The Treasurer’s Guide to Trade Finance

Chapter 4 Integrating cash and trade

decision. Treasurers will want to ensure that

a funding strategy meets as many of the

company’s objectives as possible.

ƒ Liquidity.

Central to any funding decision is the need

to ensure that the company has sufficient

liquidity to support all its activities, both

now and into the foreseeable future.

This applies to procurement as well

as supporting sales. For example, a

treasurer will often prefer a funding

solution which can grow as the company

grows – a large, committed loan facility

may provide guaranteed funds to support

future development, but it may be more

convenient to arrange to finance invoices

or other trade documents as and when the

business materialises. As far as possible,

the treasurer will want to avoid reliance on

one or two funding sources.

Case study

SCF programme eases cash flow pinch for technology firm

A US-based technology equipment manufacturer sources parts from between

15,000 and 20,000 suppliers globally. Under the contracts with the suppliers, the

company has to pay within very short periods, often 15 days. However, when

selling the finished products on to its customers, it may have to accept payment

terms of 60 days. This results in a significant mismatch in the company’s use

of working capital, with average time delays between paying suppliers and

receiving customer payment of about 70 days, reflecting the stock holding and

manufacturing period.

To resolve this gap, the manufacturer has

entered into a supply finance programme

with its bank. Under the terms of the

programme, the suppliers are paid within

15 days as before, while the manufacturer

only has to pay after 90 days, giving

time for payment to be collected from

its customers. Although it is similar to

a revolving credit facility, the company

prefers the structure, because it is viewed

more positively by credit analysts.

The structure does not include all

20,000 suppliers, but focuses on the

manufacturer’s most important suppliers.

When it receives an invoice from

one of the participating suppliers, the

manufacturer approves it for payment.

These approved invoices are then

uploaded to the bank in a file generated

by the manufacturer’s ERP system. Under

the terms of the agreement the bank then

purchases these approved receivables

from the suppliers. The suppliers receive

cash under the terms of that transaction,

with the bank being repaid by the

manufacturer after 90 days.

Under the programme, suppliers continue

to receive payment according to existing

payment terms, while the manufacturer

benefits from a liquidity boost, a critical

concern to a company that uses cash

very quickly.