Managing cross border risk in times of economic uncertainty

During periods of economic downturn, access to finance becomes a harder task than ever, with traditional lenders tightening purse strings to mitigate increased risks – not least when it comes to cross-border transactions. Yet for smaller businesses operating vital parts of the supply chain, having access to capital during these periods is crucial. As Ben Boateng, Editorial Board Member of TRF News and Senior Director at ExWorks Capital, explains, with the correct measures, financiers can make sure these businesses do not go underserved

While every economic crisis is different, one thing remains constant: the need for supply chain efficiency. From food to household necessities, the goods we need for survival all have their own production and distribution chains – more often than not spanning various jurisdictions. Yet, at the very time when the economy faces challenges, banks are forced to scale back in order to mitigate potential risks, and businesses operating cross-border are the first to feel the pinch.

To make matters worse, during such periods, demand is often multiplied, and for smaller businesses that do not have the cash-flow to cover this, funding is necessary to bridge the gap between upfront costs and later payment. And it’s not just those operating in less-economically stable jurisdictions that are affected. Given the more stringent risk mitigation measures, even companies operating in countries that would qualify for bank lending in times of economic normality are forced to look further afield, and defensive measures such as protectionism mean access to certain components within the supply chain could become strained. A slowdown in just one area can lead to widespread interruption, and equilibrium between supply and demand is quickly lost.

Of course, there is good reason for lenders to err on the side of caution. On a large scale, the revenues of entire sectors could be affected if areas of the supply chain are forced to close due to edicts and legislative measures. Therefore, certain industries are often regarded as being too risky by more traditional financiers. But this means there could be a significant and important part of the supply chain that is left in need of capital.

Knowing your client

So, what can lenders do to ensure these businesses have access to funding? On the most basic level, credit insurance can be taken out to cover the lender in the event of non-repayment, minimising any potential revenue loss and rendering assets more secure. What’s more, depending on levels of economic uncertainty, local measures may be introduced to safeguard smaller or more vulnerable businesses in the event of supply chain pressure – for instance, obliging businesses to submit payment details in the public domain – which can assist lenders in making a more informed decision when choosing to finance certain companies.

Yet, given the complexity of cross-border supply chain transactions, financiers must ensure they consider a wider-reaching range of measures in order to cover all bases and mitigate large-scale issues that could disrupt the wider supply chain.

Due diligence is key here, but it should extend far beyond standard checks on the borrower. In order to fully mitigate concerns, the lender must look at all parties in the transaction, including counterparties and the end-receiver, covering all jurisdictions in the supply chain. Looking at recent transactions and examining the length and track-record of business partnerships is also key and can ensure products will meet quality criteria based on previous imports or exports. Additionally, the journey of the product must be taken into consideration and account for any potential logistical risks – for instance, the distance it must travel to the nearest port and any possible barriers to overseas transportation – as well as other financial setbacks, such as import duties and licence obligations.

When it comes to more formal restrictions that prevent lenders operating locally – such as legal disparity, political discord or currency issues – specialist payment vehicles (SPVs) can also be set up in order to process a transaction in a common region. These off-shore vehicles provide the lender with more control over a transaction and, in the case that legal disputes are presented, provide the security that they will be dealt with fairly. What’s more, these vehicles enable lenders to by-pass local restrictions on foreign lenders, meaning financiers are able to help businesses importing or exporting in a much wider range of jurisdictions.

The role of the alternative lender

Yet, a limited number of lenders possess the flexibility and the creativity to offer such options, particularly during times of economic strain. Specialist alternative lenders, however, are able to take a different stance. With an expert understanding of the sectors in which they operate, these lenders take a holistic approach to bridging gaps in working capital. What’s more, a thorough knowledge of the market enables them to strategically assist clients in procuring or moving goods, and advise on where to take precautions or consider alternative sourcing, thus stabilising their businesses.

Of course, often, these financiers do work in tandem with banks, mitigating capital risks and providing the more traditional institutions with greater flexibility when it comes to lending slightly further up the risk curve. But for smaller businesses operating in niche areas of the supply chain, these lenders can provide them with the oxygen they need to meet demand and grow their businesses – economic crisis or not.