Corporate TreasuryFinancial Supply ChainLetters of Credit/Open AccountAdvancing in Trade Finance

Advancing in Trade Finance

Most recent figures released by the Office for National Statistics (ONS) reveal that UK exports are experiencing a boom period with more and more medium-sized businesses (MEs) taking advantage of the ever increasing opportunities for expansion in Europe and beyond. Indeed, records for June 2005 proclaim the sharpest monthly rise in sales of UK goods overseas for more than eight years, with export volumes rising by an impressive 10 per cent. And as export volumes rise, imports too are steadily on the increase as UK companies increasingly looking abroad to manufacture or source products and raw materials. These trends have meant a fundamental change in how companies look to finance their trade cycle.

Indeed, if mid-market companies are to succeed in a bigger and often more competitive international arena, they need to source appropriate finance and process management solutions. Funding the supply chain is not merely a necessity for facilitating successful trade, it should be an integral part of overall supply chain management and consideration to finance arrangements should be given right from the outset, even before the ordered is placed or the supplier sourced.

Often when people think about supply chain management they do not think automatically about their banking arrangements. However I take the view that the more traditional definition of supply chain management and financial services are inextricably linked. The two must complement and work with each other and are therefore part of one and the same strategy.

In its simplest form, supply chain finance is about ensuring that what is ordered is delivered, that what is sold is paid for and that there is sufficient cash available along the way. However, there is far more to be derived than this from a strong supply chain management financial package. A well structured and flexible facility should actually enhance a company’s negotiating stance, cash flow and ultimately profitability and off-the-shelf products are no longer sufficient in today’s market. While there are many options available, companies need to really look at what is being offered to them and be confident it addresses their specific, immediate and ongoing, trade finance requirements.

What options are available to mid-market companies? While there does exist a finite list of products there is an almost endless number of ways for them to be combined. An importer for example, may need to obtain credit or a discount from a supplier but wish, or be required, to provide assurance that they can and will pay. By issuing an Import Letter of Credit on the company’s behalf, the bank undertakes to pay the supplier at a given point in time, subject to them complying with the agreed terms and conditions. This satisfies the supplier that they will get paid and provides better negotiating power for the business on credit terms as well as on the quality and price of the goods that are being imported.

It may then be that once the goods arrive they will be in stock or production for a period of time before they can be sold on and finance will be required for the period between receiving the goods from a supplier and receiving payment from a customer. A fixed term Import Loan, based on the value of the imported goods will help to bridge this gap, creating a significant working capital benefit for the business.

On the other side of the fence, exporters might wish to retain control over the goods until payment is received by using an Export Letter of Credit, while at the same time ensuring that customer payments are received on the due date by asking its trade financier to ‘confirm’ the Letter of Credit, therefore adding the bank’s own undertaking to pay.

If an exporter wishes to maintain control of its goods, but is faced with the challenge that its client will not issue a Letter of Credit in its favour, the business might benefit from a Documentary Collection. One product to consider is invoice finance. It can enable a business to offer credit to customers without impeding its cash flow or to use the cash generated to accelerate repayment of an import loan or letter of credit thus providing the ability to place more orders. Importantly, unlike an overdraft, the cash availability grows in line with the company’s sales ledger.

There is of course a much wider range of banking services than just those above. The key though is really in how they are structured and whether they fit neatly in line with the trade cycle to derive the greatest benefits for the company.

The risk of overseas trade may come in many forms: non-payment, political, currency, country, economic and even bank risk. Similarly, elongated delivery times and terms of trade when dealing with overseas suppliers and customers can seriously impact cash flow. The key is identifying them early, talking and working with the right bank, a specialist in international trade finance, and develop a clear strategy at the outset to navigate through the challenges.

Case Study – Complete Coffee

Complete Coffee is an established coffee merchant with a history dating back nearly 100 years. They import a wide range of coffee and coffee products for resale to recognised café and supermarket chains as well as roasters, manufacturers and suppliers of own brand coffee products.

No stranger to international trade, Complete Coffee imports from countries such as Colombia, India, Brazil, Costa Rica, Kenya, Ethiopia and Tanzania, and exports to Japan, Europe and the Middle East. Norman Rankin, finance director of Complete Coffee, knew they needed a bank with the flexibility to tailor a risk and cash management strategy around the company’s complex trade cycle.

Norman Rankin said: “We needed to mitigate our exposures but we also wanted to find a solution that would blend with, and react to, our trade cycle on an ongoing basis. We didn’t want an off-the-peg solution and we didn’t want to be treated like an account number.”

Complete Coffee chose a package of facilities from Fortis Bank that provides finance, minimises the risks of trading with countries considered politically and economically less stable, and assists with the management of processes.

The company uses Import Letters of Credit that ensure the correct goods are received, in the specified time period and in accordance with the terms and conditions set out. Norman Rankin adds: “This facility also guarantees that all the necessary documentation is correct and delivered, something quite important for us since the industry demands that a clear audit trail of goods is kept. Inward Bills and Loans against Imports allow us to pay suppliers promptly, helping maintain these strong relationships. They are also transactionally linked, providing follow on finance up to the point of sale.”

Once the product has been sold on by Complete Coffee and an invoice is raised, the Invoice Discounting facility advances a high percentage of the outstanding invoice value. At which point Complete Coffee uses the cash available to pay back the import loan and undertake further transactions.

“Since we trade with companies in countries with a higher risk factor, we also take advantage of Documentary Collections which enable us to retain control of the coffee pending payment or an undertaking to pay.” Given the high percentage of international transactions Complete Coffee is subject to considerable exposure to currency movements. To counter this Fortis Bank has agreed a 24 month foreign exchange hedging facility.

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