2012 developments in trade finance

1. From haute finance to social business finance
By Gertjan Kaart / January 23rd 2012.
Business and risks in the real economy.
There are many uncertainties for businesses that are associated with the current Euro-crisis. One of my
observations of this crisis so far is that businesses in the real economy pay the bill for the absence of political
European leadership to solve the Euro-crisis. The Dutch economy is in a state of recession, consumer trust is
down, and bankruptcies go up again. Although interviews with entrepreneurs in The Netherlands tend to give a
positive outlook, it is still my expectation that bankruptcies will increase further into 2012 and that workers will
have to be laid off for further cost reductions.
Another observation is that governments have a focus on the financial markets, and therefore are subsidizing the
problem instead of focusing at the solutions. For instance stimulating access to business credit or improving the
flow of information in the market and restore trust in the SME sectors of our economies - Because I think
businesses are the engine of the economy. Any reduction of bank support for business through trade finance, will
have to be offset somehow. Either through alternative financing, like suppliers credit, or by an increased number
of business failures. The loss resulting from lack of support by banks compared to the years before is therefore
distributed into the real economy (creditors, employees).
In the book “Capitalism at risk - Rethinking the role of business” (2011, Harvard Business Review Press) the
authors argue that a good government and regulatory measures are crucial, but that governments are not the
savior in this financial crisis. It needs the support and engagement of an effective business function as well. I
strongly support that notion. So a big question is how can the Credit Management function facilitate business in
the real economy with real services. Businesses themselves must take a more active role in surviving financially
and at the same time should realize that they are much more exposed to financial hazards than 3 years ago.
Do businesses realize that they are exposed to increased credit risks?
Much of the attention is on the reduced bank support for businesses. Besides the lack of credit, there are huge
side effects resulting from the new banking policies that put businesses in highly exposed positions. Some of my
observations include:
● Companies pay the bill for the political- and euro-crisis
Businesses are exposed to increased credit risks; powerful suppliers requesting strict payment terms and
customers delaying payments. Business are in fact the largest bank-alliance of our economy. But they are
usually last in line when it comes to recovery of funds in a default situation of a buyer. They bear the risk of
key customers going bust and supply the cheapest credit without having the risk management tools in place.
● Slumber crisis – too long: lack of trust, lack of credit
The crisis is wearing out the financial situation of businesses. This is supported by the fact that payment
delays are going up in the Netherlands. Only the public sector shows a slight improvement, but the
government remains the slowest payer in the Netherlands.
● Banks are cleaning up their balance sheets; risk is mitigated into the market
A recent report in the Netherlands shows that 24% of credit applications where rejected in 2011 as
compared to 7% in 2007. Credit lines from banks are blocked for a long time now already. Resulting in
financial defaults, diminishing businesses or more reliance on different credit lines like trade credit.
● Governments subsidize balance sheets of banks, have too little focus on real economy and take
counterproductive measures preventing efficient information flow.
Governments do not have an integral view on the trade finance sector as a whole. A good example is the
lack of a clear and effective business information policy. Instead of supporting the availability of Public
Sector Information, new legislation is counterproductive, for instance by releasing filing requirements for
so-called micro-entities. Another example are the increased legal fees resulting in even higher recovery
costs in default situations for SME’s especially.

2. ● Persistent cost reductions, (financial) defaults increase 2012
The ongoing crisis situation squeezes out individuals and companies and results in ongoing cost savings
with effect on demand and consumption.
Businesses are crucial factor in our economy. And policymakers and businesses alike should acknowledge that
businesses also play a crucial role in financing our economy. Businesses should be stimulated and supported to
play the trade finance game. But there is not a level playing field. Efficient market information and a more equal
competitive position vis-a-vis institutional finance sector is needed to increase the power of the business function
in (trade-)financing and growing the economy.
Focus at the solution: from ‘haute finance’ to ‘social finance’.
Companies are looking for alternative ways to finance their business or find new ways to credit like crowd
funding or -financing (many different small investors that pool financial resources mostly acquired through
internet). But also there is a new strong reliance on ‘good old’ supplier credit. I see this as a form of crowd
finance by suppliers: trade credit 2.0 so to speak.
The re-positioning of businesses as trade creditors is reflected in growing exposed suppliers capital (versus bank
credit for instance), credit risks increasing (more financial defaults and late payments) and the costs are growing
(cost of recovery and cost of capital). Strong measures must be taken by businesses to manage these trade related
credit risks. Like a bank, companies must manage their own risk. I estimate that not more than 10% of all SME’s
in the Dutch market have an active credit risk management policy in place.
Policy makers can support the trade credit function in the economy by improving the accessibly of business
information and create a market level playing field for recovery of debt positions. This will support businesses to
expand their financing capacity and it will increase trust and grow trade. Banks can build on this financial
capacity of the business sector by trusting and supporting it through credit insurance and factoring services.
So far it is still trade credit 1.0. But businesses are part of a trade finance crowd; they both give and take credit.
Businesses are exposed but also have exposure. This notion combined with new ‘social’ technologies and
behavior and the increased reliance on credit supplies of trade partners should result in higher interest of one’s
own creditworthiness. Information will be created through sharing and inviting objects and subjects (trade-
creditors and -debtors) to exchange relevant information. Companies will have to promote themselves as
financially sound business partners to the rest of the world. And also they should want to know how the credit
assessment processes by financial institutions work. All relevant parties in the market should contribute to
financial openness. Institutions by clear communication of credit decisions and governments by creating
effective PSI information flows.
And companies should have a financial PR and create transparency on their own financial situation. Because
more than ever businesses depend as well as rely on a clear information and a good credit rating. Companies that
do so will create a competitive advantage by building stronger relations to all financial stakeholders including
their suppliers and customers.
Conclusion
The economy depends on a financially effective business population. An integral focus on all the factors that
support inter-company lending (trade credit) will support the real economy. Trade credit 2.0 is in fact crowd
finance and is supported by openness in business, a level playing field in risk management opportunities and
efficient flows of business information.
Gertjan Kaart, Amsterdam Januari 2012
http://twitter.com/gertjankaart
This text was written in preparation for participation in a round table discussion for the Credit Alliance meeting, Paris 2012.