Trade Financing for International Freight Forwarders

7-minutes Read

Trade Financing for International Freight Forwarders

International trade involves a lot of cumbersome logistic procedures. Booking, towing or customs declarations are only some of the many things that need to be handled when eng aging in trade, especially cross-border trade. These procedures are crucial to get right and are not carried out by the shipping companies (ocean carriers). Thus, this is the task of freight transport international freight forwarders. Freight forwarders play an important role in the communication, coordination, and resource allocation throughout the entire cross-border supply chain process. They accept the entrustment of the consignees and shippers of import and export goods. They do so in the clients’ name and handle international cargo transportation and related services for them.

In many ways, international trade forwarding companies act as a bridge between the client and the carrier (shipping company), and rely on information asymmetry and resources such as relationship with shipping companies, customs or import and export company prospects. Since entry-barriers are low, there are many market participants, and most of today’s forwarding companies are MSMEs. According to the filing and registration of international freight forwarding companies by the Ministry of Commerce of China, as of March 10, 2021, there are over 72,354 companies nationwide engaged in the international freight forwarding business. Although international freight forwarding companies have low entry barriers, the characteristics of their business process make it a capital-intensive industry. Companies need a large amount of working capital to support their daily operations: shipping companies usually provide first-level freight forwarders with an open account for about one month. The exporter’s credit term with second or third-level freight forwarders is about three months. There is a liquidity gap of two months in between. Therefore, international freight forwarding companies generally face large amounts of advance payments and insufficient self-owned capital, and are in need of financial support.

The financing channels currently available for international freight forwarders include:

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The following are some of the major institutions and companies that have entered the field of digital assets.

1. Bank loans

This is one of the most common financing channels. Because of its high requirements for corporate qualifications and relatively cumbersome procedures, it is often difficult for SMEs to solve their financing needs. Most international freight forwarding companies are asset-light, and their revenue mainly comes from three aspects: transportation fee spreads, service fees, and operating costs. The industry has no risk-resistance ability whilst being of high operational risk, which makes it generally difficult to meet the bank’s credit access requirements. Although the government has issued relevant support policies, average enterprises still have to take mortgage loans. Applications for mortgage loans are very tedious – you need to apply for evaluation and pay insurance premiums and appraisal fees to the bank. Moreover, the short-term loans provided by banks (for one year) do not have the flexibility to withdraw (need to remove all at once) and fail to meet the even shorter-term financing needs of the freight forwarding industry (the liquidity gap may only appear in certain months), which will make forwarders bear unnecessary capital costs.

2. Private lending

This includes family and friends, small loan companies, lending institutions, pawn agencies, internet finance platforms, etc. Compared with bank loans, the borrowing efficiency is faster, and the use of funds is flexible (borrowing and repayment at any time), which is more in line with the characteristics of the international freight forwarding industry and can meet the needs of SMEs, so it is widely adopted. However, this type of channel has a limited amount and high cost, so it is usually considered in case of temporary emergency but not a good choice for the long term. 

3. Equity financing

In addition to bank loans, international freight forwarding companies can also unite with similar companies to solve insufficient funds. For example, SME forwarders can be merged into the supply chain of larger-scale freight forwarder companies and utilize their resources, such as the recent cooperation between Shenzhen World Initiative and CIMC Logistics; or cooperate with similar SME forwarders to seek complementary resource integration. There have been more and more cases of mergers and acquisitions in the international freight forwarding industry worldwide in recent years. Integration is a general trend. If the weak want to survive, they can only sacrifice autonomy. This method still has certain limitations, though.

4. Supply chain financing

International freight forwarding companies can act as core companies or rely on core companies’ credit advantages to carry out commercial acceptance bill financing, commercial factoring financing, and reverse factoring financing. International freight forwarders can also depend on the benefits of logistics, business flow, and information flow to solve information asymmetry with financial institutions. This method is the same as equity, which has high requirements for enterprises and is challenging to gain wide adoption.

Therefore, it seems complicated for MSMEs to get financing. However, with the in-depth integration of technology the visualization and controllability of business operations, and the circulation of goods and documents, every ticket of the freight forwarding business can be converted into cash flow. The traditionally fixed asset-based loan financing method can be transformed to a ccredit evaluation, which is based on alternative data sources, such as historical transactions. This will provide a clearer picture of forwarders’ operational activities and monitor the credit risks in a dynamic way. Besides, trade-related documents issued from immutable blockchains can be used to prove real transactions. As a result, the forwarder can reduce financing costs as there is no requirement for the collaterals as imposed by traditional banks.

This furthermore opens the door for new entrepreneurial ideas around “service platform, data collaboration and streamlining the information flow of the value chain” within the freight forwarding industry. Technology-focused freight forwarders can digitize the logistics process, including quotation, booking, commodity inspection, manifest sending, and customs declaration, to improve synergy. It can help cargo owners realize cost reduction, increase efficiency, and improve service experience. Undoubtedly, there is a certain substitute for traditional freight forwarding. However, it is still a considerable challenge to implement automated operations across all aspects.

As a trustworthy financing platform for SMEs, TradeFi will utilize advanced technologies combined with financial expertise to do exactly that: so that SMEs’ can export with peace of mind. Do not hesitate to contact us for a demo.

AI Link Group Limited, through its affiliates, AI Link Finance Limited and DeepAuto Limited (collectively “ALG” or “AI Link”) operates TradeFi, a financial technology platform that provides trade finance to customers in Hong Kong and Mainland China.

Warning: You have to repay your loans. Do not pay any intermediaries. Money Lenders Licence No.1852/2020