Chapter 7 Trade financing techniques
Structured trade finance
Structured trade finance refers to many
different techniques offered by banks and
other providers to support a supply chain.
These techniques can be used to support
both domestic and international trade. At
the heart of most structured trade finance
transactions is a desire to improve cash flow
along a supply chain to strengthen suppliers
and facilitate sales.How it works
As its name implies, there is no standard
technique for structured trade finance. Aspecific structure depends on the nature of
the entities in a particular supply chain and
the relationships the company is seeking
to support.
Broadly speaking, structured trade finance
transactions will look to achieve one or more
of the following objectives. Increase liquidity and manage cash flow.
The primary objective of many companies
arrangeing structured trade finance
solutions is to gain access to cash. This
has been especially true since 2008, whenCase study
A UK manufacturer of tin cans for the food and beverage sector
One of the company’s large strategic suppliers wanted to be paid faster as part
of its cash management strategy.The European supplier had previously
been supplying materials on 105 days
open account terms. It approached the
UK company with a request for earlier
payment. The UK company agreed
to consider the request because it
recognised the importance of the supplier
to its own business.The UK company’s bank worked together
with both companies to develop a
EUR 10 million supply chain finance
solution. Under the terms of the structure,
the European supplier submits its invoices,
as before, to the UK company. The UK
company approves the invoice and
then uploads it to the bank’s proprietary
platform. Both companies have access to
the platform, which allows them both to
verify which invoices have been approved.On receipt of the approved invoices, the
bank pays the supplier the full face value
of the invoice, less an agreed discount.This means the supplier now receives
cash immediately. The structure has also
benefited the UK company’s cash flow, as
it was able to negotiate improved payment
terms to 165 days, at which point it pays
the full amount of the invoice amount to
the bank to complete the payment circle.
In this instance the solution remains trade
payable in the UK company’s books.This structure is based on leveraging the
creditworthiness of the UK company, which
means the European company has access
to funding at rates which it may not be able
access. Furthermore, the bank has no
recourse to the European supplier in the
event of default by the UK company. Both
companies benefit from the arrangement
by seeing improvements in cash flow and
working capital metrics. The structure has
also strengthened the trading relationship
between the two companies and their
respective supply chains.