Trade finance and Brexit

The international trade, commodities and export markets have become exceptionally dynamic, driven by volatile commodity prices, the growth of emerging markets and the economic downturn.

Trade finance can help a range of businesses to purchase goods from suppliers, both overseas and here in the UK. Lots of high-growth SMEs need finance to support their business, but they may feel frustrated by a lack of viable working capital options. Trade finance provides practical, flexible finance, designed for growing businesses. It also provides a means to overcome some of the risks of volatile trading.

However, it is likely to become a more complicated proposition post-Brexit.

What are the areas of concern around Brexit?

At present, the UK continues to attract inward investment from overseas markets as international businesses look to expand into the UK through acquisition, equity investment, joint ventures, the incorporation of new entities and by expanding existing operations.

However, increasingly complex finance documentation and security structures, as well as new and stricter regulation regimes, mean that a range of new legal challenges and risks have arisen.

Every area is affected, whether you are trading in physical goods or commodity derivatives, using goods to generate cash flows within financings, entering into a commodities financing or structuring a complex trade arbitrage transaction. In each case there are a plethora of diverse legal issues to consider, from documentation to credit mitigation and from regulatory approvals to reputational issues.

Despite the rising complexities, there are few signs businesses are planning to change the way they work. However, there are obviously risks that they might.

The US$250bn of trade finance intermediated through London could just as easily be intermediated through an EU-based finance centre. Further, the growth of open-account trade finance could mean that banks may find themselves displaced by corporates such as DHL, Amazon and Google because they will need faster supply-chain finance to counter any customs and excise complexities as tariffs are imposed.

The global logistics industry will be significantly affected and the biggest risk is to supply chain management. There are three key areas of concern: supply chains, logistics and residency.

Supply chains

Whether we have a hard or a soft Brexit, it will impact existing supply chains, disrupting EU-UK cross-border trade. It’s widely accepted that the issue of logistical slowdown will be the biggest risk to supply chain management. Additional documentation, customs checks and border congestion will frustrate the flow of goods, leading to increased shipping times for both inbound and outbound logistics. We will have more time-consuming procedures will be put into effect on each delivery to authenticate them.

Logistics

A major concern for the logistics sector is the issue of rising costs, especially that of fuel. The UK relies heavily on imported natural resources, and Brexit could influence price hikes on goods entering the UK from EU countries. Export costs would rise as a consequence and higher costs will have a ripple effect throughout the logistics industry. Logistics firms would most likely pass these increased costs on to their customers.

Residency

Another key issue is the right of residency for EU workers in the UK. This is a significant concern for the logistics industry as there is a reliance on experienced foreign workers (reports suggest that around 10% of commercial drivers in the UK are from other EU states). A Brexit deal that restricts EU nationals working in the UK could result in a substantial gap in the workforce. Avoiding a nationwide ‘talent drain’ will be a priority in preserving the ongoing health of the logistics sector.

What do companies need to do now in those three areas?

Every attempt will be made to ensure a smooth transition. However, if this is not achieved, there is a risk of complexity that could have a negative impact on the market. This is a consideration that businesses should have at the back of their minds as they prepare for transition on 1 January 2021.

After that date, EU-based importers, UK-based customers and exporters and importers and exporters from further afield, will need to be alert to new restrictions, tariffs and regulations.

Our trade finance experience suggests that businesses will need to be commercially smart in the following areas:

• documentary credits and supply chain finance
• import and export finance
• letters of credit, guarantees, promissory notes and bill of exchange and bank payment obligations
• structured trade finance
• prepayments and limited recourse financing
• receivables finance and asset-based lending.

With our trade finance experience, we can provide advice to banks, financial institutions, corporates, traders, brokers, ship owners, insurers, producers and industrial end-users on all aspects of the financing of trade in hard and soft commodities. We have assisted international and local banks in preparing their trade finance documentation and advised banks and traders on structured trade finance deals.

If you would like advice on your trade finance and your business as we approach 1 January 2021, get in touch.