Non-bank trade finance providers look to boost market share

Emerging market (EM) manufacturers were facing difficulties even before the coronavirus pandemic decimated international demand for many of their products.

The Asian Development Bank estimated that $1.5 trillion of requested trade finance was rejected last year – a figure that could rise to $2.5 trillion by 2025, according to the World Economic Forum (WEF).

In mid-May, Stenn closed a new $200 million financing facility to provide liquidity and cash-flow management to global companies affected by the coronavirus pandemic. Then in the first week of June, the company announced that a new round of funding had boosted its core trade financing programme to half a billion dollars.

Stenn hopes these funds will help it capitalize on the increased acceptance of non-bank trade finance, as indicated from a survey it conducted with more than 700 medium-large sized businesses in the UK, US and China at the end of last year.

More than 80% of respondents said they were considering switching to alternative finance providers from traditional banks for trade finance in 2020, with Chinese businesses particularly keen to explore their non-bank options.

Kerstin Braun, Stenn

Kerstin Braun, president at Stenn, says most manufacturers have had to eat into their liquidity reserves during the coronavirus crisis and that many are now operating on as little as four weeks’ cash flow.

The typical Stenn client is a manufacturer of fast-moving consumer goods.

At the start of the year, Braun acknowledges that the company was thinking ‘if there is no global trade, there is no global trade finance’, but it quickly realised that rather than approaching manufacturers in EMs working with larger importers in developed markets, it needed to speak to the importers directly.

“In the past, these importers may have looked to squeeze their suppliers, but in an era of social and corporate responsibility they are increasingly realising that they cannot afford to lose any supplier, so they are introducing us to their manufacturers,” she says.

“By fronting them, we ensure that they receive their money on the day they ship their goods and the importers are then able to negotiate longer credit terms.”

Non-banks can onboard and fund clients more quickly because they are not relying on legacy systems 

 – Kerstin Braun, Stenn

While there has been a much greater focus on creating sustainable supply chains since lockdown measures were introduced across the world, the WEF’s estimate for the trade finance gap was based on the assumption that supply chains would move away from China to poorer developing countries.

However, one of the consequences of coronavirus has been increased commitment to reshoring.

“This is happening not so much because companies fear another pandemic, but more to increase their ability to cope with the fall-out from future tariff disputes,” says Braun. “They are definitely considering the reduced cost of logistics from reshoring in their supply chain decisions.”

Capital

One of the obvious differences between the current crisis and the global financial crisis of 2008 is that banks are well-capitalized.

Given that the leading commercial banks have plenty of capital and existing – and often lengthy – relationships with businesses, what can non-banks and alternative lenders offer to outweigh these advantages?

“We have been approached by companies who in the past would have been the typical bank client,” explains Braun. “They are telling us that their bank is not able to establish a programme that gives them access to finance quickly enough.

“Non-banks can onboard and fund clients more quickly because they are not relying on legacy systems.”

She accepts that individual banks and consortia are working on technology solutions – particularly around the use of blockchain – but says they will never cover the whole market.

“Trade finance is still a niche product for banks,” she claims.

In January, Stenn released the findings of a survey of 250 medium- to large-sized businesses in the UK that found just over half (51%) expected geopolitical tensions – including Brexit – to have a positive effect on their business this year.

However, fast forward just a couple of months and the company was warning that a hard Brexit combined with coronavirus could be a perfect storm for UK firms, with uncertainty over tariffs and the prospect of increased paperwork pushing already vulnerable firms under.

“Our risk does not lie with the supplier of the goods – it lies with the buyer being unable to repay us,” concludes Braun. “The credit ratings of even strong companies are deteriorating almost daily and geopolitical uncertainty will accelerate this trend.

“In this context, our ability to raise two rounds of funding in challenging circumstances indicates that investors have confidence in our credit management systems.”