You might be done with the newspaper, but after you toss it into the recycling bin, it still has a long way to go, according to Frank Colubriale of Forest Fibers Inc.
The recycling broker, headquartered in the Saint-Hubert borough of Longueuil, Que., buys tonnes of discarded paper, plastics, metals and glass from suppliers, and then ships containersfull to mills in North and South America, Asia, India and Europe, where the discards are refashioned into items such as paper towels, toilet paper and asphalt.
In all, Forest Fibers says it does about $200-million worth of business a year, working in 35 countries around the globe. That means a lot of cash can be tied up between the time it pays suppliers and it is paid by far-flung customers.
As accounting/credit director, Mr. Colubriale has investigated various forms of trade financing to free up as much of that cash as possible.
He has settled on "discounted" letters of credit provided by two banks. This means that Forest Fibers is paid early by the banks rather than having to wait 60 to 90 days or more as the recycled material makes its way abroad and customers are obligated to pay. The "discount" – the Libor benchmark interest-rate index plus a small percentage – is what the bank keeps for itself.
"We might pick up material in Italy or Spain and ship it to China. Sometimes we have to put it on the water and it's not even sold," Mr. Colubriale says. "So we have to be creative with how we manage our cash flow."
Like Forest Fibers, more and more Canadian companies are looking to financial institutions for the trade financing that helps them stay cash positive as they venture into foreign markets. And more financial institutions are looking for ways to help them.
"Because the actors are more global, you have to be able to make arrangements where financing will also be global," says Michel Leblanc, deputy vice-president international trade at Montreal-based National Bank of Canada. "It's one of the reasons people use our services … to put together different players around the world."
One of the bank's clients is an Ontario company that sells a popular consumer product. Its suppliers are in Asia and its buyers in Canada, the United States and Europe. The suppliers want to get their money as fast as possible, while customers want to take as long as possible to pay. So to help its client juggle these demands, the bank pays the suppliers so they can get their money in less than 15 days from shipment. The client may then have, say, 90 days to pay back the bank. The client has less cash tied up and may also benefit by negotiating a 1- to 2-per-cent discount on price because its suppliers are paid quickly.
The other side of the equation involves receivables financing, where the bank pays its client what it is owed by customers sooner than the negotiated terms of payment. As with the letter of credit option, the payment is discounted. For a $100 invoice, as an example, the bank may pay between $95 and $98, depending on the level of risk and the time it will take for it to be paid back.
"So the customer has cash in his hands," Mr. Leblanc says. "And in any kind of business there is one expression that people use: Cash is king."
These liberated funds can be used to buy materials for new orders, develop new products, investigate new markets, pay down debt, or whatever need there may be. In addition to freeing up cash, receivables financing also has become a marketing tool, Mr. Leblanc adds, because companies who use it win business by offering buyers a longer time to pay.
The interest rate – in this case the discount – is generally equal to what a client could expect to pay for a line of credit. National Bank charges a fee on top that, usually between 0.1 and 1 per cent, for collecting on the invoices.
Prospective clients often think these products will be more expensive than they are, Mr. Leblanc says. "The administration fee is not that high because they themselves do not have to intervene in the collection of receivables so they don't have that expense anymore on their books."
Ananth Krishnan, national head of business development, global trade and receivable finance at HSBC Bank Canada, says trade financing has been catching on here over the past several years, particularly with mid-size companies.
"These are the guys who are trying to become bigger," he says. "They have been building the company steadily and they have a product that has been reasonably successful and they want to expand with new markets or new buyers. These facilities help them to realize their ambitions, to dream a bit more."
He cites the example of a Vancouver company with a seasonally cyclical retail product sourced in China and sold into big-box stores in North America. With payables financing, the bank can pay a supplier directly when an order is ready to be shipped, which means that the company can easily gear up for high-volume times of the year.
A mid-size lumber trader that buys from big companies and sends the products on to 15 export markets mainly in the Middle East and Southeast Asia has a $4-million (U.S.) facility for financing receivables. It gets paid sooner, and also can leverage that payment guarantee to increase the amount of lumber it gets from suppliers.
"For this company, it is a critical lifeline," Mr. Krishnan says.