Attacks on cargo ships in the Red Sea in recent months have caused vessels to reroute around the Cape of Good Hope in Africa, producing longer and costlier trips. Happening simultaneously, the lower water levels along the Panama Canal have limited the number of cargo ships that can pass through the waterway each day.

Supply chains were also rattled not so long ago with the collapse of the Francis Scott Key Bridge in Maryland, which meant other U.S. ports had to step up and take on the shipping activity that the Port of Baltimore normally manages. There has also been a reported shortage of truck drivers stateside.

With all of these external factors in play – from public health crises to weather patterns to political discord – how can we protect our supply chains and – dare we say – even improve the relationships among selling and buying partners?

Export factoring.

Export factoring is a strategic tool to ensure cash flow

Trade finance is a set of financial tools that both improves a business’ cash flow and reduces its credit risk. Two well-known types of trade finance products are export factoring and supply chain finance.

Export factoring is when a financial firm buys a company’s receivables and advances them the majority of the invoice amount up front in cash (up to 90% in some cases).

This type of funding can also include credit protection and collections services. When this is the case, this full package is known as non-recourse export factoring.

Though manufacturers tend to choose export factoring services and retailers initiate supply chain finance with their suppliers, both umbrellas of trade finance achieve the same goal: better access to working capital all along the supply chain. A reliable source of working capital is critical to keeping operations moving along, despite any headwinds in global trade.

The waiting game

In today’s global trade landscape, there is often a wide gap between when an invoice is issued by the seller and when payment is submitted by the buyer. This is normal, though it can be a strain on supplier cash flow.

Payment terms between buyer and seller can be up to 3 months in some cases, meaning buyers don’t have to settle their invoices until 90 days after they have placed their order.

In fact, according to The Hackett Group, it takes large U.S. buyers an average of 54.7 days to pay their bills.

Factoring cuts this waiting period and converts unpaid invoices into cash up front. This method can be looked at as a “win-win” for both the supplier and the buyer, since the supplier receives additional liquidity right away while the buyer can enjoy extended periods until payment is due.

Why does getting cash right away matter to a supplier?

Well, in short, suppliers have vendors to pay too, and they can’t do so on schedule without sufficient capital on hand. By releasing the capital locked in their receivables, suppliers can pay their vendors in a timely manner, respecting these vital relationships needed to procure raw materials so they can continue to fill orders smoothly.

Besides paying their bills, manufacturers can also be looking to grow or expand their operations and customer base, which requires enough working capital to achieve these business goals. Many of these new buyers in new markets are also looking to negotiate longer credit terms, an arrangement that is attainable with trade finance bridging the cash flow gap.

Why do longer payment terms matter for buyers?

Trade finance allows buyers to optimize their working capital too. Without the pressure to pay suppliers right away, large retailers can invest in their operations, product offerings, footprint, employees, and their own growth and expansion aspirations. Having ample time to settle their bills gives retailers the opportunity to focus on their core activities and values.

Credit protection and collections services

Now, in the case a buyer happens to go bankrupt, trade finance still ensures that the buyer’s supplier gets paid. This is because trade finance, or non-recourse export factoring, includes credit protection to protect against non-payment in such cases of default.

This inclusion of credit protection allows suppliers to conduct business with peace of mind, without the worry of not getting paid.

These suppliers also benefit from the collections services that come as part of trade finance packages, which means the trade finance company is responsible for collecting payment from the buyer, giving suppliers more time to invest in their business.

The upshot

Cash is a major catalyst in allowing supply chains to function properly and operate smoothly. In a global trade environment that can be affected by everything from political discord to drought, reliable cash flow through trade finance is something a business can count on.

Trade finance provides easy access to cash by turning unpaid invoices into capital within 48 hours of verifying a business’s invoices, in some cases. Importantly, it supports payment cycles that work for all parts of the supply chain while reducing trade risk, allowing for strong, “happy” relationships and global trade dynamics.

While every business is unique, taking inventory of what worked for other successful enterprises, and what didn’t, can help you keep your business on the right track and even boost it to the next level of profitability, growth, and customer approval ratings.

Keep in mind: learning from mistakes doesn’t just apply to our personal lives.

Let’s take a look at common mistakes international businesses make, and how trade finance can relieve some of the financial stresses that come with the territory of being an entrepreneur:

1. Poor cash flow management, the #1 reason small businesses fail

So many parts of running a business rely on a healthy cash flow. Working capital is not only used to cover everyday expenses like payroll and electricity, but it is also needed to pursue bigger plans like growth and expansion into new markets.

There are a couple of factors that can impair cash flow, however, leaving a company with a lower reserve of liquidity than it would like.

In fact, according to a report from Jessie Hagen, previously of US bank, 82% of failed small and medium-sized businesses went under due to poor cash flow management.

Too much growth, too little capital

Growing too much, too quickly, in some cases, can actually be detrimental for a business. Rapid growth may have the adverse effect of drying up cash and might ultimately send a business hurling towards bankruptcy.

This, in fact, happened to the ice cream brand Ample Hills, based in Brooklyn, New York. The company grew from a single local scoop shop to having a footprint of 17 stores nationwide, links with Disney, a presence in grocery retail outlets, and a stamp of approval from Oprah Winfrey, according to the New York Times. Though this brand never ended up expanding overseas, rapid growth without the right support can hurt businesses trading internationally just the same.

Brian Smith, Ample’s co-founder, revealed to the Times, “We made every mistake it is possible to make.”

This included an ill-placed location in Los Angeles and switching up packaging from a traditional round container to a square one. Even with the Ample Hills brand skyrocketing to success, decisions like these ultimately sapped the company’s cash.

Trading with long payment terms in place without the right oversight and support

While the demands of rapid growth may be one culprit for leaving a company cash-strapped, long payment terms with buyers can also drain a company’s liquidity if not managed correctly.

Today, many commercial transactions occur on open account terms, which means buyers are allowed to pay their bills months after an invoice is generated.

Recent data shows that large U.S. buyers take an average of 54.7 days to pay their invoices.

While giving customers the freedom to pay later can help a business win and retain orders, a company must be vigilant of the cash gap that can occur with such terms in place. Many businesses may find themselves needing to pay their vendors upfront, while still waiting on payment for their sales.

Without a keen awareness of the overlap in outgoing and incoming payments, cash flow might be jeopardized.

2. Selling domestically or internationally without having the demand needed to succeed

It can be the aspiration of many growing companies to expand domestically, or even enter new markets abroad. But without the demand overseas or at home, your product may turn out to be a flop.

According to a recent Forbes article titled “Small Business Statistics of 2024”, inadequate market demand is the second most common culprit for business failure.

Inadequate market demand is the second most common culprit for business failure.

“For a small business to be successful, it’s imperative not only to have adequate capital to sustain operations in the early stages but also to ensure there is a consistent and growing demand for its products or services,” the article states.

Given this common mistake, it’s imperative to conduct sufficient due diligence before launching a new product or service. A business must take the necessary steps, like conducting a market gap analysis and gaining a full grasp of the demographics they’re trying to reach, in order to set itself up for success.

3. Skipping credit protection

As we’ve seen in the past couple of years, several big-box retailers have gone out of business. These famously include Bed Bath & Beyond, Christmas Tree Shop, and Lord & Taylor.

When doing business with these large buyers, credit protection can come in handy if bankruptcy is looming for the retailer.

It’s not always easy to predict if a retailer will shutter, but the pandemic taught us that large brands can go bankrupt, and if they don’t fully collapse, then they can still be tardy on their payments to suppliers or skip paying them completely.

How trade finance can help businesses stay the course

Trade finance is a tool that can help businesses better manage their cash flow, reduce trade risk, and accelerate their growth, among other things. Companies of all sizes can take advantage of this financial resource, but small and medium-sized enterprises are especially known to benefit, since traditional banks may require them to meet stricter borrowing criteria.

If a business opts to use trade finance services, here’s how it works:

A financial intermediary will purchase their unpaid invoices and will provide them cash upfront in exchange. This sum of cash will equal up to 95% of the invoice amount.

By receiving this cash advance on the payment they are owed, a business can pay their own supplier on time, or on an earlier schedule. Retailers and other buyers can still enjoy longer windows to pay their invoices since the financial intermediary is able to close the payment gap.

What’s more, trade finance also includes credit protection and collections services.

This means that a business is guaranteed to get paid even in the case of buyer insolvency, as the financial intermediary absorbs the risk in this case and will ensure the business gets paid.

Since running a business requires a lot of focus on marketing, R&D, and customer service, accounts receivable management that comes as part of trade finance packages can take the burden of collecting payment from customers off the business.

The Upshot

Operating a business has its challenges, but it also comes with many rewards. Paying attention to the mistakes that other businesses have made can certainly protect a company from falling into the same pattern.

To get a better handle on cash flow, secure an extra layer of security, and get more freedom to focus on running core business activities, a company can consider trade finance as a solution that can clear hurdles and pave the way for success.