Chapter 7 Trade financing techniques
Structured trade finance means different
things to different people. However, here is
a list of the more common techniques being
used.
Pre-export finance.
An exporter can arrange finance
accelerating the receipt of cash. It is an
effective technique for accelerating cash
payments to a supplier to support working
capital. It reduces a supplier’s reliance
on external funding, which may well
result in it being able to reduce its cost of
supply. There are two main forms. Pre-
shipment finance finances the production
of goods. It usually requires evidence ofan established trading relationship before
funds are advanced. Post-shipment
finance is available to an exporter/seller
on evidence that the goods have been
shipped. Availability and charges for
such a facility will be determined by the
creditworthiness of the importer/buyer.
Warehouse finance.
This finances goods sitting in a warehouse
awaiting shipment. The lender will usually
secure the finance against the goods, so
it is most suitable for commonly traded
commodities that maintain their value in the
event of default by the borrower. Its simplest
form is commodity financing (see above).under a variety of tenors ranging from
30 to 60 days. The programme was
structured to offer additional terms of up
to 180 days. The company is still paid on
its standard terms of 30–60 days from
invoice/onboard bill of lading date. The
bank takes ownership of the receivables
at this time and finances the buyers for
the difference between the original and
extended tenors. Both parties benefit from
this arrangement. First, the company’s
customers benefit from financing at very
favourable rates compared to local rates.
Second, the company benefits from no
impact to its days sales outstanding
(DSO) and not having to carry the
receivables on its balance sheet for
extended periods. Instead, the receivables
are carried as a contingent liability in the
footnotes. Obviously, this form of financing
does not qualify for a true sale opinion
under existing accounting standards, but it
does move the receivables off the balance
sheet and into the notes.
The company’s side-guarantee may or
may not be disclosed to buyers in the
financing agreement they sign with the
bank. However, in the event of non-payment by one of the buyers, the bank
follows up directly with the buyer for
payment, after notifying its customer
of the delinquency. The bank and the
company have developed a mutually
agreeable arrangement for follow-up
on late payments, including when the
exercise of any drawing under the
guarantee may occur. Late interest is
billed to the buyers but is also ultimately
the company’s responsibility.The structure took about three months
to negotiate. Initially launched to support
US customers, the programme was later
expanded to Western Europe and Latin
America as it became clear it would
benefit customers around the world,
especially those in countries with very
high interest rates. The programme
currently operates in two currencies, USD
and EUR, though it can operate in more.The company has noted the goodwill
the programme has engendered with its
customers. Another, unexpected, benefit
is that in paying the bank rather than the
company, the customers appear to be
more disciplined in making timely payment.