Forwarders increasingly moving into trade finance arena

There’s a growing trend in the freight forwarding industry towards vertical integration with several freight forwarding companies broadening their offering to include the provision of trade finance. Equally some trade financiers have expanded their operations to include the moving, clearing and warehousing of goods. But does the freight forwarder have the relevant skills to enter the trade finance arena? Lombard Trade Finance account executive Menso Kwint believes that if the relevant skills can be brought into a clearing and forwarding business then the incorporation of trade finance lending can be successful. But along with the opportunities come significant challenges. In a tough market where margins are small the attraction for forwarding and clearing companies to add trade finance to their service menu is clear, says Kwint. “Not only does it open up a new revenue stream with existing clients, but the clearing and forwarding component rises as well as these clients can buy and sell more goods on the back of additional trade finance. On top of this, new clients in need of trade finance can be won. A comprehensive, all-in-one solution may be desirable for an internationally trading business as it means they deal with only one provider.” Typically transport and clearing costs comprise a set percentage of the cost of the goods imported or exported – between 10% and 30% on average, he explained. “Trade finance lending can cover up to 100% of the cost of the goods bought or sold. Therefore, offering trade finance as well as clearing and forwarding can increase a provider’s share in a trade transaction from say 30% up to possibly 130% of the cost of the goods traded. This vertical integration brings enhanced revenue streams but also substantially increased credit risk for the supplier.” Trade finance and clearing and forwarding are two very separate businesses, Kwint points out. “Trade finance is a highly specialised lending product which is reliant on particular skills and only applicable in certain situations. The fact that non-bank trade finance companies do operate in South Africa could cause one to argue that not even the most prevalent lenders – the commercial banks – have perfected the product. “Individuals with the necessary expertise and experience are required to assess, approve, securitise and monitor a trade finance lending facility. A freight forwarder may not always have the requisite staff on hand. Even though they may have known their customers for many years and understand everything there is to know about transporting and clearing goods, it does not always translate into managing a unique kind of credit facility. And exposure will increase sharply if trade finance debt is added to monies owed for clearing and forwarding. Should a bad debt result at these higher levels of exposure a freight forwarder’s business could be seriously threatened." In Kwint's view it often makes more sense to keep the two product offerings separate, with each provider – freight forwarder and trade financier – sticking to what they know best.” INSERT & CAPTION It often makes more sense to keep the two product offerings separate, with each provider sticking to what they know best. – Menso Kwint