2007 AFP Trade Finance Survey. Report of Survey Results. Underwritten by

Transcription

1 2007 AFP Trade Finance Survey Report of Survey Results Underwritten by

2 Association for Financial Professionals, Inc. All Rights Reserved

3 2007 AFP Trade Finance Survey Report of Survey Results October 2007 Underwritten by Scotiabank Association for Financial Professionals 4520 East-West Highway, Suite 750, Bethesda, MD Fax

4 Comments from Scotiabank Scotiabank is very pleased to sponsor the 2007 Trade Finance Survey. In recent years, with global trade booming, supply chain management and financing have been two of the most widely discussed and reported on topics as companies look for ever more efficient ways to manage their trading activities. As a leading provider of Global Transaction Banking services Scotiabank recognized the need to better understand how companies are taking advantage of traditional trade products along with new tools and technology to manage risk, streamline business processes and reduce the costs associated with trade. Historically, trade products were used by buyers and sellers to reduce or transfer the risks associated in the exchange of goods and as a way to access financing. While this is still true, this study highlights that for AFP Members and their trading partners today, accessing alternative financing is less of a concern and efficient payment is a priority. Not surprisingly, the study shows that open account transactions continue to grow both in number and volume of trade. While Letters of Credit are still the most widely used trade tool, rather than using LCs to support individual transactions, Standby LCs are now the tool of choice. Participants also reported considerable confidence in their ability to assess and manage the credit, business and political risks associated with their trade. Finally, automation, while important, continues to be applied selectively to individual processes with few participants reporting end-to-end automation of the financial supply chain, with cost cited most often as a primary barrier. Our clients have responded the same way to the demands of today s global trading environment. So what do these and the other insights from the study have to tell AFP members and their supply chain partners? Improving the efficiency of invoicing and payment processing and minimizing costs are key drivers for both buyers and sellers. It is about getting the deal done and remaining competitive. Organizations that can provide transparency with minimal documentary overhead and efficient payment processing at a reasonable cost requiring little in the way of client IT resources to bring it all together will continue to play an important role in the expansion of trade around the world. These are the reasons why Scotiabank delivers an integrated offering of trade finance, payments and cash management services to our clients around the world through our Global Transaction Banking (GTB) division. For over 175 years Scotiabank has been helping clients finance and manage their trade and today we apply our experience and on-the-ground presence in over 50 countries to make it more efficient and cost effective. We hope that as practitioners you will benefit from the review of what others in your industry are doing to manage their trade, either to confirm your current approach or serve as a catalyst to consider some alternatives that will help you drive down the cost of trade and goods, for you and your trading partners. It was our pleasure to support the Association of Financial Professionals with the 2007 Trade Finance Survey. Your feedback, as well other insights into the issues and challenges you face, would be welcomed. Sincerely, Alberta Cefis Executive Vice President & Group Head Global Transaction Banking Scotiabank

5 2007 AFP Trade Finance Survey Introduction Supply chain management and financing are two of the most frequently discussed and reported on commercial trade topics of recent years. But the underlying concepts are not new. Indeed, from the very first markets of ancient times, sellers of goods and services have been concerned about communicating pricing, booking orders, delivering products and being paid by their customers. At the same time, buyers of goods and services have always wanted assurances that they are being quoted competitive prices, getting the goods or services they need and want, and concerned with having the resources to pay for those goods and services and ultimately paying for them in an efficient manner. Until recently, most trading partners relied on a number of tools to manage documentation, risk and payment. Open accounts and factoring have been widely used for years, with new enhancements, including variations in factoring and enhanced roles for financial institutions that arbitrage the credit worthiness of buyers and sellers in the supply chain. Very recently, however, the area of supply chain management and financing has seen a number of new developments, including the introduction of new technologies and the emergence of new financial and logistics intermediaries that broker agreements between buyers and sellers, benefiting both parties. While these developments have generated much discussion, there is little evidence to suggest that organizations have embraced these initiatives to any broad degree. In order to begin to assess the current state of supply chain financing, or more simply trade finance, the Association for Financial Professionals (AFP) surveyed practitioners in the U.S. and Canada to understand how trade finance practices have evolved. In its survey, the Association for Financial Professionals asked its senior-level corporate practitioner membership about their organization s practices in the area of trade finance. Members were invited, by , to complete the on-line survey in June The survey generated 202 responses. More information on the respondents to the survey is available at the end of this report Association for Financial Professionals, Inc. All Rights Reserved 1

6 Highlights of Survey Results Key findings of the AFP Trade Finance Survey include: The Use of Trade Finance Products The typical organization uses three different products/methods to manage their trade finance. - Letters of credit are used by 83 percent of organizations; they are the most frequently used trade finance product. More than seven out of ten organizations (72 percent) use standby letters of credit. - Open accounts are also popular trade finance tools, with 57 percent of organizations reporting their use. Most transactions are conducted using one of two trade finance products: open accounts or letters of credit. In general, organizations conduct nearly half (47 percent) of all of their trade activity using open accounts while 36 percent of such activity is conducted using letters of credit. - Organizations that use open accounts do so for the vast majority of their transactions. The typical organization using open accounts uses them for 90 percent of all of their transactions, while the typical organization that uses letters of credit uses them for just 25 percent of their transactions. - Organizations that import goods from outside of their home country or export out of their home country are more likely to use open accounts. Forty-one percent of organizations have increased their use of open accounts over the past three years percent of organizations with annual revenues greater than $1 billion have increased their use of open accounts. - Forty-three percent of organizations expect to increase their use of open accounts over the next two years. Use of Automation Nearly four out of five organizations (78 percent) have automated at least some part of their order-to-cash process. - Eighty-six percent of organizations with annual revenues greater than $1 billion have automated at least some part of their order-to-cash process while 71 percent of smaller organizations have done the same. - Eighty-four percent of organizations that export at least some of their products have automated some portion of their order-to-cash processes. - Just seven percent of responding organizations have fully automated the entire process. Even those organizations that have not automated the entire order-to-cash process have automated some aspects of the process: - Invoicing process (53 percent) - Ordering process (38 percent) - Cash application (38 percent) Three-quarters of organizations have automated at least some component of their purchase-to-pay process Association for Financial Professionals, Inc. All Rights Reserved

7 - Large organizations are more likely to have embraced automation for at least some part of their purchase-to-pay process (85 percent versus 68 percent of smaller organizations). - Seventy-nine percent of organizations that import goods from outside of their home country have automated at least some part of their purchase-to-pay process. - Just seven percent of organizations have automated their entire purchase-to-pay process. Even those organizations that have not automated the entire purchase-to-pay process have automated some aspects of the process: - Purchasing processing (57 percent) - Ordering (31 percent) - Accounts payable reconciliation (31 percent) Organizations that have not fully automated either the order-to-cash or the purchase-topay process have not done so due to a lack of IT or other resources. Managing Risks Associated With Open Accounts The most critical factor organizations consider before offering open account terms to a customer is the credit risk of the buyer (90 percent). - Three quarters of organizations that use open accounts consider the country and the size of the buyer before offering open account terms (76 and 75 percent, respectively). - Ninety percent of organizations manage at least some part of their open account transactions through negotiated payment terms. Seventy percent of organizations offering open account transactions offer their trading partners early payment incentives. Nearly half of organizations use buyer insurance to mitigate non-payment risks. - Half of organizations also turn to logistics companies to mitigate shipment risk. - A quarter of organizations use political risk insurance while 22 percent use factoring to mitigate collection risk. Survey Findings There are a number of trade finance products and methods available to organizations for managing their trade finance process. The typical organization uses three trade finance solutions. Twenty-two percent of organizations use a single trade finance solution while 23 percent use two different products. A significant share use even more: 19 percent of organizations use at least five different trade finance products. Letters of credit remain the trade finance product used by the largest percentage of organizations, with 83 percent reporting their use of such products for at least some of their transactions. More than seven out of ten organizations (72 percent) use standby letters of credit; 83 percent of those are large organizations. Thirty-five percent of organizations use import letters of credit while 29 percent use export letters of credit. Open accounts are the second most widely used trade finance product. Nearly three out of five smaller organizations (57 percent) use open accounts Association for Financial Professionals, Inc. All Rights Reserved 3

8 Letters of guarantee are used by 37 percent of organizations while bonds are used by 23 percent. Other trade finance products used by a significant number of organizations include: Documentary collections (21 percent) Invoice financing (ten percent) Factoring (eight percent) Structured trade financing (eight percent). Use of Trade Finance Products and Methods (Percent of Respondents) Standby letters of credit 72% 65% 83% Open accounts Letters of guarantee Import letters of credit Export letters of credit Bonds Documentary collections Invoice financing Factoring Structured trade financing Pre-shipment financing Forfaiting 3 * 4 Bills of landing financing Warehouse financing Median number of trade finance products used Association for Financial Professionals, Inc. All Rights Reserved

9 The vast majority of trade occurs via one of two trade finance products: open accounts or letters of credit. But there is a distinction between the percent of organizations that use specific methods and the percent of business that organizations conduct through those methods. Even though a larger share of organizations use letters of credit than use open accounts, those that do use open accounts frequently use them as their primary trade finance method. Overall, organizations conduct nearly half (47 percent) of their trade activity using open accounts while 36 percent of trade activity is conducted via letters of credit. The typical organization that conducts trade via open accounts uses them for 90 percent of all of their transactions; the typical organization that uses letters of credit uses them for just 25 percent of its transactions. Other trade finance products are used by a smaller percentage of organizations and for less of their trade activity. While 37 percent of organizations report using bank letters of guarantee, only eight percent of trade activity is conducted through them. Slightly more than a fifth of organizations surveyed indicate they process trade via documentary collections, but only three percent of trade activity is conducted through that method. Other trade finance products are used more rarely including, factoring (two percent), structured trade financing (two percent), documentary financing (one percent) and forfaiting (one percent). Smaller organizations (those with annual revenues below $1 billion) are even more likely than larger ones to use open accounts more frequently. Small organizations conduct 54 percent of their trade activity using open accounts. The use of open accounts and letters of credit is fairly equal among large organizations: 41 percent of trade is conducted using open accounts while 38 percent is conducted using letters of credit. In addition, larger organizations are far more likely to use bank guarantees in conducting trade activity than are smaller ones (13 percent of trade activity for large organizations versus five percent for smaller organizations). Organizations that import goods from outside of their home country or export out of their home country are more likely to use open accounts. Fifty-two percent of trade activity by organizations that import goods and services is conducted using open accounts while 51 percent of trade activity by trade organizations that export goods and service is conducted using open accounts. Twenty-eight percent of activity by importers is conducted using letters of credit while 29 percent of activity by exporters is conducted via the same method. The emergence of China as the world s manufacturer often of lower cost goods has resulted in high volumes of goods moving through supply chains that originate, pass through, or terminate in China. The frequency of deliveries to China and exports from China is also greater as organizations work to keep inventories thin. The organizations that conduct business with suppliers and/ or buyers located in China are even more likely to prefer the use of open accounts in their trade activity. Fifty-seven percent of transactions for those organizations that conduct business in China do so via open accounts, compared to 29 percent of transactions that are conducted via letters of credit. This preference for open accounts is likely due to the fact that other trade finance methods, such as letters of credit, are paperwork-intensive and more expensive than open accounts Association for Financial Professionals, Inc. All Rights Reserved 5

10 Current Allocation of Organizations Use of Trade Finance Products (Mean Allocation) Open accounts 47% 54% 41% Letters of credit Guarantees Documentary collections Factoring Structured trade financing Documentary financing Forfaiting 1 * * The use of several specific trade finance products has increased significantly over the past three years. Forty-one percent of organizations have increased their use of open accounts during that time period. The use of open accounts has increased even more dramatically among large organizations 51 percent of organizations with annual revenues greater than $1 billion have increased their use of open accounts compared to 34 percent of smaller organizations. More than a third of organizations (38 percent) also increased their use of letters of credit during the past three years, with nearly the same percentage increasing their use of guarantees (35 percent). Trade activity through documentary collections also increased for 29 percent of organizations. Conversely, 20 percent of organizations reported that their trade activity via letters of credit decreased more than any other trade finance product Association for Financial Professionals, Inc. All Rights Reserved

11 Change in Organizations Use of Trade Finance Products and Methods Over Past Three Years (Percentage Distribution) Remain the Remain the Remain the Increase Decrease Same Increase Decrease Same Increase Decrease Same Open accounts 41% 9% 50% 34% 15% 51% 51% 5% 44% Guarantees Documentary collections Letters of credit Documentary financing Factoring Structured trade financing Forfaiting * * 87 The use of several specific trade finance products and methods is likely to increase in the future. Forty-three percent of organizations expect to increase their use of open accounts over the next three years, including 55 percent of organizations with annual revenues greater than $1 billion. Nearly a third of organizations (32 percent) expect to increase their use of guarantees while 31 percent expect to increase their use of letters of credit. Twenty-nine percent of organizations expect to expand their use of structured trade financing while 23 percent will increase their use of documentary financing. Organizations that trade with particular countries are more likely to indicate that their use of open accounts will increase in the next three years, compared with the use of other tools. For example, 42 percent of organizations that trade with China expect their use of open accounts to grow while 27 percent expect to increase their use of letters of credit and just 14 percent expect to increase their use of guarantees. Similarly, 48 percent of organizations trading in India expect to increase their use of open accounts while 32 percent expect their use of letters of credit to grow and only nine percent forecast a similar hike in the use of guarantees. While survey results indicate that letters of credit use decreased for 20 percent of organizations partly due to encumbrances associated with letters of credit on credit lines and the availability of other trade finance products overall use of letters of credit remained the same or increased in the last three years. And though a very small portion (two percent) of respondents indicated their use of letters of credit would fall over the next three years, nearly a third indicated that they expect use of letters of credit will increase over that same time. This further contrasts with reports that the usage of letters of credit use is dropping precipitously Association for Financial Professionals, Inc. All Rights Reserved 7

12 Expected Change in Organizations Use of Trade Finance Products and Methods Over Next Three Years (Percentage Distribution) Remain the Remain the Remain the Increase Decrease Same Increase Decrease Same Increase Decrease Same Open accounts 43% 10% 47% 37% 17% 47% 55% 5% 40% Guarantees * 64 Documentary collections Letters of credit * Documentary financing Factoring Structured trade financing * Forfaiting * 6 94 * 6 94 The preferences and abilities of buyers or sellers to accept particular trade finance products fuels the mix of trade finance products offered by organizations to their trading partners. Fifty-five percent of respondents report that their organization s use of trade finance products is influenced by their trading partners preferences. Thirty-nine percent of organizations use a particular trade finance product because a trading partner does not accept the organization s preferred trade finance product. In addition, cost is a significant factor 51 percent of respondents indicate that cost was a major determinant in their organization s choice of trade finance products. The relative importance of the factors driving organizations decision-making about particular trade finance products is not significantly different whether the organizations are importers or exporters. Factors Driving Organizations Decision to Use Certain Trade Finance Products (Percent of Respondents) Preferences of trading partners 55% 55% 50% Cost Trading partner inability to accept other (preferred) trade finance product/service Technology Other Association for Financial Professionals, Inc. All Rights Reserved

13 Use of Automation Order-to-Cash Organizations continually strive to reduce the time between when customers order their products or services and when they are paid for the products. At the same time they look to mitigate any associated risks (including nonpayment). To address both of these concerns, organizations have turned to automated systems for at least parts of their order-to-cash processes. Paper checks remain the method by which many organizations continue to receive payment from customers, and this presents a challenge to organizations that wish to automate the payment process. Nearly half of organizations indicate that their customers prefer to issue checks as payment for goods and services. But for a third of organizations the most common form of payment from their customers is a wire transfer. Fourteen percent of organizations receive payment in the form of ACH credits. Large organizations are more likely to receive payments electronically. Just 43 percent of respondents from large organizations report that checks are the most commonly used payment method by their corporate customers compared to 54 percent of smaller organizations. For a third (32 percent) of large organizations, wire transfers are the most common payment method, while 18 percent report ACH credits as the most common payment method. Payment Method Most Commonly Used by Organization s Corporate Customers (Percentage Distribution) Checks 47% 54% 43% Wires ACH Credits ACH Debits Other Organizations have many opportunities to automate the order-to-cash process and in many cases they have taken advantage of these opportunities in some parts of the process if not fully automating it entirely. Nearly four out of five organizations have automated at least some part of their order-to-cash process; just seven percent have fully automated the entire process. Eight-six percent of large organizations are automating at least some part of their order-to-cash process while 71 percent of smaller organizations have done the same. Eighty-four percent of organizations that export at least some of their products have automated at least some portion of their order-to-cash processes. Even if other parts of their order-to-cash process are not automated, many organizations have automated at least the invoicing process. Fifty-three percent of organizations, including 60 percent of large organizations, have automated their invoicing processes. Thirty-eight percent of organizations have automated the ordering process as well, while another 38 percent have auto Association for Financial Professionals, Inc. All Rights Reserved 9

14 mated the cash application. Other parts of the order-to-cash process that many organizations have automated include: Collections (25 percent) Accounts receivable reconciliation (21 percent) Credit management (15 percent) Dispute resolution (four percent). Components of the Order-to-Cash Process Automated by Organizations (Percent of Organizations) All components of the order-to-cash process are automated 7% 6% 8% Invoicing Ordering Cash Application Collections Accounts receivable reconciliation Credit management Dispute resolution Automation is not used in any aspect of the order-to-cash process There are a number of reasons why an organization may not have automated all or part of its order-to-cash process. One reason is a lack of resources. Fifty-three percent of survey respondents indicate that their organizations have not automated parts of their order-to-cash process because of a lack of IT or other human resources. Eighteen percent of respondents indicate their organization s management does not believe that there will be a sufficient return on investment through automating more of the process, while another 18 percent are concerned about the high cost of the technology required to automate certain systems. Smaller organizations were more likely to cite cost concerns as a deterrent to automating their order-to-cash process. In addition, a number of organizations have not automated more of their order-to-cash process either because of customer resistance or because they are satisfied with the performance of the current process. A quarter of respondents (24 percent) indicate that customer resistance is a factor in not automating more of their processes, including 38 percent of respondents from larger organizations. Eighteen percent of respondents, including a quarter of those from large organizations, indicate that they have not increased their use of automation because they are satisfied with their current processes Association for Financial Professionals, Inc. All Rights Reserved

15 Reasons Organizations Have Not Automated Parts of the Order-to-Cash Cycle Process (Percent of Organizations that Have Not Automated At Least Some Part of their Order-to-Cash Processes) Lack of IT and other human resources 53% 52% 50% Resistance from customers Satisfied with current process Insufficient return on investment High cost of technology * Other * Most organizations that have not fully automated their order-to-cash processes, especially those with annual revenues greater than $1 billion, still expect to increase their use of automated systems over the next two years. Sixty-three percent of organizations plan to automate more of their processes over the next two years. Seventy-eight percent of large organizations plan to increase their use of automation over the next two years while 61 percent of smaller organizations expect to take similar action. A third of organizations expect to automate their invoicing processes while another third of respondents expect to automate the cash application. Large organizations are more likely to be planning to automate their cash application process (56 percent) while smaller organizations will more likely automate their invoicing methods (35 percent). Seventeen percent of organizations expect to automate accounts receivable reconciliation while 14 percent expect to automate ordering. Order-to-Cash Components that Organizations Plan to Automate in Next Two Years (Percent of Organizations that Have Not Automated At Least Some Part of their Order-to-Cash Processes) Invoicing 34% 35% 33% Cash application Accounts receivable reconciliation Ordering Credit management * Collections Dispute resolution * * * No plans to automate Association for Financial Professionals, Inc. All Rights Reserved 11

16 The increasing use of open accounts when selling goods has led many organizations to turn to financial institutions for assistance and support. Sixty-two percent of organizations that use open accounts highly value their financial institutions ability to facilitate the timely receipt of payments. Seventy-two percent of large organizations highly value this service compared to half of smaller organizations. Survey respondents report other highly valued financial institution-provided services that support their open account transactions, including: Compliance and regulatory services (46 percent of organizations) Data management (43 percent) Document preparation services (40 percent) Post-shipment financing (for working capital) (38 percent) Pre-shipment financing (for operating capital) (30 percent). Value of Services from Financial Institutions for Open Account Transactions (Percent of Respondents that Use Open Accounts and Rate the Service as either Valuable or Very Valuable ) Facilitating timely receipt of payments 62% 50% 72% Compliance and regulatory services Data management Document preparation service Post-shipment financing Pre-shipment financing In some cases, customers with sufficient buying power have chosen to pay their suppliers outside the stated payment terms. In some cases, these buyers have offered their suppliers the opportunity to participate in programs with a financial intermediary that allows the supplier to receive a discounted payment within terms or even earlier. For instance, payables financing or reverse factoring is the discounting of suppliers bills by a financial intermediary in return for earlier payment than the buyer would offer on its own. The suppliers receive what is essentially a loan based on the buyer s credit, offering suppliers more control over when they are paid. Sixteen percent of organizations have been offered programs by their large buyers that have or would have enabled them to benefit from earlier payment for their receivables. Smaller organizations are more likely than large ones to have been the recipients of such an offer for reverse factoring (20 percent versus 11 percent), possibly reflecting a trend of large buyers helping their smaller suppliers obtain lower-cost financing. Reverse factoring is popular for buyers with suppliers in emerging markets, such as in areas of Eastern Europe and southern and central regions of Latin America where creditworthiness is more difficult to assess. Contrary to traditional factoring, reverse factors purchase receivables from suppliers based on the credit quality of the buyer of the goods, not the supplier, the original owner of the receivable. Reverse factoring also may be used Association for Financial Professionals, Inc. All Rights Reserved

17 more frequently in emerging markets to combat the preponderance of fraud, such as receivables from nonexistent customers, and sometimes weak legal systems. Organizations Offered Programs from Large Buyers that Enable Suppliers to Benefit From Cheaper Sources of Financing (Percentage Distribution) Organization offered programs 16% 20% 11% Organization not offered programs Purchase-to-Pay While organizations are naturally interested in accelerating their cash flow by automating and streamlining the order-to-cash cycle, there are also significant cost savings and operating efficiencies to be gained from streamlining the purchase-to-pay cycle. The purchase-to-pay cycle is the time from when a company purchases goods or services until the time that it pays its suppliers and accurately updates its accounts payable records. While the motivation for buyers to automate the purchase-to-pay process is seldom to accelerate cash flows (as with the order-to-cash cycle), reducing the number of manual processes and reducing errors through automation can significantly reduce costs and enhance vendor relationships. Even so and perhaps not surprisingly checks still remain the preferred method by which most organizations pay their vendors. Fifty-seven percent of organizations make vendor payments with checks, compared to 25 percent that use wires and ten percent that use ACH credit. Large companies are more likely to have moved away from paper checks as only 52 percent of large organizations prefer to pay vendors using checks (compared to 60 percent of smaller organizations). Large organizations are more likely than are smaller organizations to prefer paying vendors with ACH credit (13 percent versus six percent). Preferred Payment Method Organizations Use in Making Vendor Payments (Percentage Distribution) Checks 57% 60% 52% Wires ACH Credit ACH Debit Other Association for Financial Professionals, Inc. All Rights Reserved 13

18 Organizations have many opportunities to automate their purchase-to-pay process. In fact, three-quarters of organizations have automated at least some component of the purchase-to-payment process. Large organizations are more likely to have embraced automation for at least some part of their purchase-to-pay process (85 percent versus 68 percent of smaller organizations). In addition, 79 percent of organizations that import goods from outside of their home country have automated at least some part of their purchase-to-pay process. Further, most organizations (93 percent) that have automated at least some portions of its order-to-cash process have also automated parts of their purchase-to-pay process. Just seven percent of organizations have automated their entire purchase-to-pay process. Most organizations that have not fully automated the purchase-to-pay process have automated purchasing processing. Fifty-seven percent have automated purchasing processing, including 65 percent of large organizations. Other purchase-to-pay components that are automated include: Ordering (31 percent) Accounts payable reconciliation (31 percent) Invoicing receipt (26 percent) Quoting/bidding (12 percent) Dispute resolution (three percent). Components of the Purchase-to-Pay Process that Organizations Have Automated (Percent of Respondents) All components of the purchase-to-pay process have been automated 7% 5% 6% Payment processing Ordering Accounts payable reconciliation Invoicing receipt Quoting/Bidding Dispute resolution No part of the purchase-to-pay process has been automated As is the case in automating the order-to-cash process, a lack of IT or other resources is a key factor why organizations have not more fully embraced complete automation of their purchaseto-pay process. Nearly two-thirds of organizations that have not fully automated their purchase Association for Financial Professionals, Inc. All Rights Reserved

19 to-pay process have not done so due to a lack of IT or other resources. In addition, 32 percent of respondents from such organizations are concerned with the high cost of technology while 22 percent believe that there would be an insufficient return on investment from automating the processes. Reasons Why Organization Have Not Automated Parts of the Purchase-to-Pay Cycle Processes (Percent of Organizations that Have Not Fully Automated the Purchase-to-Pay Cycle) Lack of IT and other human resources 65% 64% 60% High cost of technology Insufficient return on investment Satisfied with current process Resistance from trading partners Other 8 12 * Fifty-eight percent of organizations expect to increase their use of automation in the purchase-to-pay process over the next two years. Fifty-six percent expect to expand automation in payments processing, while a third expect to increase automation of accounts payable reconciliation. Other areas in which increased use of automation in the purchase-to-pay process is expected include: Invoice receipt (28 percent) Quoting/bidding (three percent). Purchase-to-Pay Components Organizations Expect to Automate in Next Two Years (Percent of Organizations that Have Not Fully Automated the Purchase-to-Pay Cycle) Payment Processing 56% 52% 70% Accounts Payable reconciliation Invoice Receipt Quoting/Bidding 3 * 10 Dispute Resolution * * * Organization does not expect to automate Association for Financial Professionals, Inc. All Rights Reserved 15

20 Organizations may choose to use a third party provider to track payments to and from trading partners. Banks are the primary third-party provider of such services with nearly four out of five respondents indicating their use. Use of Third Party Providers to Track Payments to/from Trading Partners (Percent of Respondents) Bank 79% 87% 68% Trade Card Orbian 5 * 11 GT Nexus 3 * 7 Bolero 2 * 4 Prime Revenue 2 * 4 Other In addition, organizations may use an integrated logistics company to help with the tracking and financing of goods. Thirteen percent of organizations, including 19 percent of those with annual revenues greater than $1 billion, use integrated logistics companies. Organizations conducting business with trading partners in particular nations are more inclined to use an integrated logistics company. For example, 23 percent of organizations with trading partners in China use an integrated logistics company while 26 percent of organizations with trading partners in India do the same. Organizations Use of Integrated Logistics Companies to Help with the Tracking and Financing of Goods (Percentage Distribution) Organization does use an integrated logistics company 13% 9% 19% Organization does not use an integrated logistics company Association for Financial Professionals, Inc. All Rights Reserved

21 Risk Treasury departments typically use one of two methods to manage their organization s exposure to non-payment or delivery and quality failures. Sixty-four percent of organizations manage their risk exposures resulting from import/export activities using trade finance products like guarantees, letters of credit or documentary collections. Fifty-four percent of organizations turn to insurance in managing risks to physical goods resulting from import/export activities. Fewer organizations use one of the following to manage risk exposures resulting from imports/exports: Financial intermediary (17 percent) Trade insurance (15 percent) Export credit agency (e.g., U.S. EXIM Bank, Canadian EDC) (15 percent). Methods Used by Organizations Treasury Department in Managing Risk Exposure from its Import/Export Activities (Percent of Respondents) Guarantees/Letters of Credit/ Documentary collections 64% 60% 71% Insurance Financial intermediary Trade insurance Export credit agency Other Given their associated costs, organizations may choose not to manage every risk exposure with these methods. They may decide to accept the payment, quality, and delivery risks associated with other methods, such as open accounts. Guarantees, letters of credit and documentary collections generate paperwork and require additional processes that can slow down the movement of goods. Guarantees, or bank guarantees, are assurances made by the buyer s bank that the buyer will fulfill its payment obligations in a trade agreement. There is a wide variety of guarantees (e.g., shipping, payment, advanced payment, performance, provisional, quality, etc.) that serve a specific risk mitigation function and may be required by a supplier. Letters of credit, or documentary credit, are similar to guarantees, but the possible claim resulting from payment failure is against the bank, not the buyer. Documentary collections are similar to documentary credit, except they do not transfer away credit, political or transfer risks. Trade insurance, which often encompasses credit risk and political risk insurance, is frequently represented to sellers as a method to ease credit terms for their buyers. Survey responses indicate that this strategy is not heavily used by organizations; this may be a result of increased premiums as a trade-off for increased business from more open terms. The volatility of foreign exchange rates during the time from initial order to payment can expose an organization (or its trading partners) to transaction risks, potentially turning a profit Association for Financial Professionals, Inc. All Rights Reserved 17

22 able sale into a loss. Two-thirds of organizations hedge their foreign exchange exposure. Large organizations are more likely to use hedges compared to smaller organizations (72 percent versus 58 percent of smaller organizations). Financial professionals have a number of tools at their disposal to help mitigate the financial risks to which their organization is subject. Fifty-seven percent of organizations with foreign exchange exposures use forwards, including 69 percent of large organizations. Twenty-four percent of organizations use swaps while 22 percent use options. Instruments Used in Hedging Foreign Exchange Exposures (Percent of Organizations with FX Exposures in its Supply Chain) Forwards 57% 45% 69% Swaps Options Organization does not hedge FX exposure Open Accounts and the Risk Associated with Their Use As organizations increasingly embrace the use of open accounts for their trade finance needs, the sellers in the transaction also are increasingly exposed to risks associated with their use. The basis for this risk is that the products are shipped and delivered to the buyer weeks or months before payment is due. Since the goods are out the door, sellers lose their leverage to demand payment. Organizations strive to manage any non-payment risk. Seventy-two percent of respondents rate their organization as being very effective in managing non-payment risks. Forty-seven percent of respondents believe that they manage document risk well, while 45 percent of respondents believe they very effective(ly) manage the commercial risk. Less than a quarter of respondents (23 percent), however, believe they manage political risk very effectively. Organization Effectiveness in Managing Risks Associated with Open Account Transactions (Percent of Organizations that Offer Open Accounts that Rate Themselves as Very Effective in Managing the Associated Risks) Risk of non-payment 72% 70% 75% Documentary risk Commercial risk Political risk Association for Financial Professionals, Inc. All Rights Reserved

23 Because of the risks associated with open account transactions, organizations need to be confident that the purchaser will pay for the goods on time and, if they are exporting the goods, that the political and business environment of the importing nation is stable. Consequently, organizations may consider a number of factors before offering open account terms to a buyer. The most critical factor considered is the credit risk of the buyer 90 percent of organizations look at the credit risk of the buyer before offering open account terms. Three quarters of organizations that use open accounts consider the country or the size of the buyer before offering open account terms (76 and 75 percent, respectively). Smaller organizations, which presumably may be relatively more at risk should a large open account transaction go unpaid, are more likely to consider the dollar amount of the proposed transaction and the availability of insurance. Importance of Specific Criteria When Offering Open Account Terms to a Buyer (Percent of Organizations that Use Open Accounts that Rated the Criterion as either Very Important or Important ) Credit risk of the buyer 90% 89% 91% Location of the buyer Dollar amount of the transaction Size of the buyer Insurance availability Sellers ship and deliver their products weeks, if not months, before the buyer is obligated to pay for the goods. Organizations typically pay suppliers within 45 days on open account transactions. Thirty-nine percent of organizations pay their suppliers within 30 days while another 38 percent of organizations pay between 31 and 45 days. Still, some organizations are slower in settling their open account transactions, with 13 percent taking 60 days and eight percent taking more than 75 days to pay their suppliers. Average Time Suppliers Receive Payments from the Organization Resulting From Open Account Transactions (Percentage Distribution of Organizations Using Open Accounts) 30 days or less 39% 39% 40% 45 days days or more days N/A Association for Financial Professionals, Inc. All Rights Reserved 19

24 Most organizations manage a large percentage of the risk associated with their open account transactions through negotiated payment terms and through early payment incentives. Ninety percent of organizations manage at least some part of their open account transactions through negotiated payment terms. Fifty-five percent of organizations manage at least of half of their open account transactions through negotiated payment terms. Seventy percent of organizations offering open account transactions offer their trading partners early payment incentives. However, these incentives are used less frequently than negotiated payment terms. Just ten percent of organizations offer early payment incentives in more than half of their transactions. Percentage of Organization s Open Account Transactions Managed Through Negotiated Payment Terms & Early Payment Incentives (Percentage Distribution of Organizations Offering Open Account Transactions) Negotiated Payment Terms Early Payment Incentives Less than 1-10% 14% 31% 10-24% % More than 50% Method not used Sellers can turn to third-party solutions to help manage the risks that result from offering open account terms. These solutions include buyer and political risk insurance, the use of logistics companies, and partnering with a factoring house. Nearly half of organizations that offer open account terms use buyer insurance to mitigate nonpayment risks. Smaller organizations are far more likely to use this risk mitigation tool than are large ones (57 percent versus 39 percent, respectively). Half of organizations also look to logistics companies to mitigate shipment risk with 56 percent of large organizations using this option. A quarter of organizations use political risk insurance while 22 percent use factoring to mitigate collection risk. Methods Used to Manage Risks Resulting from Open Account Transactions (Percent of Organizations that Offer Open Accounts Transactions) Buyer insurance (for non-payment) 49% 57% 39% Logistics company (for shipment) Political risk insurance Factoring (for collection and/or early payment services) Association for Financial Professionals, Inc. All Rights Reserved

25 Conclusions Even as the conversation surrounding supply chain management and financing becomes louder, the use of traditional trade finance tools is evolving. Companies continue to use open accounts and letters of credit, and in fewer cases use guarantees and/or factoring. In recent years, the use of open accounts has increased and has been embraced by organizations trading overseas. The increased use of open accounts may have exposed these organizations to additional risks compared the risks of using a letter of credit particularly the risk of non-payment. Organizations also have increased their use of automation in both their order-to-cash and the purchase-to-pay processes. Companies are most likely to have automated invoicing, ordering and the cash application in their order-to-cash systems. On the purchase-to-payment side, companies are most likely to have automated payment processing, ordering and accounts payable reconciliation. Most organizations have not fully automated either their order-to-cash or purchase-to-pay processes because of a lack of IT and other human resources and the high cost of technology. About the Survey In June 2007, the Research Department of the Association for Financial Professionals surveyed their senior-level corporate practitioner membership about their organization s practices in the area of trade finance. The survey generated 202 responses. The majority of respondents work for companies in the manufacturing (33 percent) and retail (18 percent) sectors, with energy (10 percent) and telecommunications (seven percent) the next most frequent. Together these four industries represent more than two-thirds of all respondents. Industry Classification (Percentage Distribution) Manufacturing 33% Retail (including wholesale/distribution) 18 Energy (including utilities) 10 Telecommunications/Media 7 Business services/consulting 5 Health services 5 Banking/Financial services 4 Construction 4 Insurance 4 Software/Technology 4 Hospitality/Travel 3 Non-profit (including education) 2 Government 1 Real estate 1 Transportation Association for Financial Professionals, Inc. All Rights Reserved 21

26 Fifty-four percent of the respondents work for businesses with under $1 billion in annual revenues, ranging from 14 percent under $50 million to 12 percent with $500 - $900 million in annual revenues. For those organizations with over $1 billion in annual revenues (46 percent) more than half have revenues of $5 billion or less. Annual Revenues (Percentage Distribution) Under $50 million 14% $ million 5 $ million 12 $ million 11 $ million 12 $1-4.9 billion 28 $5-9.9 billion 7 $10-20 billion 5 Over $20 billion 6 The Research Department of AFP is grateful for the financial underwriting of the AFP Trade Finance Survey by Scotiabank. The AFP is solely responsible for the content and conclusions of the report Association for Financial Professionals, Inc. All Rights Reserved