FREIGHT FINANCE\\\


A fair exchange? Don’t bank on it


Most freight and transport businesses will look to their bank when they need to exchange money – but there are alternatives that may offer a cheaper, and better service. International payment specialist Smart Currency Business has around 60 freight forwarder clients, and has also recently launched a dedicated aviation division. Business Aviation Specialist,


Alex Bennett, says that the aviation industry in particular has specialist needs, including high levels of client confidentially for the very hefty sums of money often involved in aircraft purchase or leasing deals. Most freight forwarders


won’t be signing multi-million dollar deals for planes, but they are still exposed to what money men call exchange rate risk – namely that the value of one currency can fluctuate sharply, leaving a company seriously out of pocket if the market goes the wrong way. While exchange rates can also work in your favour, most companies prefer the certainty of being able to fix exchange rates in advance. “Currently, the dollar is at


an eight-year high against the Euro,” Bennett says – but who knows what the forex markets will be doing in one,


two or


Issue 2 2015 - Freight Business Journal


If the bank says no, is there an alternative?


Before he became part-owner and director of RH Freight – and, now, owner and chairman of Baxter Freight – Ian Baxter was a finance lawyer with


global


law firm Linklaters – so he is in a possibly unique position to see both sides of the financial fence. In his previous life, he helped


three weeks’ time – or even this afternoon? Events like general elections can set exchange rates fluttering, as can wars or natural disasters. Anyone who deals in the Swiss France will know that the decision to unpeg the currency from the Euro has had a profound effect on exchange rates. So a degree of certainty in a


very uncertain world can be very comforting. An increasing number of


freight forwarders are coming to Smart for this type of service, although most new customers come to it because it offers better deals on ‘spot’ foreign exchanges than the banks do - about 1-2% better, says Bennett. But Smart will also contemplate forward


exchange rates for much smaller amounts than the minimums the banks will contemplate


doing such


deals for – and an increasing number of forwarders and other smaller firms are taking advantage of this. Danny Summers of


Interfreight UK says that Smart is an integral part of its import and export activities to and from the UK: “We deal with high volumes of trade, which require reliable, secure foreign exchange transactions. Smart Currency Business helps us with hedging strategies that allow us to reserve currency exchange rates in advance, in order to protect our transactions from the unpredictable nature of the markets.”


Express freight – and now fast cash too?


Express giant UPS through


its UPS Capital arm (www. upscapital.com) is offering insurance, trade finance and payment solutions in what it says is a first for the logistics industry. In the UK UPS Capital offers risk mitigation solutions through its affiliates, which allows companies that are not used to quantifying supply chain risk to begin apply basic risk mitigation strategies. UPS Capital also offers a variety of products including trade credit insurance and cargo insurance, along with other


financial services products, which allow businesses to expand globally, accelerate cash flow and develop new business. On its website, UPS Capital


says: “We can work with businesses that traditional financial service companies often ignore.” It says it can help firms expand in global markets, or even domestically. UPS Capital says it can help firms borrow operating capital against goods warehoused abroad or moving through their supply chain within the UPS network – or expand


overseas sales by extending credit to prospective buyers in emerging markets. The website, aimed at a US audience, says that asset-based


lending


its global service


provides a revolving line of credit to ensure smooth, predictable cash flow, with funds


advanced flexibility, against


offshore-warehoused or in-transit goods. This gives financial


because


the borrower isn’t locked into a fixed loan or payment amount. Traditional business lenders


typically do not advance funds against inventory that are not


banks put together complex corporate funding packages. The freight industry, though, is a bit different: “It tends not to need major start-up funding at all.” His new company, Baxter Freight, for example, was completely self- funded. But if some start-up capital


is required, freight forwarders, like any new, small business, are likely to find the going tough, Baxter believes. Not that this is necessarily a criticism of the banks, he hastens to add: “It’s not their job to fund companies while they build up goodwill, to finance fresh air.” Lately, we have been criticising banks for recklessness - so we shouldn’t really complain now if they are more cautious, he suggests. It certainly doesn’t seem to the number of


restrict start-


up forwarders, in his view. In how many other industries could someone compete with a company the size of DHL from their front sitting room? If the banks are saying ‘no’,


these days there are alternatives in peer to peer lending or ‘angel’ investors. While the investments available from these sources are not huge, most start-up forwarders will only be seeking fairly modest sums.


within US borders, the company argues. UPS Capital Cargo


Finance lets customers use their in-transit inventory as collateral to obtain working capital - so there is no need to wait weeks or months to convert it into cash needed to run or grow the business. Again, the premise is that traditional business lenders typically do not advance funds against inventory outside the US.


Angels are usually people who


are sitting on some capital and are looking for a better return on their investment than can be got from the building society; there could well be a network of them in your local area. You don’t have to go to anyone local, but many angels will include the benefit of their business expertise as part of the package and being round the corner is an advantage in this respect. Potential borrowers will have


to present to the angels, rather like the popular ‘Dragon’s Den’ TV program, though fortunately without cameras present. But their verdict will be based on a lot more due diligence than the seeming snap decisions of the TV programme. (Though in fact, the Dragons’ decisions are in fact also very thoroughly researched, it’s just that people poring over spreadsheets and reading analysts’ reports wouldn’t make compelling viewing.) Anyone starting a freight


forwarding business may have to be prepared to spend time explaining what it is all about, and it isn’t the most glamorous or ‘sexy’ industries. It is, though, highly profitable, Baxter asserts, “despite all the moaning”. Cash flow is probably the


forwarders’ biggest headache. Suppliers like shipping lines and airlines need to be paid – oſten before the goods are even shipped – but shippers don’t always see the need to pay their forwarders so promptly. One possible solution to this problem is invoice financing – indeed, for


37


many freight forwarders, the only asset that could conceivably used for funding purposes are invoices, or the ‘debtor book’. Some companies do use this


as a source of finance – basically, banks and others may be willing to lend against unpaid invoices, for a fee – to help smooth out cash flow. But it isn’t used in the freight industry as much as it might be, says Baxter, partly because some banks see freight forwarders’ invoices as more risky than average. They have a picture of shippers refusing to pay invoices in full because a shipment arrived two days late or because a stevedore in a distant port damaged some of the goods. “This


though” Baxter says.


is a misconception, “In


fact,


freight forwarders’ debt is highly enforceable. The law is absolutely clear.” Freight forwarders may oſten have the right of lien – the ability to seize and if necessary sell shippers’ goods if freight bills are not paid. In fairness, some banks


are more open to the idea of forwarder invoice financing than others. For anyone interested, it could be worth looking beyond the well known clearing banks at some of the asset-backed lending banks. Of course, the time may come


when the forwarder wants to grow beyond the ‘desk and phone’ stage into areas like warehousing or trucking, at which point serious finance would be required. Back to back contracts with customers could be the answer.


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