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AFP Survey Finds Trade Finance Tools Evolving
October 16, 2007
AFP Writers
As global trade increases, letters of credit continue to be a dominant method for managing trade, but other methods—particularly open account transactions—are growing rapidly, according to a new survey report issued by the Association for Financial Professionals (AFP). The AFP Trade Finance Survey, underwritten by Scotiabank, reviews current practices with respect to trade finance and explores areas for future development.
Traditional trade finance products such as letters of credit are used by buyers and sellers to manage trade risk and effect payment, as well as being a tool to access alternative sources of financing. According to the new survey, 83% of organizations still report using letters of credit for many of their trade transactions, while more than half (57%) of organizations use open accounts for some or all of their trade activities. And, the use of open accounts is growing with 41% of organizations indicating they have increased their use of open accounts over the past three years. In fact, today, nearly 47% of transactions are conducted using open accounts, while just 36% are conducted using letters of credit.
Interestingly, the study highlights that using traditional trade finance products as a source of alternative financing is less of a concern for organizations than in the past and that efficient payment is a priority for most trading partners. Tools such as invoice financing, factoring and structured trade finance, while still used by almost 10% of organizations, represent little more than 5% of total trade activity.
The use of technology, particularly to manage and accelerate payments is fairly widespread with almost three-quarters of the organizations having automated at least some of their processes. However, only 7% of organizations have fully automated their financial supply chain from end-to-end.
Organizations use a variety of factors to manage the risks associated with open accounts. Ninety (90) percent of organizations that accept open accounts consider the credit risk of the buyer before offering open account terms and the same percentage manage at least part of their open account transaction risk through negotiated payment terms. Half of all organizations that accept open accounts use insurance or other methodology to mitigate non-payment risk. Nearly half use buyer insurance, a quarter use political risk insurance and 22 percent use factoring to reduce collection risk. Half of all organizations that accept open accounts rely on logistics companies to mitigate shipment risk.
The full text of the AFP Trade Finance Survey can be accessed at www.afponline.org/research.
Copyright © 2007 Association for Financial Professionals. All Rights Reserved.
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