What you can do now to guard your business from disruptions and market fluctuations
In a bid to contain the novel coronavirus outbreak, the lockdown on Chinese manufacturing has sent ripples across the world. Even as Chinese factories slowly resume operations, shipping delays on billions of dollars’ worth of goods has hit smaller businesses particularly hard, with inventory running at precariously low levels for many companies.
China’s government is allowing factories in low-disease risk areas to reopen, while making sure that employees use disinfectant and wear face masks. Cjtouch, a smartphone touch screen maker in Guangdong, is back to 90 percent normal production. Other factories, however, are still struggling. China’s Ministry of Industry and Information Technology says that only about 52 percent of China’s small- and medium-sized enterprises have been able to resume work.
With the future progression of the new coronavirus around the world uncertain, businesses may well want to take preemptive measures to ensure the quicker flow of goods and reduce risk, according to Tom Chang, head of the cross-border banking team at East West Bank.
“Several tools are available to businesses facing logistics and supply chain issues, and an experienced cross-border bank can provide solutions to the problems they’re currently facing,” Chang says.
Supply chain financing to get your products sooner
With many Chinese factories just starting to come back online, suppliers are likely strapped for cash and a regular letter of credit may not be as effective as before. This is where supply chain financing can help U.S. companies waiting for inventory to receive their products faster.
“Your supplier is probably facing a lot of challenges right now. So, whoever can pay first will probably get the goods sooner,” Chang says.
Typically, a buyer pays for goods sometime after they are received. But by using supply chain financing, a buyer in the U.S. is able to leverage their creditworthiness to enable the supplier to receive much-needed cash more quickly.
Chang cites a U.S. pillow company that recently used this method. Working with East West Bank, the company entered into an agreement with their supplier. Under the terms, East West Bank, through their offices in Greater China, immediately sent the funds to the supplier. In turn, the pillow company agreed to pay the bank back based on the original payment timeline, which in this case was 90 days. This allowed the company to optimize their cash flow, while getting their shipments expedited.
“By providing funding more quickly to their vendors in China, the buyer’s shipment will be prioritized, and the supplier will have funds to help get their operations restarted. This helps foster trust and build a long-term business relationship,” concludes Chang.
Foreign exchange hedging to create certainty
The stock market has fluctuated wildly in recent days, as has the value of world currencies. For companies that already have thin margins, even a slight currency fluctuation can mean the difference between profit and loss, according to Michael Hayashida, head of foreign exchange (FX) risk management at East West Bank.
“In the financial markets, there are always winners and losers, depending upon which side of the market you're on. The recent volatility that we've been seeing could actually help increase your profits, or potentially exacerbate your losses. So, the whole concept of hedging is really about taking risk off the table to try to create greater certainty,” Hayashida says.
Several financial instruments can help businesses nail down certain costs, so that revenue and expenses are more predictable. The forward contract is an instrument that allows you to lock in a rate of exchange in anticipation of a future payable or receivable.
For example, companies importing goods from China typically receive invoices that are payable within 30 to 90 days. Importers may choose to preserve their cash flow by not paying it off immediately. However, in the meantime, the exchange rates can go up or down in unpredictable ways, and suddenly they can be incurring a significant loss. The forward contract locks in a rate and the dollar-value equivalent of the invoice, turning it into a fixed expense when they do pay it off. This can be helpful for budgeting purposes, and it creates certainty and peace of mind. Forward contracts also can be useful for exporters, who can lock in the rate of their sales abroad.
Another tool is called the currency option, which gives you the ability to participate in a possible upside currency movement, while defining a safety net in case of downward movement. Hayashida says to think of it like an insurance policy. “So, let’s say you’re concerned that the renminbi (RMB) is going to strengthen. As an importer, you define the worst-case scenario upfront so you know how bad things get; you’re not going to get an exchange worse than 6.9 because you’ve defined what’s called the strike price. But if the renminbi shoots up to 7.5, the currency option allows you to take advantage of that better level,” Hayashida says, adding that, like an insurance policy, there is an upfront premium.
Whatever option fits your situation the best, both Hayashida and Chang recommend working with a financial institution that has a presence in both the U.S. and China and 24-hour trading capabilities, the ability to monitor the market around the clock and the ability to execute transactions in any time zone.
“Whenever you have an international transaction, you always have currency risk, whether you’re using U.S. dollars or RMB,” Chang says. “You want to work with a company that has in-depth cross-border banking knowledge and solutions to help you weather economic challenges.”