Supply-chain finance is still work in progress for many companies; and nowhere is this truer than in Latin America. But the region is getting more sophisticated, which is helping companies expand their business and treasurers better manage cash. As was noted in a spring article on Deutsche Bank’s role in trade finance in the region, fueling the that sophistication and the success of many regional companies and economies has been new business from Asia, particularly China. Accordingly, as Latin American trade has shifted more toward Asia-Pacific, trade partners in the region have also grown more receptive to trade finance in order to expand avenues of business with more trading partners.
One aspect of supply chain finance that came up recently at a NeuGroup meeting for treasurers who deal with Latin America, the Latin American Treasury Managers’ Peer Group (LATMPG), is receivables factoring. Factoring is a transaction whereby businesses sell their accounts receivable to a third-party, like a bank, otherwise known as a “factor.” This approach is appealing for a few reasons, the major one being its ability to free up credit lines when there are overdue invoices to collect. That is, companies can receive cash more quickly than they would by waiting 30 to 60 days for a customer payment (with which they often take their time as part of their own working capital management). Other companies in the in group said they weren’t wild about factoring and instead offer pre-payment discounts.
Yet another “factor” helping grease the trade wheels in the region is pooling, although it is not able to be done everywhere. However, in Mexico, local and dollar pooling can be done. One group member noted that one doesn’t necessarily need to pool locally first before pooling cross-border; there can actually be less documentation involved to pool entities separately.
Another discussion point of the meeting: Brazil’s transfer pricing rules is creating a build-up of cash for some companies. One LATMPG member company, using a cost-plus model of 5 percent, now needs to comply with a 15 percent profit margin, which will cause cash to build up there. And what about cash as collateral instead of litigation guarantees? By mistake, another company’s local staff in Brazil posted cash collateral instead of letters of credit for litigation. If you have cash, it may not be such a catastrophe as you are entitled to interest on it. Interest accrues 15 percent per year on L/Cs, after all. But if you want the cash back to put a guarantee instead, the court needs to approve it.
Latin America requires special attention by treasurers. Thus, KPIs on working capital are coming into sharper focus, particularly when the credit taps get turned off. Therefore, it is a priority for treasury to watch for ways to speed up collections and the cash conversion cycle. But customers are increasingly savvy and will not pay their bills faster with nothing in return. SCF providers are stepping in with solutions that can spread the benefits across the supply chain. Many member companies have already or are preparing to take advantage of such services in select countries or region by region.