Investors Score When Companies Delay Paying Their Bills
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Your Money Briefing. Money and market stories from The Wall Street Journal. I'm J.R. Whalen in New York. How do suppliers and vendors get paid when corporations want to hold on to their money for as long as possible? We'll have the answer in a moment. First, these money headlines. New home sales in the U.S.
What problem does trade finance solve for suppliers and corporations?
fell 5.3 percent in June, to the weakest pace in eight months. It was the slowest rate for new home sales since October, and the latest evidence that the housing market is cooling. And as we have previously reported, existing home sales declined 2.2% in June from a year earlier. They've now declined on an annual basis in five of the first six months of 2018. The median sale price for a new home sold in June was $302,100. That was down 4.2% from a year earlier. The median hit a recent peak of $335,400 in March and has gradually declined since. With regard to mortgage rates, the average rate for a 30-year fixed-rate mortgage was 4.57% in June, up from 4.03% in January. The Trump administration is proposing to tighten the criteria that dictate when former college students who accuse their schools of fraudulent behavior can have their student loans forgiven.
The Education Department says the plan is designed to help genuine victims of fraud while limiting frivolous claims by former students. Under one option, the department may require students seeking loan relief to be in default rather than allowing students to apply for forgiveness while they remain in good financial standing. Under the alternative, former students would have to show that their colleges had an intent to deceive or showed a reckless regard for the truth in their advertising or recruitment efforts. This is your Money Briefing from The Wall Street Journal. Welcome back, everybody. A corporation wants to hold out for as long as possible before paying its bills, but its suppliers need the funds as soon as possible.
How can this scenario be resolved? Enter the trade finance business, and Wall Street Journal reporter Vipal Manga joins us to flesh out the details. So, Vipal, can you just describe for us in simple terms what the trade finance business is?
Trade finance is basically the business of providing loans to suppliers and who need cash in order to sort of make ends meet until they get paid by their buyers, the big corporations like Procter & Gamble or Stanley Black & Decker.
And for vendors who have corporations as customers, there's a real need for this service. A lot of these vendors are small companies that, in some cases, maybe couldn't even keep the lights on if they hold out for payment for too long.
This is an essential service for a lot of companies. Think of the small suppliers in China or Brazil. They need to pay their workers. They need to pay their utility bills. And sometimes they might have to wait 30 to 60 days before they get payment from a large company in the United States that's just bought their rubber duckies, if you will. Without a loan, it'd be really hard for them to continue making enough of those duckies to make the next shipment. So it's essential.
And then for the corporations, extending that time that they take to pay their bills, that allows them to put that extra cash to work while it's in their hands.
This strategy is something that more and more companies are using. They are aggressively pushing out their payment terms as much as they can. I've heard in some cases of companies waiting 120 days to pay their suppliers after they've received a shipment. Now, the companies also realize that they need to fund their suppliers, which is why they use trade finance. But in the meantime, while they wait to pay the suppliers, they have all this extra cash that they can use to do things like investments or help fund stock buybacks as they wait.
And the trade finance business used to have just big banks involved. But due to banking regulation, the door has been opened for other institutional investors to be a part of it.
So after the financial crisis, a lot of the regulatory agencies really clamped down on banks lending, if you will.
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