Authors
Authors
Saskia Sludden
Read time: 5 minutes
Introduction
In the ever-evolving world of global trade, the past year has been particularly challenging for supply chains. A confluence of geopolitical tensions, environmental changes and logistical bottlenecks has significantly delayed the movement of goods. These delays have not only disrupted schedules but also tied up substantial amounts of capital, creating financial strain for both buyers and sellers.
In this article, we will explore the key events contributing to these delays and discuss various financing techniques that can help unlock capital tied up in goods in transit.
Financial and investment considerations
Supply chain delays: A perfect storm
1. Red Sea conflicts
One of the most significant disruptions has been the increased frequency of attacks in the Red Sea by the Houthi militia. These attacks have expanded the risk zone, forcing vessels traveling from Asia to the Suez Canal to take a much longer route around the southern tip of Africa. This detour adds considerable time to the voyage, delaying the arrival of goods in Europe and tying up capital for extended periods.
2. Port congestion
Aging port infrastructure, combined with a surge in e-commerce, has led to severe port congestion. Ships are often left waiting for weeks to unload their cargo, exacerbating delays. The increased demand for cargo handling has outpaced the capacity of many ports, leading to significant backlogs and inefficiencies.
3. Climate change
Climate change has introduced a new layer of unpredictability to maritime logistics. Rising sea levels and more frequent severe weather events have forced ships to deviate from their usual routes or anchor until conditions improve. These disruptions not only delay shipments but also increase operational costs.
4. Labor shortages
The COVID-19 pandemic has had a lasting impact on the labor market, particularly in the logistics sector. A decline in port workers, coupled with strikes, has left ports struggling to efficiently unload cargo. The resulting delays have further strained supply chains and tied up capital in goods in transit.
5. Slow steaming regulations
In an effort to conserve fuel and reduce carbon emissions, slow steaming regulations have been introduced. While beneficial for the environment, these regulations have increased transit times, adding to the delays already caused by other factors.
6. Shipping container shortages
The pandemic-induced shutdowns created an imbalance in the distribution of shipping containers. Subsequent issues, such as Red Sea conflicts, port congestion and an increase in demand for sea transport, have made it difficult to resolve this imbalance. The struggle to find shipping containers and the resulting surge in container prices have further contributed to delays in shipping transit times.
Unlocking capital: Financing techniques
Given the lengthier journey times, a significant amount of capital is being tied up in goods in transit for extended periods. For those buyers and sellers who find themselves affected by this, there are various trade financing solutions that can unlock that capital and maintain liquidity. We have summarized below three of the most commonly used methods:
1. Letters of credit
A letter of credit (LC) is a financial instrument issued by a bank on behalf of a buyer, guaranteeing payment to the seller upon the fulfillment of specified conditions. This instrument provides assurance to the seller that they will receive payment even if the buyer faces financial difficulties, meaning that sellers are willing to ship goods prior to receipt of payment. For buyers, an LC can help manage cash flow by deferring payment until the goods are received or certain conditions are met. This can be particularly useful in mitigating the financial strain caused by extended transit times.
2. Loans against the value of goods in transit
The owners of goods in transit may obtain loans against the value of those goods. Financiers may provide loans in an amount equal to a percentage of the value of the goods being shipped, offering immediate capital to a borrower, in return for receiving security over those goods. In some cases, security may also be granted over additional assets, forming a “borrowing base” of assets against which loans will be made. The loans may be required to be repaid once the goods are delivered and payment is received or rolled over if further goods are to be financed.
3. Receivables purchase arrangements
Receivables purchase arrangements, in the form of invoice discounting or factoring, involve the sale to a third party at a discount of receivables owing to a seller from the sale of goods. This allows sellers to receive immediate cash flow instead of waiting for the payment terms to be fulfilled. In the context of delayed supply chains, receivables purchase arrangements can provide much-needed liquidity by converting receivables into cash quickly. If a buyer has delivered an LC in place of agreeing to make a direct payment, sellers can also use a similar technique known as forfaiting to sell their right to receive payment under the LC to a third party.
Conclusion
The past year has presented unprecedented challenges for global supply chains, with delays tying up significant amounts of capital, creating financial strain for businesses involved in international trade.
However, by employing trade finance techniques such as LCs, trade loans and receivables purchase arrangements, companies can unlock the capital tied up in goods in transit and maintain liquidity. These methods provide the financial flexibility needed to navigate the complexities of modern supply chains and ensure the smooth flow of goods across the globe.
Authors
Authors
Saskia Sludden