The Treasurer’s Guide to Trade Finance

Chapter 3 Understanding trade

domestic transactions. It would be a mistake

to only consider trade finance as supporting

international transactions.

Even the largest multinational companies

tend to make most final sales on a domestic

basis, via various branch or subsidiary

structures established to manage sales

outside their home markets. (Intragroup

transactions may well be international

transactions in these organisations.) In

these organisations, the treasurer will have

the additional responsibility of establishing

an efficient liquidity management structure

to ensure cash can be moved around the

group as effectively as possible, and a netting

structure to ensure efficient settlement.

International

That said, even companies with a purely

domestic focus will almost certainly rely on

at least some imported inputs. These may be

indirectly imported, for example in the case

of energy, imported via a distributor, or direct

imports, whether in the form of raw materials

or as finished goods.

Where a trade does have a direct

international element, the import/export

relationship will clearly be more complex than

a purely domestic transaction. Not only will

both parties be concerned with counterparty

risk, but they will also be concerned with

a range of other factors as a result of the

international component of the transaction.

Any transaction involving parties resident

in more than one jurisdiction gives rise to

additional country risks. These range from

understanding the local legal system in case

it becomes necessary to enforce the terms

of a contract, to the complexity of managing

the passage of goods through the respective

customs controls. In addition there will be

challenges such as the management of

transport logistics, which will simply be more

complicated, a requirement for customs

bonds and the need to handle any foreign

exchange risk.

These points all suggest that an

international treasurer faces greater

challenges than the treasurer working in the

domestically focused company. However,

the international treasurer’s fundamental

responsibilities are no different to those of

his domestic counterpart: ensuring that the

company has the resources in place to meet

its obligations under the terms of the contract

(whether the means to pay, if an importer, or

the ability to produce and deliver the goods,

if an exporter), and assessing whether

the counterparty can deliver its side of the

bargain (the agreed goods, if a supplier, or

correct and timely payment, if a customer).

The types of payment terms

As can be seen then, both parties to a

transaction have to assume at least some

risk when entering into a contract. The

treasurer has a degree of expertise in

evaluating many of the risks associated with

particular transactions. These include having

the skills to help manage any counterparty

risk and any financial risks that arise as a

result of the terms and conditions of any

particular transaction.

A critical part of agreeing any contract

between an importer or buyer and an

exporter or seller is to agree the payment

terms between the two parties. Although both

parties to a transaction have a mutual interest

in it being successful, especially if they have

established a successful trading relationship,

their respective interests are, at least with

respect to payment terms, very different.

From the perspective of the seller or

exporter, the object of trade is to dispatch

the goods or provide the service, and ensure

payment is received in return. Clearly, the

best way to ensure that payment is made

is for the seller only to dispatch the goods

or provide the service once payment has

been received from the buyer. Yet, from the

buyer or importer’s perspective, this might

represent a significant or even unacceptable

risk and cost to its business. The buyer will

be concerned with the cash flow implications

of the transaction, as shipping could take

some time, whilst there is the risk that the

seller may not release the goods (either

through dispute over payment or as a result

of insolvency, for example), or provide a

substandard service.

The buyer, therefore, would be much

more comfortable with terms that only require

payment to be made once the goods have