A Reference Guide to Trade Finance TechniquesCase study
Large multinational outsourcing the preparation of
documents to its bank
As with many companies, this large Asian-based subsidiary of a European
electronics manufacturer faced staffing pressure. It found it did not have
the correct skill set among existing staff to prepare the full set of documents
needed to support letters of credit. With the company preparing about 2,000
sets of documents a year, the proportion of errors resulted in a large number of
discrepancies in the documents which the company presented to the bank. As a
result, the company saw a serious adverse impact on its days sales outstanding
(DSO) and decided to outsource this non-core activity to its bank.
The bank had specialist teams
responsible for originating and checking
all such documents, and today the bank
prepares the full set of documents for the
company. The solution was implemented
in a short time frame to the company’s
satisfaction, using dedicated resources at
the bank. Not only did the bank improve
efficiency by using its own expertise in
the preparation of documents, it was also
able to reduce the risk of discrepancies,
by simplifying the company’s own
internal processes.
As a consequence the company has
effectively shortened its collection
cycle, resulting in an improvement in
the company’s DSO of three to four
days. Moreover, when establishing the
outsourced arrangement, the bank’s trade
advisors also reviewed the company’s
processes, leading to further operational
savings and reduced staff costs.
Thus, this move had both cost and
revenue benefits. The company started by
outsourcing trade documents prepared by
at least one of its divisions to the bank. It
is now considering opportunities to further
expand this service.- Seller’s bank checks received documents
and sends them to buyer’s bank.
The seller’s (advising) bank will check
the received documents against the
requirements of the letter of credit.
If the advising bank approves the
documents, it will forward them to the
buyer’s (issuing) bank. Depending on the
agreed payment terms (if payment is at
the exporter’s bank), the advising bank
may then also pay the seller.
If the advising bank identifies
differences between the presented
and required documents, it may advise
the seller to amend and represent the
documents. This course of action is only
appropriate if the seller can present new
documents within the timeframe shown on
the letter of credit. If this is not possible,
or if the differences are minor and there
is a good relationship between the buyer
and seller, the advising bank may ask the
issuing bank to authorise payment despite
the differences.
The alternative is for the advising
(seller’s) bank to send the documents to
the issuing (buyer’s) bank ‘on inspection’.
This protects the seller’s interests, because
the issuing bank will still hold the title to the
goods until the buyer authorises payment.