Opening New Doors: Business Partner Collaboration within International Supply Chains

Although most daily business interaction remains local, business globalization has become more than merely “a fad.” Cooperation between international business partners is a paradigm that Deutsche Bank aims to emulate. This is particularly important due to the ever-increasing complexity of international supply chains of corporate clients. Many large corporations in the retail and industrial sectors have established comprehensive sourcing arrangements with producers in emerging markets.

As companies in emerging markets find it difficult to obtain access to attractive funding, total cost of goods increases since suppliers need to finance their order-to-cash cycle without the assistance of their often better-rated importer counterparts. Hence, the case for banks to offer collaborative financing solutions to clients and business partners.

In the past, letters of credit (L/C) predominantly have been used on an international basis to solve this financing dilemma. These are an established means for suppliers to obtain certainty of payment and easier access to funding from local banks. Although traditional L/Cs are an excellent means for risk mitigation, their use increases the total cost of the supply chain, since conditional payment guarantees offered by banks in the context of L/Cs carries a price. Moreover, handling expenses for all parties are substantial, as L/C processing remains largely paper-based. Therefore, the financial industry is actively supporting a new cooperation model, reconciling conflicting interests of buyers and suppliers to produce genuine “win-win” scenarios.

One way of leveraging value from international sourcing arrangements is introducing new financing schemes in the open-account sphere, such as payables-based ‘reverse factoring’ programs. In such scenarios, global banks offer attractive short-term financing through internet-based platforms by discounting suppliers’ receivables. This form of supplier financing is considerably cheaper than traditional L/C-based funding or bilateral lending, as the credit standing of suppliers may be considerably enhanced by supply chain-related information provided to the financiers by the importers. Relevant information can either connect to the nature of the buyer-supplier business relationship or may be associated with individual sourcing transactions. Whatever the scenario, by working together, importers, suppliers and banks can unlock substantial value for all parties.