Alternative trade finance

Ship Notes

THE practise of law – particularly in shipping and transport – does not operate in isolation but is inextricably linked to international commerce.

For this reason, it remains important for lawyers to keep abreast of developments in their field. I recently sat down with Dr Paddy McDowell to learn more about his trading finance offering for medium-sized importers.

McDowell has an MCom in economics and a PhD in international trade finance and heads International and South African Trade Finance Advisory Services.

He painted a picture of the gap in the market for alternative finance (AF), which he believes has come to the fore following the 2008 crash in the banking and finance sector and the continued depressed market conditions.

Trade finance is often an indispensable part of standard international sale transactions. In the absence of some assurance of payment, sellers will often be hard-pressed to incur transport costs before the delivery of the goods.

McDowell explained that the Basel III Accord was born out of the 2008-2009 financial crisis range of standardised products.

• AFHs can process an application for a facility in about a month, whereas decision-making by banks is committee-driven.

The ideal beneficiary of alternative financing is a company in a growth phase, which has been established for a few years, is profitable (with a turnover of at least R1.5 million a month) and which sells quality products.

An import facility can start at $250 000 (R3.7 million) for 90 days’ credit, covered by a bill of exchange.

One of the main purposes of alternative financing is to extend credit to South African manufacturers and distributors.

Terms

When manufacturers increase production or launch a new product, it takes, on average, between six and eight months from the time orders are placed with overseas suppliers for raw materials before payment is received from customers.

This period includes transit and manufacturing time, as well as credit terms to customers. Alternative finance houses provide the working capital (cash flow) to assist importers to cover this period.

This kind of investment in smaller businesses should be seen in wider socio-economic terms: more businesses means more jobs, which means a better standard of living for more families. It’s a winning formula for all concerned.

McDowell is convinced that the current economic climate is creating a demand for alternative financing, which will increasingly fund the growth of South Africa’s profitable medium-sized enterprises and grow the economy.

Of course, the legal sector has its part to play in facilitating alternative finance transactions. As shipping lawyers, we are often required to consider trade finance arrangements when drafting international sale of goods agreements and when advising on risk management implications of transactions.

Armed with the experience of recognising and resolving trade finance problems which arise in practice, we are often best placed to assist with the negotiation of trade finance deals and the drafting of key security instruments.

• Norma Wheeler is an associate in Bowman Gilfillan Africa Group’s shipping and logistics practice.