The year 2020 will always be remembered for coronavirus and the impact it had on the world, in terms of lives, livelihoods and money matters… after all, never before has anything hit the whole world so hard and so comprehensively!
The apparel exporters all across the globe have been impacted in a big way, as they are, without exaggerating, left at the mercy of buyers. Since the onset of the pandemic and subsequent lockdown of markets, the buyers have been cancelling orders and to make matters worse, they are not even paying for goods already delivered, delaying the same indefinitely.
While the exporters have nowhere to go amidst this uncertainty and financial crunch, buyers are using bankruptcy provisions to protect themselves from the responsibility to pay. The number of brands/retailers going bankrupt has been on the rise over the last few months and includes some of the biggest names in the business. Declaring insolvency has probably become the easiest escape route for the buyers, but the question remains: where do hassled apparel exporters go without any money?
Sadly, even the Bank LC agreements, Open Account and DP arrangements that are common in international trade failed to protect the suppliers during the ongoing crisis. Ideally, the manufacturers would want to be paid in advance or as soon as the goods are ready, even before shipment, but the obvious question is – who will pay them in advance, as no buyer does anything that puts them at risk? And more importantly – are there options?
Early payment programme – a viable option?
A relatively new finance option for businesses is the early payment programme or EPP, which has yet to pick up in the garment business, but has over the last decade managed to leave an indelible mark in other industries. In today’s tough times, when every apparel exporter, or any exporter, for that matter, is struggling to get finance to run their units and pay workers, EPP could be the answer. EPP is a form of trade finance and importantly a way for buyers to get a discount on an exporters’s invoice – and in return to pay the exporter early. That’s a win-win for both! The buyer pays less than the decided amount, while the exporter gets money before the work starts.
An early payment programme is also commonly referred to as a cash discount or prompt payment discount.The primary advantage of early payment discounts is that suppliers can get paid sooner, which accelerates cash flow and also reduces the risk of non-payment or late payment. For some non-investment-grade suppliers, an early payment discount is an attractive alternative to traditional financing methods like commercial-based lending. Suppliers also feel that they will be rewarded with more business if they participate in customers’ early payment discount programmes.
What else would an exporter want! Cash flow acceleration right at the beginning, without much risk of non-payment, is enough to give an impetus to his/her business. No wonder, over the last few years, EPP has been gaining immense popularity among many firms across several countries, including India. Modelama Exports Ltd. is among the few garment exporters that is using the EPP finance tool with RTS International.
Modelama Exports, with 8,000 employees and an annual production capacity of 8.4 million garments, is also into jewellery, real estate and automobile sectors. With a yearly turnover of US $ 60 million, Modelama is one of those Indian apparel firms that have successfully embraced EPP to finance its production cycles without tapping into banks. Sharing their experience of using EPP, Narendra Somani, Chief Financial Officer, Modelama Exports Ltd., says “There are very limited avenues to get finances. It is very helpful when buyers extend supply chain finance arrangements which enable exporters to get fund at optimum cost and rotate money faster.”
And it’s true! Capital costs are huge and banks are generally not keen to finance SMEs. In such tough times, if an exporter could factor his/her account receivables for immediate cash in exchange for a small discount so as to finance their production, then that’s a boon. That’s where EPP has fit into the scheme of things effectively. It’s worked for many, and for Modelama too, it has been providing a source of operating cash flow through financial supply chain integration – importantly without tapping into banks.
EPP is also comparatively safer, as the system is completely automated, there is no manual work involved, and in addition document preparation time is saved. The rotation of the lines is also faster as shared by Modelama because RTS International credits the funds to the same account where Packing Credit for Foreign Currency (PCFC) is taken from their bank lines.
Further, today, lines of credits from the present consortium of Indian banks like SBI and Canara Bank are about US $ 12 million with continuous rotation of their limits up to 120 days and an additional capital of US $ 3 billion. Current credit lines with these banks are not enough to help Indian exporters run smoothly – yet another justification for Modelama’s adoption of RTS’ EPP.
Buyers also gain from EPP terms
It has its own benefits for buyers as well. With the involvement of multi-funder models, which has been lately a practice of EPP, enterprising buyers get an opportunity to meet and build ties with new banking partners. Better relations bring better programme rates. Additionally, it also helps buyers maintain or extend days payable while exporters continue to get funds early.
Besides, as EPP works on approved invoices only, buyers consciously reduce the time taken to approve invoices, thereby maximising acceleration period available to exporters for early payment. This helps remove process inefficiencies at the enterprise level and simultaneously enables speedy invoicing on the part of the supplier. Also, good relation with the supplier may end in earning the buyer the ‘preferred buyer’ status.
Though a debate does exist on the viability of using the EPP tool for finance, as the margins in apparel exports have dipped considerably, there is no doubt that trade finance firms and more of EPP-like options are the need of the hour!