Inside Trade Finance: A Deep Dive with TradeCap’s Bryan Ballowe
- The Independent Lender
- Jun 2
- 14 min read
In this installment of our series of executive interviews, Charlie Perer sits with Bryan Ballowe, Managing Partner of TradeCap Partners, to hear insights about today’s trade finance/in-transit inventory market and his views on the tariffs, among other things.
Charlie Perer: Thank you for your time Bryan. To begin, can you please talk briefly about your background?
Bryan Ballowe: Charlie—It’s a pleasure being with you. I started my career working for Bank of America in their Media and Telecom Corporate Leveraged Finance Division. During my time at BofA I was lead analyst for all things media and telecom including underwriting senior bank debt and highyield bonds, as well as working with the bank’s syndication desk on large corporate debt deals. After two years with the bank, I started my career in the purchase order funding space by joining King Trade Capital. That was back in 1997 and very few people at that time had any idea what purchase order funding was. Fast forward 20 years, and in 2017 my business partner and I started TradeCap Partners. TradeCap Partners provides a comprehensive incremental purchase order funding solution to importers, exporters, distributors and manufacturers to fulfill large customer orders and contracts. Nowadays, purchase order funding is a recognized niche in the alternative trade finance space even though the number of credible standalone purchase order funding companies that have a proven track record and strong balance sheet is very limited.
Perer: What is trade finance for those readers not as familiar with it and what are the nuances that most lenders don’t understand?
Ballowe: If you’re looking for a textbook definition of trade finance, it would probably read something like this: “A funding solution that ensures smooth and secure cross-border transactions comprised of solutions used to facilitate trade by helping companies bridge the gap between suppliers’ needs for immediate payment and customers’ desire for maximum payment terms.” I would argue that trade finance encompasses all types of funding solutions, including purchase order funding, asset-based lending, factoring, reverse factoring/supply chain finance, dynamic discounting, and trade insurance, and is not limited only to cross-border transactions.
There are several nuances of trade finance that many lenders don’t understand or, more importantly, don’t do well. First, many lenders don’t know that they are exposed to international trade exposure (either directly or indirectly) and certainly don’t know how to underwrite for and/or monitor their exposure properly. Let me offer a couple of examples: The first example is financing in-transit inventory and/or including in-transit inventory as part of the borrowing base. If that in-transit inventory is controlled by a third party (i.e. purchased under ‘delivery, duty paid’ terms), owned by a third party, or ‘consigned to’ a third party (namely the shipper), that in-transit inventory should be deemed ineligible since the lender really has no interest or ability to control or foreclose on those goods in the first place.
Another issue with in-transit inventory for lenders is properly securing an interest in the inventory outside of a jurisdiction that would provide the lender with the ability to foreclose and liquidate. If the borrower is past due on freight and duties payments, freight forwarders/customers brokers and/or United States customs have statutory rights that will trump those of the lender in the inventory located and/or in control of the party who is in arrears. Another issue is one that is on everyone’s mind right now—tariffs. These are changing daily and if rates increase to a level that the borrower can’t pay the necessary duties to clear US Customs, that inventory will be held, seized and eventually disposed of unless all contingent liabilities are satisfied. How are lenders able to accurately value and lend on inventory whose costs could increase significantly overnight? Lastly, lenders aren’t accustomed to properly monitor in-transit inventory real time. In-transit inventory is fluid and its location changes daily—hence the name. Lenders have no way to keep up with where in-transit inventory is located, much less be able to control and exercise any rights they may have in such inventory at any given time.
Another practice I’ve seen recently is lenders providing availability based on customer purchase orders. Purchase orders are merely contracts for the purchase of goods to be delivered in the future. Purchase orders are only as good as the paper they are written on if the borrower can’t fulfill the order on time, in the quality and quantity requested by the customer. Additionally, most purchase orders can be cancelled for convenience and are subject to offsets, allowances, buy-back clauses, etc. If the lender is providing availability to the borrower based on customer purchase orders, and the borrower is not able to execute and deliver goods pursuant to the terms of those customer purchase orders for any reason, the lender has essentially provided an “over-advance” above and beyond what the actual collateral can cover.
Perer: How would you describe the market right now at the start of the 90-day truce?
Ballowe: As it relates to trade between the US and China, I would describe the market as “Cautiously Optimistic” with an asterisk on “Cautiously”. It’s much more manageable than it was back in April when duty rates from China reached 145%. No one was bringing goods in from China profitably under those rates. As a result of a temporary pause that is currently in place, we now have a rate that most importers’ margins can support—FOR NOW. However, this pause is a temporary measure and could very well escalate if a long-term deal is not reached. Trade relations between countries—especially between two superpowers like China and the United States—are not managed in a vacuum. The never-ending geo-political relationship not only between China and the US directly, but the relationships each have with other countries could easily sway these negotiations in a negative direction before any type of long-term negotiation is reached. An added component to the tariff situation that will need to be watched closely is the constant back and forth between the Trump administration and the federal courts regarding the President’s ability to enact reciprocal tariffs in the first place. Not only do companies need to monitor trade negotiations between the US and China, but also the actions of the judiciary. At the end of the day, importers that currently have goods in production overseas don’t know for certain what their true cost of goods will be until negotiations are finalized and the legal landscape is finally set. This uncertainty will create a challenging environment to navigate through not only for importers but also their lenders.
Reaching a long-term trade deal with China is a key component, but it’s only part of the bigger picture, in my opinion. If you drill down on US importers’ relationships directly with its suppliers in China, you will more than likely find that those US importers that had favorable payment terms with their Chinese suppliers (especially those that took advantage of those terms and ballooned payables with Chinese suppliers) will see those favorable payment terms disappear. In fact, many Chinese suppliers might reduce the amount of open credit they extend to US importers, as well as begin to require immediate payment of past due balances before new goods are shipped. Additionally, Chinese suppliers may also require large deposits, or payment guarantees upfront (including irrevocable bank letters of credit) before new production is started. What will then begin to happen is that relationships between Chinese suppliers and US importers will become strained, production and resulting shipments will begin to slow or not ship at all, and US importers will begin to quickly require additional availability from their lenders to handle the resulting cash crunch this will cause.
Another dynamic, as a result of the trade uncertainty between the US and China: the challenges that US importers will encounter as they work to move production to new suppliers outside of China. Supplier relationships (and trust) take time to establish. Quality issues, line times, efficient communication, and favorable payment terms all improve as relationships are established and solidified. Those US importers that were proactive in moving production to new suppliers are already ahead of the curve in addressing some of these aspects at the expense of unfavorable payment terms in the near term as a result of the newly established supplier relationship. The bottom line:moving production to new suppliers is not as easy as simply “flipping a switch”. Lastly, those that are trying to simply “engineer” their supply chain through percentage of country content and transshipment methods are certain to fail, in my opinion, based on how closely imported goods are being monitored.
Perer: How has demand shifted, specifically in China, over recent months? Have you noticed any trends within sectors specifically?
Ballowe: The demand shift that we are seeing is fluid and still a bit uncertain. There were importers that decided to shift a large percentage of their production away from China prior to the election in a proactive effort to hedge against a Trump victory in November 2024. Then there are those that decided to shift production away from China in reaction to the increased tariffs imposed back in early April. There are still those that have decided to keep all production with existing Chinese suppliers, not only in hopes that a long-term agreement will be made between the US and China, but also because they simply don’t have the ability to move production to different suppliers in different countries at this time. Since the tariffs were increased across the board on all Chinese goods, no specific product type or sector has been immune, including electronics, machinery, chemicals, commodities such as steel and aluminum and auto.
Perer: Are you seeing production costs and, therefore, underlying cargo values increase average origination values increase as well?
Ballowe: We have actually seen production costs from Chinese suppliers go down across the board as a result of the tariffs. I believe this is telling on a couple of fronts: 1. There was already significant margin built into the original cost of goods from China to begin with; and 2. The real net effect of our trade deficit with China has resulted in US importers’ increased leverage over Chinese suppliers from a pricing standpoint. Simply put, the marginal costs for Chinese suppliers to materially lower prices they are currently charging US suppliers is much less than losing access to the US market altogether, as well as the trends the US consumer sets all over the world.
Perer: How does your organization manage the longer lead times (i.e., longer duration)?
Ballowe: That’s a great question and brings to light a couple of inherent risks when providing a trade finance solution to support overseas production. The businesses we finance are severely undercapitalized in relation to the trajectory of sales and/or seasonality of sales they are experiencing. Therefore, the amount funding needed significantly outpaces what their balance sheet can support. As a direct result, the exposure to normal supply chain risks, including production delays and cost overruns, is far greater than those clients who are adequately capitalized with stronger balance sheets. Therefore, we are more sensitive to longer production lead times from overseas suppliers as well as potential cost overruns than traditional lenders might be. For that reason, we provide highly structured funding solutions in the form of irrevocable documentary letters of credit and/or payment on shipping documents to help mitigate production risks overseas. We never finance cash deposits to overseas suppliers on behalf of our clients. While cash deposits are commonplace and required by overseas suppliers, think of the risk associated with sending cash deposits to suppliers in China in the current environment we are in. First, how do you mitigate the risk of production delays, especially with highly seasonal items going into retail? Secondly, what happens when there are quality issues that arise with production from an overseas supplier? Lastly, what happens when unexpected price increases occur such as increased import tariffs while goods are in production? Imagine financing significant cash deposits on behalf of a US importer for goods that the US importer is all of a sudden losing a significant amount of money on. We also have a certain risk appetite as it relates to production lead times we will finance. This varies and is dependent on several different factors, including the profile of our client, the history of sourcing from the overseas supplier, the type of product that is being sourced, the margins associated with the goods we are financing, and the seasonality related to the goods we are financing. We also verify and closely monitor logistics costs and current duty rates related to the goods we are financing. Even with these types of funding structures in place, there is always a risk associated with unexpected production delays and rising costs that can occur with long production lead time.
Perer: As supply chains shift to China + 1, 2, 3, how are you validating manufacturing quality and ability to execute on clients’ needs while maintaining compliance with US regulations?
Ballowe: This is part of our underwriting process and structuring guidelines. We verify all compliance requirements on the front end and structure third-party inspections on goods sourced from overseas suppliers prior to shipment. This way, we can address issues before goods are put on a boat and imported into the US.
Perer: What long-term changes do you believe will take place based on tariffs?
Ballowe: I believe the simple answer will be for US importers to continue to feel the need to diversify their supply chain from a country-of-origin standpoint. That said, this will create some challenges not only from a costing standpoint, but also payment requirements by overseas suppliers as well as production scheduling. US importers have become accustomed to relying heavily on a few suppliers at any given time, in order to maintain purchasing power and favorable payment terms, as well as ensure production lead times with greater certainty. Spreading production to multiple suppliers, including new suppliers in different countries, might potentially lead to higher costs depending on volumes committed to those suppliers, less favorable payment terms, and greater variability in terms of production lead times due to the lack of a relationship with those suppliers.
Perer: Where do you see the most risk in the working capital ecosystem?
Ballowe: Personally, I feel the most risk comes from the need for more and more lenders to increasingly automate and standardize working-capital relationships with their borrowers even during this time of great uncertainty and fluidity in international trade. While automation and standardization are inevitable, as we stand on the precipice of life with AI, I firmly believe lenders should stick to proven credit monitoring and decision making, as well as maintaining regular communication in order to understand what is driving the borrower’s business and what challenges they face.
Perer: Can you please provide your views regarding the state of trade finance pre-tariffs and post-tariffs (or 2024 vs 2025)?
Ballowe: I believe in the short term (next 3 to 6 months), lenders will see a steady increase in funds deployed due to increased borrowing base availability created by swelling inventories as a result of companies staying ahead of the price increases created by the tariffs, as well as increased receivables by those companies that had cheaper goods available to sell to their customers. Within that same time frame or shortly thereafter, I believe there will be a significant reduction in inventory levels and a reduction in sales as borrowers are unable to replenish inventory stocks in an efficient manner due to increased costs and less favorable payment terms with overseas suppliers. This will create stress on lenders’ portfolios unless trade deals are quickly reached and any permanent increase in costs are dispersed within the supply chain.
Perer: Has the trade finance industry ever experienced a black swan type of exogenous event?
Ballowe: More times than I care to remember! Several events come to mind—the 9/11 attacks, the financial crisis of 2008 and 2009, the West Coast Longshoremen’s strike in 2002 and 2015, the Los Angeles and Long Beach port strike in 2012, and the COVID-19 pandemic of 2020. I’m sure there were others I’m forgetting to mention. All of these events had a sudden and adverse impact on trade as well as the trade finance industry. 9/11 was a day that significantly impacted trade finance, primarily by disrupting financial markets, raising concerns about international trade, as well as leading to increased scrutiny of financial transactions and increased regulation (i.e. the USA Patriot Act). The financial crisis of ’08 and ‘09 created reduced lending and increased risk aversion by banks across the board, directly impacting the ability to finance trade, which highlighted how interconnected the worldwide financial system is and how fragile trade flows can be. The port strikes disrupted the flow of goods by causing delays related to delivery of goods which lead to difficulties meeting payment obligations to suppliers and banks, managing risk, and forcing businesses to seek more costly alternative financing options. Although the pandemic created more of the same disruption regarding the flow of goods as well as significant increases in logistics costs, it also triggered a massive amount of liquidity that was pumped into the financial system by the US Government via the Paycheck Protection Program, the Economic Injury Disaster Loan program, and the Main Street Lending Program. All of these programs in one way, shape, or form impacted the trade finance industry.
Perer: Ten years from now will the net effect of a tariff scare, whether real or perceived, be positive if it results in less China concentration?
Ballowe: I believe so. China has benefitted from our trade deficit for years while all the while stealing product ideas and trade secrets from undercapitalized US importers who don’t have any realistic way to protect themselves. The same goes for exporters who have been unfairly charged significantly higher tariffs and other prohibitive trade practices, such as foreign taxes and fees in order to export their goods. I believe disruption from the status quo and forcing importers and exporters alike to maximize and constantly manage their supply chains and supplier relationships is a good thing. It will be interesting to see if the recently committed investments from large multinational firms abroad as a result of these tariffs actually come through and are implemented and executed timely and efficiently. I still believe in the concept of “comparative advantage”. There are simply some things that we can’t and don’t need to be producing here in the US. That said, the ends will justify the means from an economic and optics standpoint if the US can effectively reset the tariffs with its trading partners, namely China, in order to maintain a fair and level playing field.
Perer: What are the biggest misperceptions about the trade finance industry?
Ballowe: That trade finance is only accessible to large, well-capitalized borrowers, it’s too expensive, and it’s too challenging to understand and offer. Trade finance is far more accessible to SMEs through products like purchase order funding, factoring, reverse factoring and dynamic discounting. The benefits associated with trade finance, in my opinion, far outweigh the costs through risk mitigation and structure, as well as access to global markets. While trade finance can appear complex, proven solutions offered by seasoned industry experts and professionals help make solutions easy to understand and implement.
Perer: What are your key underwriting criteria and how have the tariffs impacted your formula to lend in-transit?
Ballowe: Our underwriting criteria has not changed as a result of tariffs. We have always verified relationships directly with our clients’ freight forwarders and customs brokers. That said, we are watching landed margins much more closely now and adjusting advance rates and requiring our clients to contribute equity to maintain adequate exposure rates on a case-by-case basis.
Perer: What is your business split between bank, ABL and factoring partnerships?
Ballowe: We see the majority of our funding opportunities from ABL and factoring partnerships. Those companies tend to be smaller to mid-sized companies and, in many instances, are constantly starved for capital due to growth opportunities in relation to their ability to execute. The transactional nature of the funding we provide, and the requirement to segregate specific collateral lends itself much better under a factoring and/or borrowing base arrangement vs. a cash flow arrangement from a bank.
Perer: Lastly, tell us something you are worried about that the rest of the market has yet to figure out.
Ballowe: Charlie, thank you for the compliment, however I can tell you that I’m not that smart. I do have a couple of concerns that I suspect a lot of my peers have that are worth sharing and they don’t involve tariffs. The US economy has and will always remain strong and resilient as evidenced by the number of economic shocks we have overcome just in the past 20 years. One, I strongly feel that fintech tools and/or automation should be used in conjunction with, and not as a replacement for proven, fundamental credit decisions. The amount of “frictionless” capital that is pursuing yield in the marketplace has put way too heavy of a burden on undercapitalized and unsophisticated borrowers, while simultaneously creating a regulatory environment that is too prohibitive for lenders who actually provide capital to small businesses in a productive and accretive manner. This type of free access to capital is not sustainable, nor should it be in my opinion. Secondly, I fully support AI and am excited to see where we are 5-10 years from now. What concerns me, however, is the iterative power it has and the potential regulatory environment it will subject us all to in order to sustain it.
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