The Treasurer’s Guide to Trade Finance

Chapter 4 Integrating cash and trade

Case study

An international construction company tendering for a

new transport infrastructure project

An international construction company, with experience of projects in both

Europe and the North America, needed financial support (the equivalent of GBP

60 million) for a large transport infrastructure project in Asia.

At the end of 2011, the company started

to plan its tender for the business. The

company needed advance payment

guarantees and performance bonds, both

for terms of four years. The company’s

bank used its local in-country office to

issue the instruments on its behalf.

Support from the company’s bank

helped the company to become

preferred bidders on the tender. This

support was critical, as it gave the

buyers confidence that the company

could deliver according to the terms of

the contract. As this was the company’s

first tender for business in that country,

the bank’s local branch also supported

the company by helping with the terms

and conditions of the contract.

It is important to remember that these

instruments are issued ‘on demand’. This is

in contrast to surety bonds provided by the

insurance market, typically used in a number

of western markets, especially the USA.

Bank support for exporters

Small and medium-sized enterprises also

may need to be able to demonstrate their

creditworthiness to potential customers,

whether domestic or international. Banks

and accounting firms can support exporting

firms by providing references to potential

customers, although the wording and

commitment can be very limited in the

current environment. Where a company

is a subsidiary of a larger entity, the group

headquarters may provide its own letter of

comfort. Banks can also guarantee payments

for specific transactions through the use of

documentary credits (see page 38).

Banks can also help exporters establish

a presence abroad, perhaps by introducing

the company to a local bank, enabling the

company to open bank accounts there.

Financial support for customers

Companies with stronger credit may be able

to offer credit to support their customers.

This is particularly the case where the

supplier has better access to credit than its

customers. Financing arranged in this way

will be cheaper than any which the customer

can arrange in its own name. Supply chain

financing is increasingly popular, as stronger

companies look to support their own suppliers

and customers. (For more on supply chain

financing, see page 121.)

Managing cash and trade as

part of working capital

Instead of improving individual aspects

of activity with a view to achieving these

objectives, it is increasingly possible to

integrate cash and trade under a broader

working capital management umbrella.

Treasurers now have the opportunity to

become more involved in their businesses,

instead of simply concentrating on the core

cash and liquidity management areas.