Supportive legal reform and continued advancements in technological capability provide a unique opportunity for the industry. Specifically, a stubbornly persistent global trade finance gap allows for a pivot towards a truly scalable model. This shift ensures that funding reaches everyone from SMEs through to large corporates. Furthermore, embracing the potential of digital negotiable instruments (DNIs) within established financing techniques, such as Supply Chain Finance (SCF), offers transformative benefits. Lenders, technology providers, insurers, and investors all stand to gain from this evolution.
Contextualising the Global Trade Finance Gap
While SCF delivers undeniable benefits to the global economy, it often falls short in reaching deep into supply chains. Consequently, smaller suppliers frequently struggle to access the liquidity a SCF programme offers. These SME suppliers face a high cost of borrowing or even an inability to access essential working capital. Although technology-driven providers have improved the situation, a stubborn trade finance gap remains. Therefore, an increased use of digital negotiable instruments across multiple SCF techniques provides a critical opportunity to move towards more effective credit access.
Legal Reform and the Electronic Trade Documents Act 2023
The passing of the Electronic Trade Documents Act 2023 (ETDA) into English law heralds a new dawn for international trade. This legislation simplifies global trade finance processes and makes working capital more accessible to a wider range of buyers and suppliers. Specifically, the legal recognition of an electronic trade record allows businesses to think and act differently. Electronic equivalents of paper documents now enjoy the same legal treatment, effects, and functionality as their paper equivalents.
| Feature of the ETDA | Impact on International Trade |
| Legal Equivalency | Digital documents share the same legal standing as paper. |
| Reliable Systems | Section 2 requires systems to ensure singularity and control. |
| MLETR Alignment | The Act reflects the essence of the 2017 UNCITRAL Model Law. |
| Market Confidence | Consistency across nations supports wider digital trade adoption. |
A critical aspect introduced by the ETDA is the requirement for a “reliable system.” ITFA has already published an addendum to its DNI Handbook to help practitioners manage these practical aspects of reliability.
The Role of Digital Negotiable Instruments in Supply Chain Finance
Historically, paper form negotiable instruments like Bills of Exchange were used more in documentary trade than in SCF. In contrast, SCF almost exclusively utilised non-negotiable invoices. However, digital negotiable instruments are more robust, unconditional, and independent from performance risk. With the passing of the ETDA, an opportunity exists to use these tools to improve working capital and earnings.
“DNI based financing solutions also offer independence from restrictive, non-fungible legal frameworks by using standardised payment and financing instruments.”
Moreover, these instruments enable payment terms to be extended without the need to renegotiate underlying supply contracts. Excitingly, ITFA members now explore tools to switch seamlessly between electronic trade documents. For example, an electronic bill of lading can be exchanged for an electronic bill of exchange once goods arrive. This triggers immediate payment or financing from a bank.
Accounting Treatment and Rating Agency Perspectives
New SCF disclosure requirements from FASB and IFRS bring the question of debt versus trade payables into focus. The audit community focuses on the substance of the underlying commercial contract rather than the settlement method. This means that the use of a trade instrument, such as an e-Letter of Credit, does not change the analysis. Furthermore, there is no change to disclosure requirements whether a paper or digital trade instrument is used.
Buyers must continue to make an honest assessment of whether they are building resilience or simply extending terms beyond industry norms. Rating agencies follow a similar approach. They use the underlying commercial contract as the primary reference point for any potential reclassification.
Future Opportunities for Digital Negotiable Instruments
The conclusion of this analysis is that the market should feel confident in embarking on the journey to use digital trade instruments. While the opportunity is significant, the industry remains at a nascent stage. Nevertheless, this change can scale rapidly due to modern data encryption and digital ledger technologies. Consequently, negotiable instruments may offer a way to ease limitations in payment tenors brought about by new regulations, such as the EU Late Payment Regulation (LPR).
By paying with a bill of exchange or promissory note, businesses can obtain an additional deferred payment period. This provides a clear path towards a faster, cheaper, and safer global trade environment.
Courtesy: itfa.org
