there and available, and we challenged ourselves as to what we could add.”

If there’s a specialised working solution already on the market, it makes sense for a platform provider to partner with the existing solution rather than try to reinvent the wheel. This is the approach that Surecomp took with RIVO.

“We buy in certain technology and then package it into a product,” continues Weitzel. “We have a good understanding of the requirements of corporates in the treasury space, and the same is true for the banks in the trade finance and supply chain arena. We stitched these two pillars into one cloud solution, where all transaction parties – including the shipping companies that are also data providers – can collaborate.”

As noted already, it can be time-consuming and frustrating for a corporate to apply for an LC when a few details might be missing. On a collaborative platform, corporates can work with their partners and hammer out the finer details.

“Take bidding as an example on the specialised services side,” says Weitzel. “Parties on our platform are perfectly open to collaborating with specialised platforms in the bidding step of the value process – we don’t need to do everything ourselves. That openness is where we can provide value.”

SaaS platforms such as RIVO typically do not require a corporate to do anything more than type in their email address and select a password when onboarding. This type of platform can support multiple processes, enabling business units across the globe, jurisdictions and time zones to use the platform to apply for guarantees and LCs. This immediately creates greater transparency for the treasurer, who can see everything going on in one place. That transparency is the first step to better managing liquidity.

“Treasurers can also invite their counterparts,” adds Weitzel. “Think about invoices – if a treasurer sends an invoice over the platform, the counterpart that is due to pay the invoice can confirm that it is accepted, and the treasurer would know. The counterpart can confirm they have started the payment cycle, so the treasurer knows that the money is on the way, and then they can confirm on the platform when the money is received. We support the automatic reconciliation of that.”

Getting the balance right

Providing liquidity to its organisation is a core function of the treasury department. Treasurers must be prepared for any eventuality and have flexible working capital or funding solutions to respond to any situation. The past couple of years has underlined just how important it is to have measures in place that can be utilised when the unplanned occurs.

“When I initially put the €100m accordion into our financing, I never thought I would need it,” reflects Almering. “But as was proved, there comes a time when things happen in the world, and you need to draw on contingencies. I’d add that, as well as increasing the funding level, there’s also an opportunity for treasurers to work with the business to reduce funding needs, speed up the cash cycle, and use technology to have cash available and visible. Work on all angles and prepare for the worst.”

Data plays a vital role in discussions about platforms that would best support the business.

“Treasurers need transparency on their status quo,” concludes Weitzel. “To achieve this, they should embrace digitalisation. This will provide a global view of cash flow which is critical, particularly for highly centralised treasury teams. Technology can also be tailored to take into account the sophistication that their specific business model requires.”