A Reference Guide to Trade Finance Techniquesaccess to liquidity became harder. With
suppliers wanting payment sooner and
customers taking longer to pay, in both
cases because of their own weakening
liquidity positions, any structure which
accelerates cash into a company’s
business will reduce pressure on raising
finance elsewhere. Mitigate risk.
Many companies look to structured
trade finance to help them mitigate
the risks associated with trade. Chief
of these risks is that of non-payment
at some point along the supply chain.
Transactions can be structured to protect
against non-payment, perhaps by
transferring risk to the strongest credit
in the supply chain. For international
trade, the other major risk to manage
is that of foreign exchange risk. Again,
transactions can be structured in such a
way as to minimise the impact of foreign
exchange risk.
Enhance sales.
The third major objective is for a company
to finance its customers via a structured
transaction with a bank. This can allow
the company to extend payment terms
to its customers, which may be helpful
in an environment where their cash flow
is under pressure. At the same time, the
finance deal may accelerate the inflow of
cash to the company, allowing it to shorten
payment terms for its suppliers.Case study
A large US-based multinational company enhancing sales with
a customer financing programme
To protect and grow its share of market, an industry-leading company asked its
bank to develop a programme that would provide competitive financing for key
customers.
Designed to strengthen the company’s
relationship with key customers who
were having difficulty accessing credit
to finance their purchases at reasonable
cost, the programme was a defensive play
against predatory competitors offering
extended financing. At the same time,
the programme had the potential to grow
market share by providing customers with
more competitive financing terms than
they could obtain on their own.
At the heart of the programme was the
company’s overarching payment guarantee.
The company understood that no bank
would be able to undertake the credit risk of
each of its customers worldwide, especially
smaller, thinly capitalised companies
that did not meet minimum bank lending
standards. Therefore, to make the deal
commercially viable, the company provided
a corporate guarantee of its buyers’
obligations to the bank.The company identified the programme’s
core participants, mostly large local or
regional distributors that were typically
under pressure from rising interest rates
in their markets and, in some cases,
having difficulty accessing financing
at any price. Each participant was
approached individually to participate in
the programme. After the bank performed
its necessary know-your-customer
compliance checks, each buyer then
signed an individual agreement with it.All of the company’s sales to these
customers are on open account terms