The hidden risk of imports
December 16, 2010
By Andrew Tananbaum
No matter what the politicians in Washington are saying, the United States is married to China. And, this relationship has been nearly 40 years in the making. Ever since Nixon visited China, the United States has become more and more reliant upon low-cost Chinese goods. Indeed, according to The United States Trade Representative, the United States imported nearly $300 billion worth of goods from China in 2009 alone. To the extent an economic recovery in the United States depends on consumers spending at retail, the ability of U.S. importers and retailers to secure financing with respect to goods manufactured and exported from China is of critical importance.
While we all wear Chinese clothing, watch Chinese TV, and listen to Chinese manufactured mp3 players, the basic paradigm of financing imports from China has changed dramatically over the past two decades. What once was a transaction based upon letters of credit and payment upon shipment, is today a constant struggle between U.S. importers and their Chinese manufacturers/suppliers. Importers want to pay later in the process, sometimes as long as three months after the goods are shipped, while suppliers understandably want to be paid as soon as possible.
However, Chinese-based banks are hesitant to accept open account customer credit risk and in the current economic climate exporters are demanding payment as soon as possible after the goods are shipped to the United States. In some cases, due to slim margins and raw material price volatility, Chinese producers ask for deposits even before product leaves Chinese ports.
For retailers and importers, managing trade finance risk has never been more important due to persistent margin pressures and consumers unrelenting quest for value, a key component of which is price.
Historically the financing was assumed by large banks and factors such as CIT. Today these banks have either left the business, curtailed lending to only large, investment grade companies, restricted leverage, or have not changed fast enough to understand the new dynamic and offer the products that importers as well as exporters need to keep the retail supply chain functioning efficiently, effectively and without delay.
This new financial paradigm is only one side of the problem facing importers and exporters. On the other side of the equation is the consolidation in the American retail, apparel and furniture sectors. This consolidation has increased importers’ buying power, forcing Asian suppliers to use open account terms when financing trade with their U.S. clients. Because of this increased clout, importers not only are putting pressure on their suppliers to trade on open accounts, but also to pay as slowly as possible. Today, it is not uncommon for the order-to-cash cycle to be between 120 and 150 days from the date the purchase order is placed in China. This timeframe puts a significant financial strain on the supplier who typically desire payment when goods are shipped.
To help solve this tension between importers and suppliers, non-bank lenders have entered the marketplace. Non-bank lenders are not subject to the strict requirements that often limit the amount of unsecured credit ba