Chapter 7 Trade financing techniques
Advantages
Lines of credit provide committed funds.
This means a company has access to
those funds for the term of the facility.
However, the company will need to be
aware that its bank may refuse to renew a
line of credit at the end of the term.
This form of bank finance is available
in all locations, including those where
overdrafts are not available or not
permitted.
Committed funds are generally available
at a lower cost than an overdraft facility.
If they wish, an international company
can diversify its sources of funding
by encouraging local subsidiaries to
access their local markets. This allows
the international group to diversify away
from reliance on the funding arranged at
the corporate centre. This is also useful
in locations which apply strict exchange
controls (making funding into and out of
the country difficult).Disadvantages
The entire loan has to be repaid or
renegotiated at maturity (although
amortisation features can be included).
There is a risk that changed market
or business conditions may mean that
the company’s banks decide to cease
lending to them, whether as an individualcounterparty or as part of a wider
withdrawal from their industry. If the funds
are not needed, this can be an expensive
element of security. This is because
the company will need to pay both an
arrangement fee and then a commitment
fee on the undrawn funds.Evaluation
Bank lines of credit are widely available to
companies of all sizes. As such they are often
a core source of working capital finance,
especially for smaller companies and foreign
subsidiaries of large international groups.
Where possible, treasurers need to be able
to negotiate appropriate terms, which do not
place too many inappropriate restrictions on
the company’s operations. They also need
to be aware of their lender’s future plans,
especially if there are signs the bank may
withdraw from, or want to reduce its exposure
to, their particular market, in which case
facilities should be renegotiated or replaced
well before their final end date.
A bank line of credit can be provided on
an uncommitted basis, in which case its
availability is in many ways no more reliable
than that of an overdraft. The draw down
mechanics will be different, in that loans
are usually taken for set periods, often a
month at a time, rather than simply varying
continuously like an overdraft.