On Aug. 30, China’s Ministry of Commerce announced a new set of policies designed to boost the competitiveness of the country’s exporters in international e-commerce markets. Among other things, the ministry said it would be “encouraging banks and payment institutions to provide cross-border e-commerce payment services.”
MOFCOM’s mavens appear to have recognized what most small business owners who source products from China already know: unless you have the cash flow and the balance sheet of a multinational company, cross-border financial services, including trade financing, can be hard to come by. Giant buyers like Wal-Mart can muscle their suppliers into providing them with Open Account financing, basically a “buy now, pay later” credit plan that allows buyers to take possession of goods but not pay for them for at least 30 days, and sometimes up to 120 days. More than 80 percent of global trade is conducted on an Open Account basis, according to Trade Finance magazine.
But that stat is a little misleading. Because they don’t like to take on unnecessary risk, suppliers rarely offer credit terms to smaller buyers. This not only puts cash-flow challenged small businesses at a competitive disadvantage, it shuts untold numbers of potential buyers out of global markets.
To encourage more trade between China and the world, B2B trading website Alibaba.com in January introduced a financing program called e-Credit Line that provides Open Account-style financing to China-based suppliers and their international customers, large and small, on extended payment terms of 60, 90 or 120 days.
Hangzhou, China-based Alibaba.com is able to make this happen by working with an affiliated import/export service company called OneTouch, as well as with the Bank of China and a government trade-financing agency called the China Export & Credit Insurance Corp., also known as Sinosure.
Unlike regular Open Account transactions in which suppliers take on all the credit risk, Alibaba.com’s e-Credit Line is supported by export credit insurance and calls for participating suppliers to be guaranteed payment of up to 80 percent of the value of an order as soon as it clears customs in China. The balance is due up to four months later, depending on the terms of the credit line granted to individual buyers.
Alibaba.com and Sinosure investigate and approve the creditworthiness of buyers, who can apply for loans of $100,000 at minimum up to a maximum of $2 million. To help ensure all deals are completed reliably, OneTouch conducts onsite inspections of suppliers and provides logistics and customs-clearance services for e-Credit Line transactions.
The interest rate charged to buyers on e-Credit Line accounts is 0.04 percent per day, or about 1.2 percent a month. The benefits of the program ought to be obvious to most buyers: it can help them better manage their cash flow, eases pressure on their working capital and reduces sourcing risk. Over time, regular e-Credit Line borrowers can also establish their credibility with suppliers, said Song Jun, a project manager in Alibaba.com’s Buyer Service & Development department.
And for suppliers? Well, they still stand to lose some 20 percent of the value of any given order should a buyer fail to pay. But participating in the Alibaba.com program can help them sell to more customers without taking on all of the risk of offering financing to overseas buyers. “For suppliers, e-Credit Line can boost their competitiveness in global markets, helping them establish and maintain successful trade relations with buyers,” Song said.
Since the product was launched in January, more than 1,600 buyers have been approved for credit lines. For loans of $100,000 or more, the success rate for approval is 70 percent, Song said. Common e-Credit Line purchases are electronics, home and garden supplies, and machinery.
“We have a lot of African buyers apply for this product,” Song added, because trade financing and bank lending is underdeveloped in African countries and interest rates are very high. Still, most importers participating in the program are from the U.S. and Europe.
On Sept. 10, Alibaba.com will start to roll out an upgrade to the e-Credit Line service that will allow most elements of transactions to be completed online via the Alibaba.com website. The move is part of an ongoing effort by Alibaba.com to become more than just an online business directory by offering users a wider range of trading services, such as factory and product inspections, trade financing and sourcing help.