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Letters of Credit vs. Global Furniture Supply Chain Financing

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Global furniture sourcing means 'retailers rule and suppliers drool,' as supply chain management takes hold for greater efficiency In furniture, the fast-changing international product sourcing landscape confirms 'retailers rule and suppliers drool,' signifying a fierce reality forcing importer-marketers to become more nimble in crafting efficient paths to maintain a competitive advantage while keeping retailers satisfied. "The rules of the trade game have changed," says Anthony K. Brown, senior vice president, managing director of supply chain financing at GMAC Commercial Finance (GMAC CF), "and that places greater emphasis on integrating technology and supply chain management methods to control inventory more efficiently while overcoming avoidable delays associated with financing global business transactions." GMAC CF provides supply chain financing along with traditional asset-based lending, equipment finance/leasing, structured finance, factoring and supplier early payment services to a wide variety of middle-market clients in diverse industries. The Company has locations in the United States, Canada, Hong Kong, Poland and the United Kingdom. Its loan facilities range from $1 million to $350 million. In fast-paced global trade, the pervasive use of Letters of Credit (LC), a bank managed "guarantee of payment" instrument, can cause unwanted and costly delays from its "cumbersome requirements." Historically, LCs have been a mainstay in international trade, but that method is changing. A more efficient method exists to finance international trade, Brown explains, saying suppliers, import-marketers and retailers can benefit from "end-to-end" supply chain financing that eliminates the LC in favor of open account terms. With open account terms, credit is granted by the supplier to the buyer, with the transaction typically guaranteed by a financial institution. Even without LCs, overseas suppliers are able to obtain production financing from their bank. "The seamless technology that drives global trade today renders paper-intensive LCs unnecessary," Brown says. "Typically, the entire LC process can be frustrating and costly, with many discrepancy traps lurking in virtually all those complex documents that are heavily scrutinized to pinpoint the slightest defect to retard payment. This method is unacceptable when international business needs to move at the speed of thought." LCs are rarely used in the U.S., prompting Brown to ask, "Why should a domestic company risk scarce capital and assets to support a U.S. bank line of credit required to issue an LC? It's better to require overseas exporters to offer unsecured, open account credit terms. This way, the credit lines of U.S. buyers are left free for more profitable purposes of marketing, product development and more." For foreign suppliers, more sources of competitive trade financing are increasingly available to finance trade credit to U.S. importer-marketers, with the service priced according to the buyer's credit status rather then the exporter's. Brown further asserts, "Providing the right trade terms gives suppliers an advantage, a fact savvy retailers know well. Here's where creditworthy U.S. import-marketers are realizing their purchasing power by demanding - and receiving - better trade terms from their vendors, their off shore suppliers." For furniture, the reality of international trade is that major buyers, whether import-marketers or retailers, want congruence in the way they conduct business with overseas vendors and domestic counterparts. "This is the reason supply chain management has revolutionized the conduct of global trade, which is more transparent, efficient and profitable," Brown says. "Those furniture companies offering value win big, and those who don't get pushed to the side."

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