AVOIDING FINANCING COST WITH CARGODIAN.TRADE
In addition to the costs of the selected trade finance product, other indirect costs have a significant impact on the earnings of a mercantile trade. Particularly in the case of long transaction timespans, this leads to a deterioration in margins.
Cost of Capital (WACC & ICC)
Mercantile goods are often transported by sea freight. Transit times of up to 2 months are not uncommon here. Long payment terms of up to 180 days have a negative impact on the seller’s liquidity.
Cost of capital (WACC) and cost of inventory (ICC) as part of the actual cost of goods sold (COGS) directly influence the profit margin (margin).
The financing of raw materials, warehousing and the production process ties up capital and thus liquidity. On average, the following values are incurred for these cost segments:
- Capital costs, i.e. financing of new raw materials (~ 7 %)
- Warehousing (~ 2 %)
- Maintenance and processing costs (~ 2 %)
- Risk costs (~ 6 %)
In total, this is about 15-25% of the total cost of a product. Keeping the financing period as short as possible has a direct positive impact on liquidity and profit margin. Classical Supply Chain Finance products (SCF) offer solutions here, but often associated with rigid processes and high costs.
Cargodian’s unique and innovative solution takes a different approach than classic trade finance products offered by banks, insurance companies and financial service providers. Cargodian enables fast payments and reduces the financing period.
Costs of Monetary Transactions
Foreign payments take a long time and often incur high fees.
Conventional commercial banks use global systems such as SWIFT. In addition, each bank has its own control and verification mechanisms before a global payment can be processed. In addition, the regulations of the financial supervisory and exchange control authorities of the countries involved must be complied with.
Larger amounts are subject to strict and lengthy controls. Additional documents are often requested as proof of an underlying economic transaction. This delays the payment even more.
In international trade, transfers often take place between banks that do not have an established business relationship. In this case, one or more correspondent banks are involved as intermediaries. The additional parties involved and their control mechanisms cause further delays.
Foreign currencies, foreign exchange availability, banking days, and cut-off times across time zones also affect the cost and duration of international payments.
Mandated, intermediary, or beneficiary banks charge fees for remittances. Currency exchange adds further costs to the foreign exchange transaction and creates currency exchange rate risk for both buyer and seller. Often, the fees and commissions charged by the banks involved are deducted from the remittance amount and cannot be tracked transparently.
Cargodian maintains its own bank accounts in the currencies of the countries in which Cargodian offers global trading. Buyers transfer funds directly to this currency account, and sellers are paid by them. Mostly Cargodian uses accounts of domestic banks in the buyer country and seller country.
Currency Exchange Rates
Exchange rates are sometimes subject to considerable fluctuations during the timespan of a trade and are not always transparent. Often a bank or service provider uses internal and not official exchange rates. Furthermore, additional costs are charged for foreign exchange transactions.
Specialized service providers for currency transactions and innovative Internet banks offer good and cost-effective alternative solutions. However, with conventional trade finance products, the customer is often tied to the offer of one service provider.
Exchange rate fluctuations represent a considerable risk, especially in the case of volatile currencies. Particularly in global trade with long production, shipping and transport routes, a supposedly good margin can quickly turn into a loss-making business due to currency fluctuations.
Goods are primarily traded globally in US-Dollars or Euros. This exposes the majority of globally trading companies to currency risks. Without precautionary measures, hoping for a “good” or “stable” exchange rate is like gambling.
Cargodian, as an intermediary, offers trading and payment in the currency of choice. In doing so, the payment amount is defined transparently and firmly at the time of trade entry. This allows both partners to avoid their individual exchange rate risks even with long trading periods.
By using Cargodian, the buyer and seller have their financing costs and payments transparently under their control at any given time.