Date: Friday, August 20th, 2021
Source: Sourcing journal
Congestion is crippling the global supply chain, sending freight rates into the stratosphere and creating a world of pain for brands, shipping carriers and suppliers alike. But the mayhem is also having an impact on a major cog in the supply chain wheel that goes largely unseen.
As shipping costs surge, the freight forwarders that are often central to organizing shipments for brands are having to foot a growing bill that they simply don’t have the liquidity for.
On Aug. 12, Drewry’s composite World Container Index rose to $9,421.48 per 40-foot-equivalent (FEU) shipping container, a monumental 358 percent increase over the same week in 2020. That is a jump no one could have possibly expected in 2020, but the effects for freight forwarders are even more drastic when accounting for the fact that they have to fork over more money that they might not even have on hand—sometimes at a four or five times multiple.
While in theory, freight forwarders should be reeling in the cash due to constant demand, they traditionally only require importers to provide payment after they were given the goods, instead of upfront. With shipping delays now totaling weeks at a time, freight forwarders may not be as willing to wait for the capital—but then they run the risk of breaching their clients’ trust.
“It’s a problem, because the companies that don’t have the cash are trying to get their clients to pay upfront,” said Salvatore Stile, president of freight forwarder and customs brokerage Alba Wheels Up International. “Sometimes when shipments arrive, they have their clients send wires, but that delays the process because once the client pays, you still have to pay the steamship line. So there could be some added delays just in the transfer in cash from forwarder to steamship line and getting the release.”
The role of a freight forwarder is essential in modern international shipping, making it an imperative for these businesses to have cash in their coffers. Freight forwarders serve as the intermediary between the importer and the shipping carrier for international shipments, a setup that’s supposed to make life easier for businesses that don’t have the time or capacity to assess the costs and risks themselves.
Given the overall convoluted nature of international trade, including tariffs, ever-changing regulations and most recently rapidly escalating prices, freight forwarders exist to offer importers services including negotiating freight costs, directing freight to different end locations, and preparing and processing customs documentation.
Alba Wheels Up International is one of the freight forwarders that feels it is in a prime position to succeed in today’s environment, with a private equity investment from Southfield Capital as of March. But the role of freight forwarders as a whole may change due to a cash crunch that exists not only throughout those business, but with their own clients as well.
“The health of the customer has always been important but it’s going to be more important than it’s ever been,” said Vincent Iacopella, executive vice president, growth and strategy, Alba Wheels Up International. “As these cost numbers get larger, and the amount of cash accelerates both in how quickly it accrues and the amounts that it accrues up to, I think that knowing the business of your customer, and what their business model is—to what is making them successful is going to be important than ever, because there might be a little bit of risk to it.”
Freight forwarders turn to factoring
Freight forwarders and customs brokers are also turning to an alternative source of lending called factoring, which is a financial transaction where a lender (a factoring company) buys a debt or invoice from the debtor (the freight forwarder). Factoring is designed to help clients specifically ensure that they aren’t incurring credit losses. What’s better for freight forwarders is that factoring companies traditionally don’t require their credit history; instead they will be more interested in the credit history of their clients.
“[Freight forwarders] will come to us and say, ‘I have this new customer. I need to give them up to a $300,000 credit line, or basically, they’re going to owe me $300,000 within a specific time,'” said Martin Efron, managing director of portfolio management at White Oak Commercial Finance. “They’ll ask if we can take that risk. After we do our analysis, and if we believe it’s a decent risk, we’ll take the risk off their hands. Then if the company goes bankrupt, they don’t suffer the loss, we take the loss. We have basically protected them against that loss.”
When freight forwarders provides a service for their importers, they send the invoice to the factoring company and in return receive a cash advance on the invoice. The factoring company then collects the full payment from the importer, in this case, and typically pays the freight forwarder the rest of their invoice amount, minus a small fee.
Factoring gives freight forwarders the increased cash flow necessary to pay employees, handle customer orders and take on more business, all of which are vital in an era when freight rates are going through the roof.
“Typically for forwarders, they’ll need some sort of terms, hence their need for a credit facility has increased significantly. Before this peak, they maybe had a $5 million line of credit from the lender. Today, it’s at least $20 million or $25 million.”
White Oak offers its clients “non-recourse structure” factoring facilities, which are designed so that the client transfers the ownership of specific accounts to another client who then attempts to collect on the debt. This relieves a company of receivable debt in exchange for a fee while providing them with the working capital they need to continue their operations.
Like Alba Wheels Up on the freight forwarding side, White Oak shares the same sentiment that the optimal relationship with customers going forward will hinge entirely on understanding their financial health.
“We have the ability to either ensure for them their receivables, so that they don’t even have to think about any of the risks associated with lending,” Efron told Sourcing Journal. “Most freight forwarders, maybe the largest ones too, but all the others, they don’t have a great partner, and they don’t have the resources to really be on top of the credit health of their customers. In a situation where the import volumes and numbers have gone up so much, it makes a huge difference.”
Importers, particularly in the apparel space, may apply for a factor if they feel a standard loan application is too time consuming and often takes months. In comparison, factoring is designed to allow a business to quickly obtain capital based on future income, helping them to continue operating as usual without having to wait for invoices to be paid.
In an era when risk is at an all-time high due to the crowded supply chain and on-and-off factory closures, brands have to balance consumer demand against supplier relationships and freight forwarders that don’t have the time or capital to wait weeks for invoices to be paid.
The freight forwarding industry has only recently considered factoring, Stile said, with Alba Wheels Up forgoing the option since it has capital from its private equity backing. But as more companies have exhausted their bank liens, the financing option will remain in play, particularly if the forwarders feel they are running out of options.
“Those companies in the past really didn’t factor too much as opposed to general bank liens, because there weren’t the margins really to pay the factoring fees on the container rates, there wasn’t that margin ability,” Stile told Sourcing Journal. “I would assume now, with the freight rates being higher, that these freight forwarders and importers really who need the capital or need to generate will absorb these costs.”