The Treasurer’s Guide to Trade Finance

A Reference Guide to Trade Finance Techniques

Bank lines of credit

As an alternative to an overdraft facility,
companies can arrange lines of credit with
one or more of their banks. These are
appropriate when the company requires
greater security of finance, or in locations
where overdraft facilities are prohibited or
not available.

How it works

The company can arrange a line of credit
with a bank, which it can draw against
as necessary. This will require formal
documentation to be drawn up between
the company and the bank, so a line of
credit will take longer to arrange than an
overdraft facility. The bank will charge an

arrangement fee (for establishing the facility),

a commitment fee (for putting funds aside for

the company’s use) and a margin on all funds

actually drawn down from the facility.

Different credit lines are available. Some

will require all the committed lines to be

drawn down at the start of the facility and

then repaid over the term (a ‘term loan’).

Others will allow committed funds to be drawn

down and repaid as often as necessary (a

‘revolving’ facility), as long as the maximum

level of the commitment is never exceeded

at any one time. Banks require all committed

funds to be repaid at the end of the facility,

although it can be possible to roll one facility

into another without repayment.

Case study

A company using revolving credit facility to finance working

capital

A UK commodities trading company specialises in the international physical

trade of dried edible pulses (sesame seed, lentils, kidney beans, etc.).

Recently, the company has seen a noticeable increase in demand, and

approached its bank to discuss an increased facility that could meet the

consequent anticipated increase in the working capital needs of the business

over the following 12–18 months.

One particular concern for the customer
was to avoid incurring an unnecessary
increase in costs associated with an
increased facility that might not see full
utilisation at the outset, but with the
anticipation that utilisation would rise as
additional demand and/or higher prices
kicked in. The bank’s solution was to
replace the existing overdraft structure,
which had suited the ongoing operational
needs of the business thus far, with a
smaller overdraft combined with a new
revolving credit facility arranged with core
facility limit to be available immediately,

but with a further two tranches available at

the customer’s election within 30 days of

two specific pre-agreed dates, to coincide

with the forecast increase in demand.

From the bank’s point of view, the

restructured facility better reflected the

amount of debt required, whilst the

customer could confidently seek out new

business opportunities in the knowledge

that additional financing would be

available as and when required, with the

added benefit of only paying for the level

of facilities actually being used.