Members of SFNet’s Supply Chain Finance Committee, including Bryan Ballowe, managing partner, TradeCap Partners; Tony Brown, principal, The Trade Advisory; Alan Eliasof, CEO, Prestige Capital; Bob Grbic, founder and president, Bearbrook Corporate Advisors LLC and Megan Slovak, SVP, underwriting manager, Rosenthal Capital Group, sat down for a discussion about global trade tensions, tariff wars, factoring innovation, and supply chain risk.
    This discussion was written in anticipation of SFNet’s upcoming Supply Chain Finance Conference which will be held September 8 at Greenberg Traurig in New York City. The event will offer a more in-depth look at supply chain finance. For more information and to register, please click here.


Pictured Above: Bryan Ballowe, Tony Brown, Alan Eliasof, Bob Grbic and Megan Slovak

TSL: How are shifting geopolitical alliances and trade tensions impacting global supply chain financing strategies?

Tony Brown: I've been in the international trade business for about 50 years, and I don't think I've ever seen a time more tumultuous or chaotic for people in cross-border trade than right now. There's been a shift away from China, and sourcing has moved to Southeast Asia and Latin America. We've seen nearshoring and friendshoring, requiring supply chain finance programs to adapt to a more fragmented and diversified supplier base.

With that—and the tariffs, which are chaotic and range from 145% for China down to 10% for others, with rates anywhere in between—the dust is still not settled. One thing is certain. There is going to be cheating. People are going to transship; Chinese goods will go to Vietnam and appear to be Vietnamese, but they're actually Chinese. There will be a lot of tariff engineering, where people are going to design products to fit a certain tariff category. This is going to cause the need for an immense amount of due diligence for compliance. If you are lending against inventory that's supposed to be in one tariff category and it turns out to be another, or if goods are impounded by customs on arrival, that's a serious problem.

We've also had currency and interest rate volatility. If tariffs are inflationary, which they are expected to be, interest rates will remain high. High interest rates aren’t good for business -- they weaken the economy. That’s likely to give rise to stagflation or a credit crunch, resulting in higher bankruptcies.

The dollar has weakened and if the U.S. dollar drops, foreign currency imports become more expensive, and if tariff rates are high, then that is likely to be inflationary.

Given this backdrop, there is an inevitable impact on supply chain finance. There is a lot of reshaping going on regarding factoring, supply chain disruptions, inconsistent delivery, and fulfillment issues are likely to increase accounts receivable volatility. As banks pull back from balance sheet lending, I think factoring, including reverse factoring, is likely to be a winner, especially for small- and medium-sized companies. Receivables financing will be an effective tool to manage cashflow volatility. Asset-based lending will remain resilient as traditional cash-flow lending tightens in the economic scenario I just described.

Overall, the climate is volatile. Strategies for supply chain finance must become adaptive and risk-aware, with a need for supplier support, cash flow optimization, and compliance. It's a complex situation.

Is factoring undergoing a reinvention in the digital era or is it being cannibalized by fintech alternatives and supply chain finance platforms?

Alan Eliasof: It's being reinvented. Cannibalization, especially by the fintech and MCA (merchant cash advance) world, is happening more. MCAs are readily available with funds to our prospective clients. Factoring can close deals in 5-7 business days compared to a bank or asset-based lender that can take 30-60 days or longer. MCAs will close in 24–48 hours, so when a client needs funds that is their first and easiest method, even if the expense is much greater than a traditional method.

So, even though we are less expensive than MCAs we've had to reinvent ourselves by becoming more reactive and funding faster and changing our pricing model. For instance, while we did not charge minimums or closing fees and had slightly higher factoring rates, now we've changed to compete.

The fintech world is on every deal we see. As we look at prospective clients, where the AR is $2 million, and there is either a small bank loan or an SBA loan, or other small funds that we were able to augment or supplement the clients’ cash flow, now they have four MCAs, and sometimes the total exposure is greater than the availability that we have to do a deal.

Reverse financing or supply chain finance are also causing us problems. A prospective client might be working with one of the large retailers offering a program that is quick, reasonable, and, in many cases, cheaper than factoring. So, they take that program and it reduces the availability of funds under our formula of what we can advance. It means we now make a smaller deal with that client, or sometimes we don't even get the client, because the amount available after this reverse factoring doesn't give us any available funds.

How are buyers’ payment behaviors evolving during the tariff war and what implications does this have for recourse vs. non-recourse factoring structures?

Eliasof: The tariff war has hurt factoring not so much in recourse vs. non-recourse, but it paused some clients’ deals. We had a client with a $1.5 million order with a large retailer, importing the goods from China. When the tariffs increased dramatically, the deal was no longer profitable. The client paused the entire order, even after getting price concessions from the retailer, just not enough to be profitable. We've lost prospects who will no longer be needing factoring for the potential future because tariffs hit them so hard.

Tariffs didn’t cause much of a shift in the recourse/non-recourse world; that happened five years ago when COVID hit. Before COVID, most of our deals were non-recourse. When COVID hit we had to go back to all of our existing clients and any new and say any non-recourse deal had to immediately change to recourse. Almost all of our new deals now are on full recourse to the client. Large retailers' bank and self-funded programs also hurt us, taking away potential funding opportunities. We still close many new and existing deals, but advanced funds have shrunk due to reverse factoring.

Brown: On the digital side, there’s a beneficial effect from digitization in factoring. There's been uptake in AI—which can help, for example, in verification processes using natural speech to interface with accounts payable departments. That's a big benefit for what is traditionally a labor-intensive and expensive process.

Procurement platforms are also now embedding a factoring option. When Procurement issues a purchase order and the seller invoices, there’s often an immediate option for the supplier to obtain payment within the platform itself. That is likely to have an impact on factoring volumes.

Eliasof: I agree, Tony. The verification side can certainly be expedited by AI. At the same time, we are still old-fashioned where we like the personal touch and relationship that is involved with somebody in payables in a warehouse. So, AI is expediting but can be a hindrance in some ways. It is sometimes hard to differentiate a fraudster using AI from the real potential debtor that we're trying to reach. We’re still doing a lot of confirmation by phone.

Bob Grbic: While channel and dynamic financing is growing, in particular with investment-grade companies, it can currently take 10–20 days for invoices to be processed and posted to these platforms before they are eligible for discounting. Factors, on the other hand, have the option to lend on the assignment of an invoice which can afford a liquidity-strained borrower funds in a shorter time frame. You may also have the option, depending on the platform, to structure deals where you can finance borrowers’ receivables that can eventually be discounted through a Supply Chain Financing Platform, which may appeal to some borrowers while still affording a factor a financing role, albeit for a short duration. If the factor also provides inventory financing, they will have a veto on whether a borrower can discount the receivable arising out of financed inventory with a third party.

AI’s value to lenders and the supply chain is growing and is becoming increasingly more important in verifying the integrity of transactions. However, we should never discount the importance of understanding the relationships and interdependencies among all the players in the supply chain cycle.

Has there been an increase in risk to inventory finance during the tariff war? If so, what are those risks and how has inventory finance addressed those risks?

Megan Slovak: Absolutely, for many of the same reasons Tony, Alan, and Bob discussed. Higher tariffs lead to higher costs of goods sold which ties up capital in inventory costs. Combine that with longer lead times, transit times, potential customs holds, and any other unforeseeable supply chain issues and risk increases. The tariff war has created uneasiness among suppliers and buyers. Buyers are trying to find the best rates and opting to shift factories from one country to another to avoid the higher tariffs, creating significant challenges that pose the questions: Is the factory capable of producing the product I need, on time, with the right quality? What are the payment terms? The new factory may not allow open terms or provide credit requiring a guarantee or letter of credit. During these times companies are reaching out to inventory and purchase order finance lenders for support.

In-transit inventory and purchase order financing funding methods include letters of credit, cash against documents, or collection payments and PO finance lenders and ABLs can provide these programs. Lenders must be prudent when making payments to overseas vendors and should always vet new factories and require an inspection pre-shipment.

Another risk is companies may not realize that factories are shifting shipping terms. Factories may move from FOB (buyer is importer of record) to a DDP model (supplier is importer of record), sometimes requesting prepayments or deposits. If goods reach the US but aren't cleared, when the supplier was responsible for clearing customs, buyers could face added costs, eating into profit margins and inventory values. As a lender or a borrower, it is crucial to understand shipment terms.

Customer cancellations are also a risk for inventory lenders, especially purchase order finance lenders. The whole transaction for a PO finance lender is based on the customer and the strength of that customer order.

Brown: The tendency to want to pass the whole responsibility to the foreign supplier to make the goods, ship them, clear customs, pay the duty and deliver the goods as if they were a domestic vendor all sounds good, except it's fraught with risk. The supplier may not be honest about tariffs and product classification requirements. They are the importer of record, so they have to comply with the Customs Modernization and Informed Compliance Act (Mod) and maintain that information, and if there is an issue, they are responsible. The Trump Administration is looking to stop foreign suppliers being the importer of record and that could really put a wrench in the works for that structure.

 Many suppliers in developing countries have greater challenges with access to capital and cost of capital and if you’re asking them to use limited access to finance to make, ship, hold the goods, and pay the duty, they may be able to do that, but at what cost?

Based on the current environment (both macro and geopolitical), has there been a stronger need for inventory finance and procurement to partner with other forms of supply chain finance including receivables finance and reverse factoring?

Ballowe: The current uncertainty and risk in the market provides an excellent opportunity for the non-bank lenders to step up and provide significant benefit and value to borrowers from a risk-mitigated perspective. In order to do so, lenders must get deep into the weeds and understand clients’ business models as well as supplier and customer relationships. Everyone in the supply chain is trying to mitigate risk right now. All this uncertainty brings the need for more understanding, transparency, and structure.

Lenders need to determine whether their borrowers can source goods effectively. Are terms with overseas suppliers changing whereby borrowers are having to catch up on supplier payables while pre-paying to have additional product produced and shipped? Is cash flow starting to deteriorate as a direct result of the quickly changing dynamic with existing suppliers? Are borrowers sitting on a lot of inventory that they brought in ahead of the tariff announcement in order to mitigate the tariff risk, but demand has now significantly decreased?

Another risk that Megan alluded to is the time aspect of this uncertainty related to the fluctuations in tariffs. For instance, if you're on the procurement side, and you've got 90 to 120 days lead time to get goods produced and delivered from your overseas suppliers, you really don’t know what your cost of goods is going to be. When you have extended exposure to overseas suppliers alongside the current uncertainty with tariff fluctuations, depending on how you're buying from your overseas suppliers (FOB, CIF, or Delivered Duty Paid), you can find yourself on the wrong side of tariff negotiations and end up losing money by the time goods clear U.S. customs.

Brown: Creditworthiness will suffer. I believe that there will be more stress in company financials, more bankruptcies, and possible pullbacks on lending limits and advance rates. To me this environment is pretty toxic.

Slovak: When PO finance lenders are asked to open letters of credit months in advance, relying on future orders, it increases risks. Extended timelines bring risks that orders could be canceled or deferred before goods are ready to ship.

With global supply chain disruptions becoming the norm, how should lenders and insurers reassess supplier default and geopolitical risk? What are the implications for assessing counter-party risk on a secured/unsecured basis?

Grbic: It starts with re-underwriting the deal. Everything you thought about credit or past trends — throw out the window. It starts with understanding how your borrower’s business model has changed post “Liberation Day” and with the expectations of higher and erratic tariffs on imports, you need to consider that every player in your borrower’s supply chain is engaged in “price discovery” to remain competitive. Every supplier to the end customers in the chain is looking to obtain lower prices and better terms to help absorb the impact of higher tariff-related costs.

How important is your borrower to its customers and suppliers? If your borrower is selling generic products, their customers have more options to find alternative suppliers at lower prices than if they are selling unique branded or patented products. The worst-case scenario is that your borrower loses a customer to a competitor because of tariff-related issues while still having related inventory commitments. On a positive note, resourceful and better-financed borrowers may be able to displace competitors.

Another important issue that needs to be considered, in addition to costs, is credit terms from new suppliers entering the borrower’s supply chain. Long-established relationships often benefit from the seller granting favorable terms to the buyer. The extension of favorable credit terms has helped fuel China’s growth and afforded companies the benefit of financing inventories through payables. With new suppliers, from smaller export countries entering the supply chain mix, we need to assume that borrowers will face a contraction of open payable support and need to rely more on lenders to finance imports. The worst case, cash deposits (not recommended) or documentary Letter of Credit, might be required by the suppliers and /or by the country of export regulations.

 Another concern- what due diligence has the borrower performed on the reliability of a new supplier in terms of delivering quality products on a timely basis? Does this supplier have “credit” to secure the components needed and pay for the related labor? This risk is greater for smaller importers that don’t have standing to secure production from more well capitalized foreign suppliers that are often larger, better financed U.S companies that can afford to give the supplier larger production commitments.

Brown: Reshoring is widely discussed, but for highly labor-intensive products the U.S. will not - be competitive; We will still be import-dependent but diversified sourcing will accelerate. The tariff issue today is just one passing phase. Hopefully, it will end really fast, but it will end. We've had supply chain disruptions of all flavors – logistics snafus, wars, pandemics. Global trade is going to continue.

Grbic: There’s nothing better than boots on the ground and backing a strong management team. The companies that strive and can pick up market shares as weaker companies fall are those that are well managed. Successful importers frequently visit their offshore suppliers and/or have country on-site staff to monitor their suppliers’ order flow. We need to remember market challenges also breed opportunities.

Eliasof: For factoring, gross margin has never been as important as it is now. We were always collateral based. As long as the receivables were good receivables, verifiable, with a good, strong, creditworthy customer, we didn't care as much about the gross margins. We're now asking what their margins are upfront. Time is now the enemy. If the order gets delayed, postponed, or takes longer to get there, the costs are going up dramatically for our client.

Ballowe: Supplier and customer diversification is also essential and raises its head as we enter into trade or tariff wars where it creates supply chain disruption. It's easy when you buy one or two products from just one supplier. You know each other and what your payment terms are. But as soon as disruption hits, lack of supplier diversification impacts your entire business. Shifting to a new supplier introduces new risks and challenges including payment negotiations, sourcing challenges, and quality issues.

Slovak: It is important to encourage clients, especially importers, to maintain a strong relationship and keep in constant communication with their logistics parties (warehouses and freight forwarders) because that's crucial with tariffs and trade wars. This helps navigate shipping and customs challenges, and helps lenders monitor inventory and payables.

If you could change one thing in the global supply chain finance ecosystem in the next 12 months, what would it be — and why?

Brown: The supply chain finance ecosystem suffers from fragmentation and lack of harmonization. Buyers, suppliers, lenders, insurers, technology platforms all operate in silos, and this hinders transparency, delays transactions, increases the cost of capital and restricts access to finance. So, my big wish is that there should be greater use of digital data across supply chains, and more integration of that data to inform people who are managing transactions in trade, logistics and finance, so that there's interoperability and standardization to unlock greater potential for supply chain finance.

Eliasof: I would love to see AI or technology adding better communication between all those parties involved in the supply chain, whether it is between a factor and getting better information from the account debtors on verification or between the purchase order to the purchase order finance company.

Ballowe: Eliminating uncertainty in the supply chain ecosystem in which we play and as well as solidifying what the clear rules of the game are for all players. If the supply chain ecosystem is stable, we can all adapt and maximize profitability and begin to operate efficiently. Standardization and digital data digitization will certainly help remove uncertainty.

Slovak: Greater consistency would benefit all of us. The fluid macroeconomic environment, particularly evolving regulatory and tariff regimes, makes it challenging for borrowers to build a realistic cash-flow forecast.

Grbic: Barring a national crisis, such as an armed conflict, I would like to see a global rule set giving a defined notice period before tariffs are imposed to give importers/exports time to react and explore options. Given production cycles for some industries - 9 months would be a place to start.