The Indo-U.S trade corridor is expected to grow to $5001 billion by 2025. Currently, the two-way merchandise trade between these two countries is at $66.7 billion2. This corridor has the full potential to strengthen Indo-US relations, enable U.S importers/buyers to expand their cross-border business with Indian suppliers and for financial institutions to offer new solutions for import financing to their customers.
The advantages of an expanding Indo-US trade corridor will be:
• Barriers to trade processes removed
• Lesser cross-border taxes
• Better regulatory compliance
Indian mid-corporates and SMEs that export to large buyers in the U.S continue to face challenges due to delays in payment, a primary cause of their liquidity problems. This liquidity crunch also affects the buyer-supplier relationship.
So, how do you, as a CFO or finance director of your business address this dilemma?
Reverse Factoring – The Balancing Bridge
On one hand, Indian banks are becoming increasingly risk-averse and conservative in today’s economic and regulatory climate. On the other, as a CFO of a business, you need to optimize your financing sources. Reverse factoring, a less explored and under-utilized option, can be the solution that bridges this gap.
Reverse factoring can:
• Accelerate cash flow
• Offer companies better returns on working capital
• Reduce the investment into a business
How Reverse Factoring Creates Value
Conventional supply chain financing arrangements and invoice processing are time consuming and expensive, leaving exporters/suppliers with delayed payments and cash flow issues.
Reverse factoring solves these problems. In case of the Indo-US trade corridor, the U.S importer/buyers, suppliers, and financial institution are all registered on a standard financial network to finance open account trade transactions. Invoice financing becomes a simple and easy process mostly relying on the credit-worthiness of the importer/buyer, and the supplier in India receives the payments. An automated financial network not only matches and reconciles invoices but allows the suppliers to receive early payments and resolve their cash flow issues. Also, being connected on the same network, the financial institutions get repaid straight from the importers/buyers seamlessly. Reverse factoring also ensures a strong buyer-supplier relationship.
Early payment techniques like these demand financial institutions to digitize – both their customer ecosystem as well the customer’s supplier ecosystem. This digital bridge will enable buyers and suppliers to optimize the entire value chain by digitizing the invoicing process and automating the accounts payable accelerating the time from invoice to approval (by buyers) to payment.
End of Traditional Receivables, A Win-Win for All
Reverse factoring is gaining traction not just because it is a well-designed program for buyers, suppliers, and financial institutions, but also because it is a low-risk program using buyer-initiated payments to suppliers helping them secure direct financing with no collateral. It is a win-win-win for all the three parties involved.
|Leverage the buyers’ credit profile||Get early payment discounts from seller||Expand business through access to buyers and their suppliers on a single platform|
|Get financed at the most competitive rates||Lower DPO, without additional debt||Reduce risk by financing only buyer approved invoices|
|Better DSO metrics, faster sales realization||Automated invoice to payment reconciliation||Reduce operational costs by collecting from the large buyer instead of the smaller suppliers|
|Reduced debt, no collateral||Deepen relationships with sellers and access to better procurement terms||Reduce customer acquisition costs|
Reverse factoring is a competitive product, gaining popularity among a growing number of large corporates, SMEs, and midcaps.
This digital bridge converts physical value chains into digital value chains that are bound to strengthen the expanding Indo-US trade corridor. How long until you join the bandwagon?
- Indo-US trade: Mission 500 billion USD, PWC, Sept 2015
- Indo-US Relations http://www.mea.gov.in/Portal/ForeignRelation/India_US_brief.pdf