Guide to
Trade Finance
Second edition
Sponsored by
WorldWideCountryProfiles
The Treasurers
Guide to
Trade Finance
Second edition
WorldWideCountryProfiles
Sponsored by
WWCP
The Association of Corporate Treasurers and WWCP Limited (except the articles and case studies supplied by
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Contents
Foreword v
Acknowledgements vi
Introduction 1
A Global View on Trade Finance 3
Anand Pande, Global Head of Trade Finance, RBS
Trade Trends in Asia 6
Manfred Schmoelz, Head of Transaction Services, Asia-Pacific, RBS
Trade Trends in Europe, the Middle East and Africa 8
Paul G. Geerts, Head of EMEA Trade Finance Advisory, RBS
The Role of Trade Finance in Working Capital 11
Chapter 1 Introduction: the treasurys role in managing working capital 13
Chapter 2 Understanding working capital management 18
Chapter 3 Understanding trade 31
Chapter 4 Integrating cash and trade 43
Chapter 5 Future developments 67
European Union Payments: the next steps
Simon Newstead, Head of Transaction Services Market Engagement,
Markets and International Banking, RBS 70
A Reference Guide to Trade Finance Techniques 79
Chapter 6 The use of documents in trade 81
Chapter 7 Trade financing techniques 104
Appendices 145
Country Profiles
Argentina 146
Australia 149
Austria 152
Kingdom of Bahrain 154
Belgium 156
Brazil 158
Canada 161
Chile 163
Peoples Republic of China 165
Colombia 168
Czech Republic 171
Denmark 173
Egypt 175
Finland 177
France 179
Germany 181
Greece 183
I would like to thank the many people who helped me in the production of this book.
Steve Hinch (Cambridge Glasshouse), Kevin Deery (Kingspan) and Andrew Coulson
(London Borough of Camden) all agreed to share experiences at their respective
organisations.
Martin ODonovan, Assistant Director, Policy and Technical, the Association of
Corporate Treasurers, and Mark Ling, Head of Trade & Supply Chain Origination,
Transaction Services UK, RBS, provided much constructive and insightful advice, as
well as invaluable comment on the main body of the text.
A vital contribution has been made by the sponsors of the book: Royal Bank of
Scotland. Colleagues have explained how their customers around the world use
trade finance techniques. Mike Regan, Manoj Menosh, Kenneth Tan, Arthur Sun and
Jonathan Jiang provided comment on some of the text.
Moreover, the unstinting support, coordination and advice provided by Mark Ling and
Esther Chan at Royal Bank of Scotland, and Peter Matza, Engagement Director, the
Association of Corporate Treasurers, has been a crucial part of the production process.
On behalf of WWCP, I would like to extend our thanks to all of the above.
Guy Voizey
Editor
April 2013
During the three years following the Chapter 1 is a general introduction to the
publication of the first edition of this book, concepts involved in the book. It explains
the global economic outlook has remained how treasurers are now increasingly involved
uncertain. Some countries, notably those in supporting trade activity and managing the
in North America and Europe, have been in wider working capital of the company.
and out of recession. Other countries have Chapter 2 explains the core elements of
been more fortunate, and have enjoyed the working capital cycle, breaking this down
some growth. Even so, all continue to be into three distinct processes: a companys
affected by the fragile nature of the global procurement process (purchase-to-pay),
economy. There remains no clear consensus its sales process (order-to-cash), and its
on when, or whether, a period of sustained production process (order-to-delivery, or
growth will return. In this context, external forecast-to-fulfil). The chapter explains how
opportunities for company growth may be these physical activities link to the financial
limited. Consequently, companies are being supply chain, and shows how treasurers can
forced to focus on achieving efficiencies, both become involved in managing working capital
internally and along their supply chains, to across the companys activities.
generate growth for their shareholders. Chapter 3 highlights the different payment
Companies are looking to enhance terms used in international trade, and
liquidity within their businesses and to explains how these terms expose buyers/
mitigate risk as far as appropriate. Despite a importers and sellers/exporters to different
trend in trade towards open account trading levels of risk, depending on the terms used.
and away from the use of letters of credit and Chapter 4 looks at how companies are
documentary collections, traditional trade beginning to integrate their trade and cash
finance techniques are increasingly being management activities to focus on more
viewed by finance directors and treasurers as efficient use of working capital. It identifies
tools which support these objectives. This is three core objectives for companies when
the background in which this book has been managing working capital: to improve
researched and written. liquidity, to mitigate risk, and to enhance
The main objective of the book is to sales. It shows how a more integrated
position the role of trade finance in the approach to both cash and trade can result
context of improving efficiency in the financial in improved working capital management
supply chain, in order to manage working and help companies meet some or all of
capital more effectively. The core text has these objectives.
been written with the corporate treasurer and Although it is impossible to predict with
finance director in mind, although it will be any accuracy how the trade market might
of equal benefit to those in companies of all develop in future years, Chapter 5 highlights
sizes with day-to-day responsibility for trade. a number of the trends which are evident
Although most references are to companies at the time of writing and which seem likely
trading goods, the analysis is equally to develop over the next couple of years.
applicable to companies trading services. It concludes with a discussion of how
The book is divided into two core sections. e-invoicing and P-cards can be used to make
The first consists of five main chapters. supply chain finance more efficient.
The second major section is designed to disadvantages of the technique are examined
be a reference guide. in detail.
Chapter 6 provides a detailed explanation The book concludes with three
of core trade concepts and instruments. appendices. The first is a series of country
This includes an analysis of important trade profiles, being a particularly useful reference
documents, such as invoices, bills of lading source that gathers together information
and insurance documents. The four core outlining the main issues affecting trade in 59
trade payment terms (open account trading, countries. Topics covered include currency
documentary collections, documentary and exchange controls, documentation and
credits and payment in advance) are all licence requirements for imports and exports,
explained in detail. and the application of taxes and tariffs on
Chapter 7 sets out explanations of all the imports and exports. The second appendix
various techniques available for financing is a guide to the most commonly used
trade and working capital. These range calculations in trade finance. The last is a
from the use of overdrafts and bank loans, glossary of trade finance terms.
through invoice discounting and factoring, We hope you enjoy reading the guide, and
to structured trade finance arrangements. that you find the work as a whole to be a very
In each case, the advantages and useful addition to the treasury library.
(AE). Intra-EM trade is expected to grow demand from emerging economies for the
from 13% to 38% of the total, while intra- commodities and infrastructure they need to
AE drops from 43% to 15%. The shift of facilitate further economic development. The
world trade from AEs to EMs will also likely growth in trade routes between emerging
manifest itself in a large regional shift in the economies is another factor, particularly
composition of trade. as many companies in these regions still
rely on documentary trade finance. For the
The prospects of emerging Asia stand out,
largest companies, however, the focus is on
with trade expected to grow by more than
the increased integration of global supply
10% per annum on average over the next
chains. There is also a renewed interest in
decade, before falling rather quickly to
the fundamentals of cash management, and
around half that level. Other EM regions are
supply chain finance is extending to include
expected to experience high growth in trade,
more integrated services.
propelled, notably in the case of the Middle
East and Latin America, by growing trade Banks rise to the challenge
relationships with EM Asia. Although trade In the face of this changing landscape, banks
growth in the AE world is likely to be more are developing innovative solutions, often in
modest, expectation is that it will exceed AE response to new regulations, technological
GDP growth. advances or a deeper understanding of
A changing landscape market and customer needs.
The global trade finance market is worth Bank Payment Obligations (BPO) are
approximately USD 10 trillion a year, and, one such example, which will target open
according to WTO research, about 8090% account trade business by facilitating a more
of world trade still relies on some form of efficient, lower-priced solution with greater
trade finance. The market is changing, visibility. Online channels and applications
however, with a number of factors creating will enable banks to meet the increasing
challenges and opportunities. demand for faster transactions and greater
visibility at all stages of the trade cycle.
As large banks tighten lending standards,
Platform and e-invoicing solutions for
and some traditionally strong European
corporates, including low-price platform
banks decrease their trade finance
renting and cloud-based e-invoicing, are
exposure, room is being created for global
another key area of innovation.
competitors with fewer balance sheet
constraints. For all banks, however, stricter Managing risk and streamlining trade
regulatory requirements (Basel II and III) will processes are key priorities for corporates.
increase the capital costs for trade finance, At RBS we have helped a number of clients
and threaten profitability. to centralise their issuance of guarantees
at parent level, allowing better control over
While banks ability to provide trade
subsidiaries activities and easier reporting.
finance comes under pressure, demand
We have seen a significant increase in the
is rising. Currently, approximately 75% of
uptake of supply chain receivables solutions,
trade transactions are carried out on open
which are being used by buyers with strong
account and only 25% are transacted as
credit ratings to help their suppliers secure
documentary trade, but the increased
better credit terms. These solutions enable
risk environment continues to drive a shift
buyers to strengthen their supply chain and
towards documentary trade. It is estimated
minimise working capital needs; and as the
that traditional trade services are growing at
RMB internationalisation programme gathers
approximately 5% per annum.
speed, we have also seen increasing
Other factors are driving demand for demand for RMB-denominated export letters
trade finance. These include the expected of credit and settlement.
Although the outlook for global trade growth by advances in technology and greater
looks positive, risks undoubtedly remain. integration. For companies aiming to fulfil
Fortunately the trade finance toolkit has their objectives in challenging markets,
solutions for all eventualities, enhanced trade finance remains a powerful ally.
Despite some signs of a slowdown during 2012, Asia remains the fastest-
growing economic region in the world and continues to offer major opportunities
for trade. While eurozone troubles and wider-reaching austerity programmes
have constrained external demand for Asian goods, this has been balanced
by stronger domestic demand and growing intra-Asian trade. Caution remains
the watchword, however, and corporates are therefore looking to their trade
finance and cash management processes to achieve the combination of working
capital optimisation, efficiency improvement and risk reduction necessary to
successfully navigate uncertain markets.
the value of technology that can offer of funds. In this area RBS is one of the
greater control and visibility over trade industry pioneers, offering an integrated
processes becomes ever clearer. solution which allows corporates to manage
their various payments through a unified
Indeed, the e agenda is gaining
delivery channel. Such platforms would
increasing support from industry players,
also enable corporates to collaborate online
such as chambers of commerce, which in
with their supply chain partners around the
turn is helping to speed up the adoption
world, driving efficiencies and maximising
rate. Industry associations such as
working capital.
Bolero and SWIFT are also helping to
drive change through the creation and Supply chain financing
continued improvement of messaging
Indeed, as the cost of credit rises and the
standards and platforms.
availability of credit decreases, supply
Evidence of market participants working chain financing (SCF) is becoming ever
together and using technology to deliver more critical. For larger companies, the
better solutions can be seen in the ability to leverage their superior credit rating
development by Swift and the ICC of the to support buyers and suppliers during
Bank Payment Obligation (BPO), which can uncertain times can be crucial to long-term
be defined as an irrevocable conditional success, and is also likely to be rewarded,
undertaking to pay, given by one bank to in the short term, by the ability to negotiate
another. The BPO can also be viewed as better payment terms. But it is important to
providing the benefits of a letter of credit in consider that for every buyer who is taking
an automated environment, and enables advantage of extended payment terms
banks to offer flexible risk mitigation and offered by the supplier, there is a seller
financing services across the supply chain to who is holding the buyers receivables on
their corporate customers. By enabling banks his balance sheet. Receivables purchase
to provide their trade finance customers with programmes are therefore also an integral
guarantees and other services, but on open part of supply chain finance and, as Asian
account terms, the BPO clearly has great corporates look for new funding sources,
potential for Asian trade. accounts receivable financing is set to
become a more significant source of funding,
Cash and trade convergence especially for smaller companies. Managing
Another emerging trend is the integration the financial supply chain efficiently and to
of cash and trade solutions. This approach best advantage is therefore emerging as a
became prominent during the economic key tool for corporate success.
crisis and tougher credit environment.
With the market landscape continuing Looking ahead
to be uncertain, and new regulations With economic conditions likely to remain
on credit coming into effect, corporates uncertain for some time, companies are
are increasingly focusing on holistic looking for expertise and products that can
management of their working capital. help them to deliver financial gains in difficult
trading conditions. The uptake of trade
New tools and solutions are now available finance solutions therefore looks set to grow,
in the market to help corporates achieve this supported by increased intra-Asian trade.
goal. An integrated solution would enable Fortunately, investment in new technology,
corporates to combine their payables and and cross-industry initiatives such as the BPO,
supplier financing programmes to achieve mean that the ability of banks to meet the
greater efficiency and faster realisation evolving needs of the market is also growing.
its particular treatment of trade finance. Also in 2013 the uniform rules for the Bank
This subject is covered elsewhere in Payment Obligation (BPO) are expected to
the book (page 79) but, in the context of be issued. This instrument will function as
EMEA, it is worth noting that the Basel III security for and mitigator of the payment
conditions may not be imposed uniformly risk to buyers in trade transactions. Not
throughout the world. While in Europe only will the BPO be complementary to
some countries are even considering Letters of Credit, it also has the potential to
implementing measures that go further replace them. Although the trade operation
than Basel III, in the Middle East not only departments of banks will be ready and
is the implementation timetable likely to able to implement the necessary policies as
be later, but the conditions may be less soon as the final rules are published, there
strict. The same will apply to Asia and is still little clarity about how the BPO will be
Latin America. In the US, the introduction treated under capital adequacy regulations
of Basel III has formally been postponed. meaning that an important element in
In the meantime there are also ongoing determining costs is not yet defined. All
discussions between the regulators on roads, it seems, lead back to Basel.
softening certain measures or slowing their
With the RMB internationalisation story
implementation, in order not to affect the
slowly improving economic environment, progressing at such a rate that it merits
especially in Europe. its own section in Chapter 4 of this book
(see page 53), it is clearly a key issue for
Of more immediate and specific impact is treasurers in EMEA. Whether RMB are
the EU Directive 2011/7/EU on supplier required for purchasing Chinese goods,
credit terms in commercial transactions, earned from commodity-related sales to
which will come into force in Europe in China or, increasingly, used in trades where
March 2013. This aims to limit supplier both parties are based outside China, the
credit terms to a maximum of 30 to 60 ability to raise funds, manage risk and invest
days, unless a longer period can be RMB is becoming essential. While the rules
agreed on terms that are not grossly have been liberalised, they remain complex,
unfair to the creditor. In EU countries, and the ability to choose the option that best
based on this directive, this approach will suits the individual corporates objective
form part of general trade law. While this
requires deep understanding and support
offers welcome support, particularly to
from the right banking partner.
SMEs who find it hardest to access bank
funding, it is important to note that these While Europe can be seen as the centre
new rules still allow sufficient scope for of regulation, with its numerous and
flexibility in trading procedures. Indeed, wide-reaching EU directives, it is worth
especially also in relation to these rules, mentioning that unique regulatory measures
the possibilities of support that banks have also been introduced, in the form
can offer to improve the management of of the increased sanctions on certain
trade payables and receivables, and also countries like Iran and North Korea. Not
support for the management of costs and only has this impacted trade flows, but also
risks in trading operations, are often not banks have had to develop and implement
fully appreciated and thus are underutilised policies, processes and systems to avoid
by corporates. Banks are able to provide involvement in transactions that could
effective routes to liquidity, cost and risk breach these regulations and incur hefty
management, This also is where trade and fines. Looking ahead, the cost and risks
cash management tools can be combined involved may drive banks to be more
to increase efficiency and optimise working selective about where they offer services,
capital management. what they offer, and who they offer them to.
Introduction:
the treasurys role in
managing working capital
This book is targeted at all companies, receivable team, and arranged for cash to be
whether they have significant international available to meet payment obligations to, for
trade or not. Some companies will be large example, existing suppliers, when advised
or complex enough to have a dedicated by accounts payable. The treasurer played a
treasury department. Others may simply more active role when arranging finance to
have a treasurer, whether full or part- support the business or when investing any
time. Others still may not operate with short-term surplus cash.
a named treasury staff at all. However, In this scenario the treasurer had very
all companies, large or small, have to little direct input into the wider running of the
perform the core treasury functions: making business. There was some opportunity to use
sure the company has sufficient cash, cash efficiently, perhaps by using techniques
denominated in the appropriate currency, in such as a lockbox designed to speed the
the right place and in time to meet all of its collection of payments.
various obligations. The level of sophistication within treasury
At the same time, all companies need to departments varied significantly. Some
generate cash from one source or another treasurers used cash forecasts to reduce the
in order to set up and remain in business. level of idle balances in bank accounts and
The job titles of the people responsible for to minimise the level of external borrowing
this will vary from company to company, but required or maximise the level of surplus
essentially there are two main sources of cash available for investment.
finance: cash received as the proceeds of Over time this role has changed and
sales, and finance arranged to support the
broadened, with a focus on risk management
operation of the business, whether in the
becoming more central to the role of
form of shareholder equity, bank loans and
treasury. The core function described above
overdrafts, or non-bank originated finance.
remains the same, but the tools available to
For the purposes of this book we will refer
support the treasurer are now much more
to the treasurer and the treasury department
sophisticated. Information from all sources
when referring to these functions, although
is much more readily available companies
in many companies it may be someone with
of all sizes have access to end-of-day cash
a different title who has the responsibility of
balances and transaction reports, with many
performing these tasks.
more having access to data in real time.
Banks increasingly offer products which allow
Changing role of the treasury
companies to use this information to pool
In the past the treasurers role in some cash and minimise external borrowing or
cases was predominantly a reactive one. maximise overnight investment.
The treasurer took control of incoming At the same time, information about
cash when it was received by the accounts activities within the wider company is
Pu
t
receivable, to bank reconciliation. The
ca
rch
purchase to pay process takes the company
to
ase
Order
to pay
Receivable
Accounts
Accounts
Payable
paying for inputs necessary to produce the
companys outputs.
rc
ca
ha
se
to
pay
Ord
er to delivery
Linking trade to the working risk management skills can help the
companys sales force to evaluate the credit
capital cycle
risk associated with potential and existing
Traditionally, trade finance has been seen customers. For example, when seeking to
as a discrete tool, used by some exporting close a sale, risk management techniques can
companies to finance and support sales into be used to evaluate creditworthiness before
foreign markets and by some importers to offering a payment discount or an extension
finance or pay for the purchase of goods. of credit terms. If a sale is arranged such
With the development of technology and the that payment is due in a foreign currency, the
integration of the treasury department within treasurers foreign exchange risk management
the company as a whole, trade finance tools skills can help to ensure the appropriate
can now be used to finance parts of every exchange rate is quoted, or hedge identified,
stage in the working capital cycle. before a price is agreed. In the case of a
For the treasurer, the core of any company providing a service, a schedule of
financing decision is whether it helps to payments may be agreed to help to minimise
reduce the companys reliance on external the counterparty risk.
borrowing overall, to diversify the sources of In the purchase to pay process, the
external borrowing on which the company companys production process is only
can draw, or to achieve better pricing. In as strong as the financial strength of its
some circumstances, depending on the suppliers. The treasurer can help the
companys cash position, using trade finance procurement department to evaluate
could result in a greater cash surplus being potential and existing suppliers to avoid a
available for reinvestment or to be returned disruption to production in the event that a
to shareholders in the form of a dividend supplier ceases trading. This support can
payment or a share buyback. include working with the supplier by offering
At the same time, the company as a some form of supply chain finance.
whole, together with the finance team, will In the order to delivery process, the
look to trade finance techniques as a way to treasurer can also work to ensure that
reduce or manage some of the transaction resources are used efficiently and that
risks associated with appropriate sales, such sufficient finance is available. Treasurers
as performance risk, bank risk, country risk can build a more detailed understanding
and counterparty credit risk. of the financial costs of the production
Together, this focus on both cash and risk process by calculating the cost of each
will allow the company to use its working input throughout the development and
capital more efficiently, generating spare production phases. A clearer understanding
capacity which might allow the company to of costs can help the operations department
expand into new markets, invest in research identify where efficiencies need to be made.
and development or simply reduce the cost For example, these calculations can help
of its products to its customers. the company to decide whether to install
There are other ways in which the new machinery or implement a whole new
treasurers skills can be used to improve production process.
efficiency within the company as a whole. Involving the treasurer in such activities
Financial risk management is a central throughout the business will allow the
treasury task. This involves identifying company to operate more efficiently. At
and quantifying exposure to financial risk the same time, because the treasurer will
before deciding how best to manage such have access to greater levels of information
exposure. These risk management skills can about a wider range of activities, the finance
be used in other areas of the business at all director will have greater visibility, and
three stages of the working capital cycle. therefore the means to exert greater control
In the order to cash process, the treasurers over the business as a whole.
Extending finance beyond the increasing the financial cost embedded in the
ultimate purchase price.
single company
Instead of seeing each individual
Companies are increasingly looking to participant along the supply chain as
improve not only their own operational separate, the participants should be seen as
efficiency, but also that of their supply chain interdependent. So as well as each company
partners. For example, companies recognise operating its working capital as efficiently
that their own suppliers are critical to as possible, the challenge is to operate
operational efficiency, given that low-quality the whole supply chain as efficiently as
raw materials will result in low-quality output, possible. From the treasurers perspective
and late receipt of raw materials will result there are two elements here. First, there are
in delayed delivery of the output. On the all the inherent risks associated with every
other side, if a suppliers customer uses raw transaction, ranging from foreign exchange
materials inefficiently, the final product will be risk to the risk that the counterparty will
unnecessarily expensive, ultimately resulting default. (However much the participants
in reduced orders for the supplier. along the supply chain cooperate, there is
Large companies sometimes seek to still a risk that one of them will fail.) Second,
control the efficiency of the supply chain there is the cost of financing the supply
by acquiring subsidiaries along its length. chain. Just as the treasurer in the standalone
Whilst superficially attractive, this can result company wants to minimise the cost of
in significant managerial challenges, as external financing, so all the participants
subsidiary entities typically still operate along the supply chain will benefit from an
independently. Other companies, especially overall reduction in the cost of funds.
in the retail sector, try to impose strict terms, Trade finance techniques offer a
conditions and controls on their suppliers, solution. Instead of viewing a supply
seeing this as a technique which will ensure chain as a series of discrete transactions
stability of supply. Yet this model is more and processes, it is possible to use trade
one of the larger companies using their finance as the means to link a supply chain
financial muscle to impose their own will together. If the supply chain as a whole
on their suppliers. Smaller companies still needs external financing, the entity with
face the risk that the larger companies may the strongest credit may be able to arrange
refuse to pay. Smaller companies also face at least some of that funding at the lowest
financial demands, as their larger customers cost. Whilst other entities will not want to
constantly put pressure on prices, whilst their become wholly dependent on the source of
operating costs remain unchanged. Most stronger credit, careful use of trade finance
particularly, smaller companies have fewer techniques, ranging from varying payment
options for working capital finance, meaning terms to the use of guarantees, will allow
they often are forced to take what finance the stronger companies to finance the
they may be able to arrange, rather than weaker entities, to the ultimate benefit of the
having a selection of funding alternatives overall supply chain.
at rates the buyer may be able to access. The next two chapters look in more
Ultimately these financial pressures on detail at, first, the concept of working capital
smaller companies will and do put the larger finance and, second, the different forms of
companies supply chains at risk, potentially trade finance.
At the heart of any companys activity the raw materials and other inputs, through
is its control over working capital. Every manufacturing the products and delivering
company needs to ensure it has sufficient them, to taking an order from a customer and
cash available to continue to finance its collecting the payment.
short-term obligations. These include Alongside this physical process there
making debt repayments and paying is an interrelated financial process. This
suppliers and employees. recognises that cash is needed to pay for all
Within this context, the first challenge raw materials and other inputs. Moreover,
for the treasurer is to ensure sufficient these funds remain tied up in inventory and
funding is available to meet the short- receivables until such time as the receivable
term obligations as they arise. This is converted back into cash as a result of a
means working closely with the accounts completed sale.
payable personnel to establish what these Treasurers increasingly have a role in
obligations are, before arranging any trying to finance the working capital cycle as
funding required from external sources, efficiently as possible. This means ensuring
from both bank and non-bank sources. that assets are appropriately financed. For
The second challenge is to ensure all example, raw materials (which can often
available cash, including cash converted be more easily sold, in the event of a fire
from sales, is recycled back into the business sale) may be purchased using specialist
as quickly as possible. For an international commodity finance, and sales invoices,
company, this may involve sophisticated once raised, can be discounted to speed the
cash and liquidity structures to enable the conversion into cash. Relatively expensive
cash to be collected from the customer and overdraft facilities can then remain free, to
repatriated to the home office. By working to be used only for emergency shortfalls or very
ensure that cash is recycled more quickly via short-term peak funding requirements.
improvements to the efficiency of the cash To be able to accomplish this, treasurers
and liquidity management structures, less need to understand how the business as a
external funding will be required. whole operates. Only on that basis can the
In the past, the treasurers role in treasurer identify at what stages funding
managing working capital might well have is required, and how different funding
ended there. Today, companies recognise techniques may meet these needs. As with
the importance of managing the cash that is many aspects of the treasurers role, there
tied up in the whole working capital cycle, or will probably not be one ideal solution. Rather,
internal supply chain. Broadly speaking, the there may a number of different funding
working capital cycle describes the processes strategies, all of which might help to make the
within the company, from making the decision use of working capital more efficient.
to produce a quantity of products or to The first stage in this process is to
provide a range of services, paying for all understand the working capital cycle.
The three elements of the can make savings by improving the efficiency
of their accounts payable process, primarily in
working capital cycle
three ways. First, by controlling disbursement
The working capital cycle can be broken processes to reduce float and the level of
down into three distinct elements: funds held in idle cash balances. Second, by
utilising the payment terms effectively. Third,
Purchase to pay.
by using technology to automate processes
This is a companys procurement process,
so as to reduce manual intervention, with the
ending in the companys accounts payable
additional benefit of a reduction in the risk of
department.
error and fraud.
Order to cash.
This is a companys sales process, ending The physical purchase to pay cycle
in the accounts receivable department.
Order to delivery. 1 1 Identifyproduction
Identify production levels
levels
Sometimes referred to as the forecast-to-
fulfil cycle, this concerns the process of
manufacturing products and delivery to
2 1Identify
Identifyproduction
production inputs
levels
the final point.
We will look at each of these in turn.
3 Determine approved
Purchase to pay accounts payable suppliers
The procurement process in any company
must be such as to ensure that all the
required inputs to the manufacturing process 1 Identify
4 Select production levels
supplier
are in place when needed on the factory floor.
In order to reduce operational cost,
many companies have moved towards the 5 1Agree
Identify production
credit terms levels
just-in-time approach to ordering, for a
number of reasons. First, with the increasing
sophistication of electronic communication, 6 Authorise procurement
inventory and the procurement process of goods
can be managed more efficiently. In other
words, just-in-time processes can work.
Second, because just-in-time can work, the 7 1 Identify
Accept production levels
delivery
benefits associated with it can be achieved.
Cash no longer needs to be spent, and
tied up, in inventory until that inventory is
8 1 Identifyinvoice
Receive production levels
needed. Because lower inventory levels are
required, there is no local cost of storage,
either in terms of the storage facility or
9 1Process
Identify payment
production levels
insurance. (The cost to the overall supply
chain may be lower too, as the provider of
the materials may benefit from economies of
scale, especially in the case of the storage of 101Perform
Identify production
back officelevels
duties
perishable goods.) Note, though, that many
supply chains operating on a just-in-time
basis came under increasing pressure as a
result of the withdrawal of trade credit as a 1. Identify production levels.
consequence of the stress in the financial The first stage for all companies is to plan
markets in 2008. future production. How a company decides
At the other end of the process, treasurers to do this will be dependent on the type
The physical order to cash cycle initial response to a sale request may
be an automated response, perhaps
allowing the sale to be completed. At
1 Identifysales
1 Receive production levels
request the very least, the response to the sales
request can be a confirmation that goods
are in stock, or may allow the items to be
1 Identify to
2 Respond production levels
sales request placed on order.
3. Negotiate credit terms.
Just as in the purchase to pay cycle,
1 Identify production
3 Negotiate levels
credit terms
the company receiving a sales request
will want to negotiate appropriate credit
terms. In this case, the seller will want to
1 Identify
4 Accept production
contract levels
to supply
try to ensure as short a payment term as
possible, to allow the sale to be converted
into cash as quickly as possible. At
1 Identify
5 Deliver production levels
goods the same time, the seller will want to
minimise its exposure to counterparty
risk (in this case, that when goods are
1 Identify
6 Raise production levels
invoice shipped the customer cannot, or refuses
to, pay). For international transactions
this may include negotiating the use of a
1 Identify
7 Collect production levels
payment letter of credit. For other sales (e.g. online
sales to retail consumers), payment in
advance may be appropriate.
1 Identifyback
8 Perform production
office levels
duties
4. Accept contract to supply.
Once appropriate credit terms have been
agreed, the company will accept the
contract to supply. Where the company is
1. Receive sales request. already an approved supplier, the terms
In most industries, sales requests will be of the contract to supply may already
sent out to companies on a customers have been agreed as part of the approval
existing approved supplier list; approved process. In this case steps 1 to 4 may be
supplier lists are not always used, automated (perhaps as part of an online
however. A sales request may be a order management process).
discrete document for a specific order, 5. Deliver goods.
or it may be part of a regular ongoing The supplier must ensure goods are
contract. For retail companies a sales delivered in accordance with the contract,
request may be an individual enquiry. otherwise issues will arise with regard
2. Respond to sales request. to payment. This is particularly the
However the sales request is received, case when a letter of credit is used.
the company needs to respond to the Where there is an unforeseen delay,
request by quoting a price. Again, the communication with the customer is vital
way in which the company responds both for this sale and for the future sales
will vary according to the nature of the relationship. It is important to remember
industry. Part of the response process that during times of economic uncertainty
will have been predetermined. For the counterparty will be examining every
example, a company may decide to problem for any sign of weakening credit
establish an internet transaction tool status. (The customer will not want to
either retail-facing or as part of an be tied into a relationship with a supplier
industry collaboration. By producing the whom it expects to fail. This is not just
appropriate functionality, the companys because of the risk of financial loss
on one contract, but also the risk of a Agree credit terms. This will require
consequent loss if a vital input into the the company to know its internal costs of
production process is not delivered.) production and to ensure that any discount or
6. Raise invoice. credit terms are calculated using appropriate
Once the goods have been delivered, interest rates, such that these costs are
the company will also need to raise adequately covered. Again, for international
the invoice. This may need to be transactions the company may consider
accompanied by a range of other it necessary to hedge future cash inflows,
documentation, depending on the terms although this can be difficult as the precise
of the transaction. timing of the inflows may be uncertain.
Collect payment. The accounts
7. Collect payment. receivable function needs to be structured
The credit terms and any accompanying in such a way that it is both convenient for
documents will determine when payment the customer to pay, and easy for the group
should be expected. The company to direct cash into its liquidity management
should ensure it has appropriate structure. The core objective is for the seller
procedures and structures in place to be able to use the cash as quickly as
to make it as easy as possible for the possible once it has been received. Again,
customer to pay. This may include having this will vary according to the location of the
bank accounts in the customers location, companys bank accounts. It may be simply
appropriate processes for collecting a case of diverting received cash into an
credit card payments, or being prepared account paying higher interest. On the other
to negotiate accepted bills of exchange. hand, it may mean repatriating the cash to
A process should exist to follow up on the home office as quickly as possible.
overdue amounts. Use data to evaluate counterparties.
8. Perform back office duties. Using data that is generated by the order
It is important at the end of the process to cash cycle is a critical function. Proper
to fully reconcile and record the received recording of transactions, including
payment. This acts as a means to protect recognition of any delay in payment, or
the company against fraud, whilst also the nature of any dispute, is a vital help
providing the company with the tools to to improving the quality of the companys
evaluate a range of metrics, from the own internal review of counterparty
counterparty risk to the efficiency of the credit. In particular, awareness of any
companys order to cash cycle. Finally slight lengthening of the time it takes
it is a critical element in improving the a counterparty to pay can indicate a
accuracy of the companys cash flow weakening of that partys credit or trading
forecasting model. position. All companies should have internal
procedures to assess their counterpartys
The financial order to cash cycle financial position.
On the financial side there are four crucial
elements: Order to delivery inventory
Negotiate price in response to sales The order to delivery cycle deals with the
request. The scope for negotiation will vary companys internal production process,
across industries and will be determined running from the forecast of demands, through
by a range of factors, including the nature the production of the product, to the storage
of the relationship between the two parties, and onward delivery of the final output.
any specific buyer requirements, as well The use of technology, especially just-
as overall market conditions. International in-time and similar production methods,
transactions may require taking a view on has opened the production process to wider
foreign exchange movements, especially if financial scrutiny, as production processes,
the contract is over a period of time or for timelines and inputs can all be clearly
payment at a point in the future. measured.
include effective quality control measures. depreciation of materials, and when trying to
In some cases, this stage includes inviting assess the true cost of employing staff on the
customers in to review the manufactured production line.
goods prior to completion, or to allow The company should be able identify
goods to be customised before finishing. the true costs of production. Moreover,
Many international standards are now in the company will also want to identify the
place across a variety of industries. marginal costs of production. In some
companies the marginal cost will be relatively
6. Store finished goods.
constant, but a point may be reached where
Finished goods need to be stored
existing facilities (such as warehousing) or
before being sent in fulfilment of an
production capacity (such as machinery) are
order. There can be significant costs
fully utilised, resulting in a significant increase
associated with storage, ranging from
in the marginal cost of any further production
the cost of warehousing (which may
at that point.
include the cost of temperature control
Providing production managers with this
in certain circumstances) and insurance.
information may enable them to prioritise
Some items perish or have use-by
processes. For example, it may be appropriate
dates, so there is a risk that goods will
to consider outsourcing certain activities,
remain unsold, in which case there will
perhaps by splitting the production process
be additional costs arising from the
into two, or by warehousing semi-finished
disposal of unsold or damaged items.
goods with a specialist. It is, though, vital that
Many companies now have regional
any changes in production methods should
distribution centres both domestically
only be made after an assessment of all the
and internationally to enable more
operational risks those changes might pose.
efficient fulfilment.
Whether or not the cost of production can
7. Deliver finished goods to shipper or be reduced, the fundamental challenge for
customer. the treasurer is to finance the process from
The final stage is to ensure goods are the point at which inputs have to be paid for
delivered, undamaged, in a timely fashion until such time as cash is received. This gap
to the end customer or to the shipping in working capital finance can be financed
company. The process used will depend in a variety of ways through bank loans
on the nature of the manufactured goods, or overdrafts, from cash generated by the
and the location of both the producers and business, or from non-bank finance, ranging
the end customers. Where international from commercial paper issuance to factoring
trade is included, there will be a focus and invoice discounting. When arranging
on ensuring appropriate documentation finance, the treasurer will want to ensure it
is in place to allow the passage of the as efficient as possible, whilst simultaneously
goods through customs and to ensure representing the lowest risk to the company.
appropriate protection of the producers We will address both of these in turn.
interests through insurance and, possibly, First, raising cash as efficiently as possible
the issuing of letters of credit. is clearly central to the companys ability to
maintain competitiveness for its products.
The financial order to delivery cycle Different companies have access to different
On the financial side it is important for the forms of finance, depending on the nature of
company to ensure the appropriate costs their business, their location and the size of
are assigned to the various stages of the their operation. (There is more detail on the
inventory cycle. It is possible, for example, to different forms of finance on page 104.) The
calculate the costs of storage of both inputs treasurers primary role in this regard is to
and finished goods, as well as the cost of determine the most efficient mix of financing
processes in between. This will require some for the company as a whole. For example, it
judgement, particular when assessing the may be possible for the company to arrange
actual, rather than the accounting, cost of a cheap overdraft by pledging a building or an
invoice stream as security. However, it may The treasurers challenge is to arrange the
be more cost effective to arrange a longer- level of finance needed both currently and
term bank loan, using the building as security, into the foreseeable future. At the same time,
discounting an invoice stream for regular this funding strategy must be flexible enough
finance, whilst arranging a more expensive, to ensure that a sufficient level of finance
but unsecured, overdraft for emergency can still be raised in the event, for example,
short-term finance. For companies operating of an existing provider changing its lending
internationally, there is the additional criteria at some point in the future. The key
opportunity to arrange financing in more than is to identify all possible sources of finance
one country. This can include a decision on and find a combination of funding sources
whether to take advantage of cheaper funding that provides for as much future liquidity as
costs in one country, whilst accepting a possible. Using other parties along the supply
foreign exchange transaction risk. The overall chain to help is an increasingly popular and
challenge is not to see each production appropriate tool.
process as a discrete activity that needs to The working capital cycle touches many
be financed, but to arrange company-wide different areas of specific management
financing as efficiently as possible, freeing the responsibility, from procurement, production
companys assets to be used as appropriate and sales to accounting and treasury. It is
security where necessary. The key is being common to find fostering the necessary multi-
able to compare like with like when reviewing disciplinary teamwork to be an organisational
the overall cost of funds. challenge. The use of key performance
Second, a key priority, wherever possible, indicators can help, but only if they are
is to ensure the company is not reliant carefully aligned: otherwise objectives across
solely on a single source of finance. This the company can be different. Whatever
applies whether the source of finance is a organisational system is used, visible
committed bank loan, an overdraft facility or endorsement from the highest levels of
a factoring arrangement. Events over recent management will help.
years have shown how banks and other
finance providers can change their lending Techniques to improve the
criteria at very short notice. This can result efficiency of the working
in existing financing arrangements being
withdrawn or not renewed, again potentially
capital cycle
at very short notice. There are plenty of techniques available
To avoid this risk, companies ideally need to improve the efficiency of the working
to enter into relationships with more than one capital cycle. Below are brief examinations
financing provider. This may mean trying to of three particular techniques which improve
arrange credit lines using more than one set of the visibility and speed of the collection
assets as security, even perhaps when this is of cash, which together help to improve
not currently necessary. Circumstances make the efficiency of working capital. First, an
it easier for some companies than others. efficient cash flow forecasting system allows
Larger companies, with good credit ratings, the treasurer to anticipate future cash
have the opportunity to arrange commercial requirements. Second, an effective cash
paper issuance programmes, as well as more and liquidity management structure supports
traditional bank finance (which may itself be the movement of cash around a business,
diversified in the form of a syndicated loan), to ensure cash is where it is most needed.
without giving security. Companies with Finally, electronic invoicing reduces the cost
overseas subsidiaries can arrange finance of processing invoices, whilst simultaneously
centrally as well as locally. Smaller companies improving the collection of information.
are likely to have a choice of arranging bank
loans and discounting invoices or using trade Cash flow forecasting
finance techniques. (See page 117 for more Companies seeking to manage their working
on invoice discounting.) capital more efficiently will almost certainly
benefit from implementing a cash flow ultimately resulting in lower external cash
forecasting system. Cash flow forecasts borrowing requirements.
help the treasurer to predict the likely cash How a company chooses to use its cash
receipts and disbursements. From this the flow forecasting system will depend on its
treasurer can then predict the likely cash particular requirements. At the very least,
balances, anticipating when cash will need to the treasurer will want to make sure funding
be raised from external sources. lines are in place to meet anticipated peaks
Calculating the cash flow forecast can in requirements, especially in the short term.
be a complex task. Smaller companies Clearly the timescales for the accuracy
can usually develop an effective cash of the systems will also vary according
flow forecast using a spreadsheet. Larger to the nature of the product life cycle.
companies, with more complex bank account However, demonstrating good control and
and liquidity management structures, will understanding of current and future cash flows
need to implement a more sophisticated cash will help the treasury negotiate efficient rates
flow forecast. Introducing a cash flow forecast for any external borrowing, as long as the
will provide a significant benefit for all types bank or other finance provider understands
of companies either through a lower cost of and trusts the cash flow forecasting system.
funding or, for cash-rich companies, higher
potential returns on investment. Liquidity management techniques
For companies trading internationally, Another way treasurers can help to improve
developing a cash flow forecast will also help the management of working capital is through
them to understand cash flows in different the effective use of liquidity management
countries, improving the management techniques. In general terms there are two
of foreign currency payments and the main issues for the treasurer to resolve. First
associated foreign exchange risk. the treasurer needs to identify where bank
Many different techniques are used to accounts should be held by the company, and
develop a cash flow forecast. A receipts in which currencies they should be opened.
and disbursements forecast identifies all Second, the treasurer then needs to identify
the anticipated future cash inflows (sales the most efficient way of linking the bank
receipts, for example) and cash outflows accounts, so the company has access to as
(loan repayments and supplier payments, much of the cash as possible.
for example) for a particular time period. Companies trading internationally need
These are aggregated and combined with the to consider carefully whether they need
starting cash position to provide the forecast foreign bank accounts to speed collections
cash position for the time period. Statistical and manage disbursements. In effect, an
techniques including moving averages and exporting company will need to decide
distribution forecasts are also used, often whether it is possible to collect payment from
as part of a receipts and disbursements international customers using their home
model, to predict likely future cash positions. country bank account. Much will depend on
For longer-term forecasts, balance sheet the nature of the transactions and the identity
modelling is often an appropriate tool. of the companys international clients, as well
By implementing a cash flow forecasting as the way the exporter operates outside
system, the treasury department will be able its home country. If sales are made through
to exercise greater visibility, and usually a subsidiary organisation, it will usually
control, over subsidiaries, as long as the be more appropriate for the subsidiary to
subsidiaries are required to feed data into open local bank accounts in its country of
the system. With greater visibility over operation. The challenge for the exporter is to
current and future trends, the treasury can make it as easy as possible for customers to
play a greater role in managing working pay, whilst operating a cost efficient liquidity
capital effectively, by identifying where cash management structure which does not result
is needed and where cash can be moved in cash lying idle in numerous bank accounts
from to fund cash-poor group entities, around the world.
The other issue for cash managers improve the management of working capital,
and treasurers is to determine how best to as the treasury staff will be able to identify
structure the companys bank accounts. cash flow patterns. In addition, a clearly
The degree of central control is typically designed liquidity management structure
established by company culture, and can should streamline internal processes, such
range from highly centralised structures, as the authorisation of payments, and will
with accounts held in the name of the result in more efficient payments including,
group treasury, to completely decentralised for example, the introduction of weekly or
structures, where each group subsidiary monthly disbursement cycles. A combination
manages its own arrangements. of any of these changes should help to
This is changing in Europe, where the reduce operating costs within the treasury and
introduction of the Single Euro Payments accounts payable and receivable departments.
Area (SEPA) should result in companies
opening fewer accounts across the European The use of technology to collect
Union. Instead of needing a minimum information
of one bank account per country, many One technique which is increasingly being
companies will be able to manage their EUR- used to collect information is electronic billing
denominated collections and disbursements and invoicing. Electronic bill presentment
from a single bank account, once there has and payment (EBPP) and electronic
been significant take-up of SEPA instruments. invoice presentment and payment (EIPP)
However, despite the three main elements of allow companies to collect funds from
SEPA (credit transfers, payment cards and customers and collate sales information
direct debits) being available since November without significant manual intervention at the
2009, it is taking longer than anticipated accounts receivable stage.
for users to switch to these instruments. Both EBPP and EIPP are increasingly
As at August 2012, SEPA credit transfers popular, as they allow bills and invoices to be
represented 29.9% of all credit transfers raised electronically and presented online,
in the eurozone. For direct debits, the reducing the time taken to deliver the invoice.
equivalent figure was 1.9%, representing both Moreover, the data can be integrated into
the later introduction of SEPA direct debits a companys enterprise resource planning
and the greater challenges in the transition (ERP) system (where there is one), giving
from legacy to SEPA instrument. (There is all parties within the organisation greater
more on SEPA in Chapter 5.) visibility of the use of working capital. From
When establishing the companys an efficiency perspective, both systems result
liquidity management structure, one of the in less manual intervention, reducing the risk
challenges is to try to implement a structure of error and increasing the efficiency of back
which allows cash to be moved as easily office work. This technique also helps the
as possible between group entities. Where treasury department understand how working
exchange controls exist, this is likely to be capital is being used, as more data can be
difficult, although typically the proceeds of captured. This is particularly the case when
sales can usually be repatriated as long as the EBPP/EIPP system links to an ERP and/
documentary evidence of the transaction or treasury management system.
is provided. Treasurers will also want to Both parties to a transaction benefit from
take care to avoid having to arrange cross- the process of electronic billing/invoicing.
guarantees (to implement notional cash The seller benefits because the process
pools, for example) wherever possible, as of invoicing to collection and reconciliation
these will restrict the companys ability to can all be automated, reducing the time and
arrange credit for other purposes. cost of this process and accelerating the
However a company structures its liquidity receivables cycle.
management, the implementation of a The buyer benefits because the
structure will provide the treasury with greater corresponding accounts payable activities
visibility over cash flows. This in itself will help can also be automated. EIPP/EBPP
allows companies to automate their This information, which may for example
authorisation process as well, ensuring that call for payment in 30 days, can also be
payment is only initiated when approved automatically entered into the companys
by the appropriate individuals, cutting cash flow forecast at authorisation, improving
down on costly manual intervention, and the quality of the forecast.
protecting against error and fraud. Data This type of system may also support the
on each transaction, such as the invoice implementation of a supply chain financing
and other material, can be accessed programme where provision of electronic
electronically when payment is authorised. invoice information is important.
Case study
Camdens Head of Purchase to Pay, suppliers to use the service. Users can
Andrew Coulson, says the move is a view documents on the e-invoicing hub at
win-win both for the Council and its any time, via the internet.
suppliers. Ending manual handling of
To assist buying organisations in
paper invoices has reduced our costs by
maximising their paper reduction and
over GBP 250,000 per annum. It speeds
process efficiencies, the bank also offers
up processing of invoices, so suppliers get
a complete invoice scan and capture
paid promptly and ensures their invoices
service. Suppliers send their invoice
are compliant with our requirements.
to a PO box address, where the paper
Approximately 90% of the suppliers invoice is scanned, validated and enriched
Camden initially identified for e-invoicing and, if necessary, referred to a manual
are now submitting their invoices acceptance desk to resolve queries.
electronically. With e-invoicing, critical Camden has recently implemented this
mass is important to achieve maximum service with 4,300 suppliers as it also
benefits, but on-boarding suppliers helps to migrate many of them to full
can sometimes be a challenge for electronic invoicing.
organisations. The banks service eases
the path by offering connection options to Compliance matters
suit suppliers with varying IT capabilities, E-invoicing is helping Camden to embed
as the service is ERP and data format contractual compliance into its accounts
agnostic. Suppliers can upload invoices payable process. Invoices received
from their existing system or EDI provider through the service are secure, digitally
or use one of the e-invoicing services signed and compliant with HMRC VAT
applications to create electronic invoices. requirements. To be accepted, the
The bank provides comprehensive on- invoices must also meet Camdens
boarding support and does not charge purchase order requirements. One feature
of the banks service strengthens the electronically, directly into Camdens ERP
control over document content and quality system, enabling greater visibility and
for both sides to the transaction. Suppliers faster payment processing.
may view pro forma invoices in the system
The average implementation time for the
before submitting and buyers are able
e-invoicing solution is three months, and
to approve, reject or query invoices after
Camden achieved return on its investment
receipt in their inbox.
in well under a year. Now all incremental
Camden has been extremely proactive savings go straight to the bottom line,
in promoting e-invoicing to their supply supporting the provision of public services
chain. Invoices are now delivered in the borough.
Understanding trade
domestic transactions. It would be a mistake his domestic counterpart: ensuring that the
to only consider trade finance as supporting company has the resources in place to meet
international transactions. its obligations under the terms of the contract
Even the largest multinational companies (whether the means to pay, if an importer, or
tend to make most final sales on a domestic the ability to produce and deliver the goods,
basis, via various branch or subsidiary if an exporter), and assessing whether
structures established to manage sales the counterparty can deliver its side of the
outside their home markets. (Intragroup bargain (the agreed goods, if a supplier, or
transactions may well be international correct and timely payment, if a customer).
transactions in these organisations.) In
these organisations, the treasurer will have The types of payment terms
the additional responsibility of establishing
an efficient liquidity management structure As can be seen then, both parties to a
to ensure cash can be moved around the transaction have to assume at least some
group as effectively as possible, and a netting risk when entering into a contract. The
structure to ensure efficient settlement. treasurer has a degree of expertise in
evaluating many of the risks associated with
International particular transactions. These include having
That said, even companies with a purely the skills to help manage any counterparty
domestic focus will almost certainly rely on risk and any financial risks that arise as a
at least some imported inputs. These may be result of the terms and conditions of any
indirectly imported, for example in the case particular transaction.
of energy, imported via a distributor, or direct A critical part of agreeing any contract
imports, whether in the form of raw materials between an importer or buyer and an
or as finished goods. exporter or seller is to agree the payment
Where a trade does have a direct terms between the two parties. Although both
international element, the import/export parties to a transaction have a mutual interest
relationship will clearly be more complex than in it being successful, especially if they have
a purely domestic transaction. Not only will established a successful trading relationship,
both parties be concerned with counterparty their respective interests are, at least with
risk, but they will also be concerned with respect to payment terms, very different.
a range of other factors as a result of the From the perspective of the seller or
international component of the transaction. exporter, the object of trade is to dispatch
Any transaction involving parties resident the goods or provide the service, and ensure
in more than one jurisdiction gives rise to payment is received in return. Clearly, the
additional country risks. These range from best way to ensure that payment is made
understanding the local legal system in case is for the seller only to dispatch the goods
it becomes necessary to enforce the terms or provide the service once payment has
of a contract, to the complexity of managing been received from the buyer. Yet, from the
the passage of goods through the respective buyer or importers perspective, this might
customs controls. In addition there will be represent a significant or even unacceptable
challenges such as the management of risk and cost to its business. The buyer will
transport logistics, which will simply be more be concerned with the cash flow implications
complicated, a requirement for customs of the transaction, as shipping could take
bonds and the need to handle any foreign some time, whilst there is the risk that the
exchange risk. seller may not release the goods (either
These points all suggest that an through dispute over payment or as a result
international treasurer faces greater of insolvency, for example), or provide a
challenges than the treasurer working in the substandard service.
domestically focused company. However, The buyer, therefore, would be much
the international treasurers fundamental more comfortable with terms that only require
responsibilities are no different to those of payment to be made once the goods have
been received and inspected, whereby the provision of a service. However, once the
seller would assume a significant risk to its service has been performed, the supplier
business. The seller would be concerned with might have greater difficulty in reclaiming
the cash flow implications, as there may be payment from a customer who is unable to
a significant delay in the collection of cash pay. Where physical goods are involved,
from the buyer. (Shipping may take time, the supplier may have legal recourse to
extending the payment term, and the buyer the supplied goods, in the event of the
would be under less internal pressure to pay, customers failure to pay.
as the goods would already be in the buyers In essence there are four main terms of
possession.) This assumes the buyer does payment in trade, each of which represents
indeed pay after inspection of the goods, a slightly different balance of risk between
the buyer may choose not to. importer and exporter. This is often shown
The position is similar in the case of the diagrammatically as a payment risk ladder.
Paying and not getting the goods Sending the goods and not getting paid
Advance payment
Increasing risk
Increasing risk
Documentary credit
Documentary collections
Open account
The following table outlines how the different types of payment term affect the main
participating parties.
Documentary The importer will The exporter has an An issuing bank issues a
credit be required to pay, effective guarantee of letter of credit on behalf
as long as the payment from a bank, of an importer. The bank
exporter meets as long as it can meet will pay the exporter if the
the terms of the the terms of the letter terms of the letter of credit
letter of credit. The of credit. The exporter are met. The importer will
importer will need is exposed to the need to arrange a credit
to arrange a credit creditworthiness of the facility with the issuing bank
facility to support bank issuing the letter before a letter of credit can
issuance of letters of credit. be issued.
of credit.
Under open account trading, an exporter may not pay. In the event of a counterparty
will ship goods to the importer and, at the failure the importer will have control of the
same time, send a request for payment by goods, making it difficult for the exporter to
the date agreed in the contract. The agreed obtain cash.
time might be immediately, or within 30 Open account trading is most commonly
days or 90 days, the timing usually being used when exporting to customers located
determined by standard practice either in the in jurisdictions where the exporter has
industry or in the importers home country. confidence in the legal system, as for
The exporter often has to accept payment instance between parties located in both
according to the normal payment terms in the Western European and North American
the importers home country, especially if no markets. Confidence in the legal system is
specific agreement has been reached. important in the event that the exporter has to
In most markets, the buyer will have a seek adjudication in a dispute.
choice of suppliers. This gives the buyer In some cases exporters may be forced
the ability to demand a credit period prior either by accepted market practice or the
to payment. In these circumstances, any threat of competition to trade on open
supplier wanting payment on delivery would account terms.
be at a competitive disadvantage to those On the positive side, where there is a
prepared to offer credit. clear record of the importer paying promptly,
the exporter may be able to arrange working
Risks and advantages for buyers/importers capital finance on presentation of the
A central benefit for the importer is that they invoices, whether via an invoice discounter or
control the timing of the payment for the a supply chain financing structure. For more
goods. Although the importer should pay on these techniques, see page 117.
within the agreed term, the importer will have More generally, open account trading does
some flexibility in chosing the precise date of not rely on documentation to the same extent
payment. This suits companies with weekly, as documentary collections or documentary
fortnightly or even monthly disbursement credits. As a result, it remains a relatively
cycles for non-urgent payments. cheap way for both parties to transact.
Where the importer pays on open
account it is likely that the importer will have Documentary collection
at least some use of the goods before having A documentary collection offers more security
to pay. From a working capital management to the exporter than trading on open account.
perspective, this effectively means the Under a documentary collection both
exporter is funding the importer. In this parties use their banks as intermediaries to
context the importer will need to consider the transaction. Although the exporter will still
whether this is appropriate, a decision ship the goods before receiving payment,
which will depend on the creditworthiness this will be to an agent or shipping line in
of the exporter and the importance of the the importers country. At the same time,
exporter as a supplier to the importer. When the exporter will send a collection order to
negotiating terms, the importer will want its bank that will include the appropriate
to consider both its own interests and the transport document as well as details of the
financial strength of the exporter. If the terms and conditions of the transaction.
exporters cash flow is under pressure, it The exporters bank (known as the
may be prudent for the importer to reduce remitting bank) will then forward the collection
the payment term, or use another trade order to its correspondent bank in the
finance technique, to accelerate cash flow to importers country (known as the collecting
the exporter. bank), which will collect payment from
the importer (or the importers bank). The
Risks and advantages for sellers/exporters collecting bank will not release the shipping
Under open account trading the exporter documents until receipt of payment or
has to accept the risk that the importer acceptance of payment.
Documentary collection
4 1. Parties agree contract of sale
Sellers
Sellers Buyers
Buyers
2. Seller ships goods to buyer
Bank
Bank Bank
Bank
7 3. Seller sends collection documents to its
6 5 bank
3 8
4. Sellers bank sends documents on to
buyers bank
Seller 1
Seller Buyer
Buyer 5. Documents presented to buyer by its bank
5 7
6. Buyer pays (collection against payment) or
2 6 accepts bill (collection against acceptance)
7. Buyers bank sends payment to sellers
Carrier
Carrier
bank, if payment received, or a notice of
acceptance, if bill accepted
8. Sellers bank pays seller, if payment
Physical movement of goods
received, or holds accepted bill until
Movement of commercial documents maturity, if bill accepted
Payment or movement of financial
documents
The importer will either make a payment The collecting bank will then pay the
or will promise to pay the collection order remitting bank the funds either immediately
through the signing of a bill of exchange. (if a cash payment was made by the
This is a pledge to pay on a set future date, importer) or in the future (if the delivery of
perhaps in 30, 60 or 90 days (the usance the documents was against an acceptance).
period), depending on the initial agreement The remitting bank then pays the exporter. In
between the importer and exporter. In return this process the banks offer no guarantee of
the importer will receive the title documents payment, unless the collecting bank avalises
from the collecting bank, enabling it to take the bill (see below).
control of the goods.
the accepted bills term, there is still a risk that the importer will refuse to honour the bill.
In these circumstances the exporter will need to pursue payment through the courts in
the importers jurisdiction. In effect, the exporters security is dependent on the likelihood
of the importers jurisdiction honouring obligations under a bill of exchange if the importer
decides not to pay.
Despite passing across the documents of title against receipt of the bill, it is still
possible for the sales contract to have a reservation of title clause, which then provides
potential access back to the goods in the event of any non-payment.
Risks and advantages for buyers/importers against acceptance, rather than collection
Trade using documentary collections is against payment. Offering an acceptance may
slightly more onerous for the importer, make it easier for the exporter to raise finance
compared with open account trading. The in the period before the importer pays, which
importers main risks are that the goods are should be a consideration for an importer
damaged in shipment, or that the shipment looking to strengthen its supply chain.
was incorrect, or that the goods are detained
by customs. The importer will usually be able Risks and advantages for sellers/exporters
to appoint a third party to inspect the goods As with open account trading, the exporter
prior to making payment, although this should faces a risk of non-payment after the delivery
be agreed with the exporter as part of the of the goods, as it can still be difficult to get
terms of the collection. cash in the event of counterparty failure.
Preparation of the documentation is central Collection against payment offers greater
to the process. Negotiation of terms whilst the protection than collection against acceptance.
transaction is being agreed will ensure the The exporter still has a counterparty
documentation is as accurate as possible, credit risk in the case of a usance collection.
reducing the risk of confusion or dispute However, it will have evidence of a debt,
later. At this stage the importer needs to be which will normally make it easier to pursue
confident in its ability to meet the requirements through any local legal system.
of the collection process. This adds cost to As with other payment terms, there is a
the procurement process, as resources will country risk. In this context the major risk is
need to be committed to the scrutiny of the that it can be difficult to pursue non-payment
appropriate documents and to ensure any in the importers jurisdiction. Even if it is
relevant import licences are in place. Note possible to pursue non-payment through the
that the latter process would still need to be local courts, this will take time and have an
followed on an open account transaction. impact on the exporters cash flow.
As with open account trading, the importer It is important that the exporter is aware
can still defer payment (using the exporter of the appropriate local rules. For example,
as a source of finance) by using collection some countries apply stamp duty on bills of
Documentary credit
3 1. Parties agree contract of sale
Sellers
Sellers 9 Buyers
Buyers
2. Buyer asks its bank to open a letter of credit
Bank
Bank Bank
Bank
11 3. Buyers bank issues letter of credit to sellers
bank
4 8 11 2 10 10
4. Sellers bank advises seller of receipt of letter
of credit documents onto buyers bank
Seller
Seller 1
Buyer
Buyer 5. Seller checks detail of received letter of credit
5 7
6. Seller ships goods to buyer
7. Seller prepares required documents
6 10
8. Seller sends prepared documents to its bank
Carrier
Carrier
9. Sellers bank checks received documents
and sends them to buyers bank
Physical movement of goods 10. Buyers bank checks documents and
arranges payment
Movement of commercial documents
11. The buyers bank will then pay the sellers
Payment or movement of financial bank
documents
documents to the importers bank, which will their role is solely linked to the checking of
also examine the documents. If satisfied, the documents. Banks do not check the goods
importers bank will release the documents to themselves. This can result in importers
the importer (including any documents of title) being forced to pay even when goods are
in exchange for payment or the acceptance damaged in transit or the wrong type have
of a bill of exchange. The importers bank been shipped, as long as the exporter has
will pay the exporters bank direct (or via a met the terms of the letter of credit associated
negotiating bank, if there is an extra bank in with the transaction.
the chain to purchase or negotiate documents Because a letter of credit represents
presented by the exporter). The exporters a financial commitment on the part of the
bank will then pay the exporter (if payment importer to pay, the importer will need to
has not already been made). arrange an appropriate credit facility with the
bank arranging the letters of credit, before
Risks and advantages for buyers/importers one can be issued. This facility will normally
Compared with open account trading and place a restriction on the time and number
documentary collections, documentary credits of letters of credit outstanding at any one
shift the balance of assumption of risk towards time. In turn, this places a constraint on the
the importer. This is because, as long as the quantity of goods which the importer can
terms of the letter of credit are met by the purchase at any one time without amending
exporter, the importer is required to pay. such a facility. The cost of a letter of credit
Banks play an important role in the is based on a percentage of its amount and
documentary credit process; however, tenor, and any resultant drawing.
Case study
Because the importer is an SME, it does mechanism(s) used to pay the supplier,
not have access to sufficient cash to cover and the time frame within which the blue
the requirement for this three to four- chip client pays in the UK.
month cycle. However, because it holds
Once the bank understood the business,
a confirmed purchase order from a UK
it offered financing in the form of import
blue chip company, banks are prepared to
letters of credit, supported by import loans.
finance the importer.
This provided assurance to the supplier
Before offering finance, the importers that it will be paid. The importer is then
bank needed to understand the importers required to repay the import loans when
business cycle. This process included funds are received from the blue chip
identifying the point at which the company, according to the agreed payment
goods become available, the payment terms of 60 days after date of delivery.
Understanding the business cycle is The bank was prepared to support the
critical to this transaction. The importer importer because it had supported the
approached its bank when looking to company on smaller, sample deals, and
tender for the blue chip contract. It had helped the importer build up a track
understood it ran a significant risk to its record of steady working relationships
reputation if it had won the tender and with its suppliers in Asia.
then found it could not finance the deal.
The importer controls the opening date or a set period after presentation of
and issuance of the letter of credit. This the letter of credit or acceptance of the bill.
means the importer has the responsibility (This can normally be discounted at the
for arranging the appropriate terms and request of the beneficiary.)
conditions, which should be agreed when the Negotiation. If a negotiable letter of credit
two parties initially contract. In many cases is issued, the issuing bank pays the bank
the exporter will send the importer a set of which negotiates the bill of exchange.
terms and conditions to include in the letter
of credit to minimise the risk of confusion or Finally, the importer can often choose the
dispute later and ensure goods are able to be currency of payment, although this will depend
cleared through customs efficiently. on the relationship between the two parties.
The customer, the importer, often has the
ability to dictate the timing of the payments. Risks and advantages for sellers/exporters
Broadly speaking, there are four alternatives Exporters face a reduced risk by using
under the terms of a letter of credit: a documentary credit compared with
Sight. This means payment is made at the documentary collections, because they
point the title documents are presented effectively have a guarantee of payment
to the importer (applicant). This can be from a bank. This does rely on the exporter
done without a bill of exchange, but a complying with the terms of letter of credit, so
sight bill is usually used. (Note that under care needs to be taken in the preparation of
a sight transaction, where a full set of bills the documentation. As with a documentary
of lading is required, the bank will have collection, it is important that the exporter has
effective title, as the bills would normally sufficient resource to be able to prepare and
be to order and blank endorsed. If the bank present documents in accordance with the
has control in this way, it may be more terms of the letter of credit.
comfortable with the underlying credit and However, there is still a risk that the bank
provide a more competitive rate.) may not honour the terms of the letter of
credit. There is also a country risk, in the
Deferred payment. This means sense that payment under the letter of credit
payment is made a set period of time may be affected by any debt rescheduling for
after presentation of the title and other that particular country.
documents to the importer. A bill of Local customs rules also apply, and the
exchange is sometimes used. exporter will need to ensure that the shipment
Acceptance. For payment to be made, the does not breach the terms of any local import
terms of the letter of credit must be met rules or restrictions and, if necessary, an
and the accepting bank will accept a bill of appropriate import licence is obtained.
exchange at that point. Payment will then Because of the central role of banks in
be made according to the terms in the letter the process, the treasurer will also want
of credit which could be on a specified to assess the creditworthiness of the
counterparty bank. This applies particularly goods are damaged in transit. To protect
when exporting to a new market where against this, the importer should ensure that
the local banks are not well known to the adequate insurance is in place.
exporter. One solution is for the exporter to There are cash flow disadvantages
ask its bank to confirm the letter of credit for the importer with this term of payment
issued by the importers bank, although too, as the importer would be financing
this will be at additional cost. This further the exporter for a period of days or even
mitigation of risk effectively removes bank weeks, depending on the nature of the
and country risk in the importers country. transaction and the shipping time. However,
Finally, even if the terms of the letter of for a cash-rich company, extending credit to
credit are well negotiated, it may be that its suppliers may be an appropriate way to
the exporter may not have access to all utilise surplus cash effectively and negotiate
the required documentation to meet those preferential buying arrangements.
terms. In these circumstances it is usually
possible to work through the two banks to Risks and advantages for sellers/exporters
seek resolution. This is on the basis that both From the perspective of the exporter,
parties want the transaction to be completed payment in advance offers the greatest level
(the reason they both entered into the of security. Risks are low for the exporter, as
contractual relationship in the first place). the funds will already have been received
However, if a disputed letter of credit is before the goods are shipped.
pursued through the local courts, then any From a cash flow perspective, the exporter
discrepancies may make it difficult for the benefits, as the importer is effectively funding
exporter to receive payment. See page 99 the exporters working capital.
for more details on the use of documentary
credits, including the use of the International Companies dont work in isolation
Chamber of Commerce Uniform Customs and The assumption behind the payment
Practice for Documentary Credits (UCP600). risk ladder is that both participants view
themselves in isolation. In reality, both the
Payment in advance exporter and the importer are reliant on each
Payment in advance is the most secure other. The exporter needs to receive cash from
term of payment for the exporter, and the the importer to recycle back into its business.
least secure method for the importer. Under The importer wants a streamlined procurement
payment in advance the exporter will only process to facilitate an efficient production
ship the goods after it has received the funds. process or, if the importer is a retailer, to allow
In many cases an exporter is able to request goods to meet customer demand.
part-payment in advance, perhaps on the As a result, it is not always in a companys
signing of the contract. best interests to require its counterparty to
accept severe payment terms. Making a
Risks and advantages for buyers/importers supplier wait for payment will mean that it will
This is the riskiest term of payment for need to find alternative sources of funds to
an importer. In effect, the importer risks purchase its own inputs. If these funds are
making payment to the exporter but more expensive (likely, if the supplier is a
receiving nothing in return. In this event weaker credit, or if its local funding sources
recourse is usually via the legal system are limited), this will result in the supplier
in the exporters home country, although being forced to increase its prices in due
this will not protect the importer against course. On the other hand, if the supplier
insolvency of the exporter. To pursue such cannot raise the funds, it may be forced to
a claim it will be important for the importer reduce production or cease trading, putting
to ensure an appropriate contract is in place the importers physical supply chain at risk.
before payment is sent, as otherwise it will It works the other way, too. If a supplier
be difficult to prove a claim. It may also be tries to force a customer to pay earlier,
difficult to seek redress in the event that the this will put pressure on the customers
cash flow. In response, the customer about their counterparties and also to
may choose to source from a competitor share information along the supply chain, it
offering better payment terms, putting is increasingly possible for all participants
the suppliers business under threat, in a supply chain to cooperate to their
especially if the counterparty is a core mutual advantage. Companies increasingly
customer. However, the supplier will need to see the physical and the financial supply
consider any information that its customers chains as a set of cooperative processes,
creditworthiness may be weakening, in which where all parties are able to agree mutually
case an attempt to make them pay earlier beneficial terms.
may be the most prudent course. The next chapter looks at ways
Certainly it is important that companies companies can cooperate to improve the
protect their own interests in trade. efficiency of both supply chains, allowing the
However, as technology allows companies end product to be as competitive as possible
to collect and collate more information in the market.
Case study
through a local bank, with the companys oversee the contracts agreed by our
local management team having to international subsidiaries.
arrange each transaction and consider the
Initially the system has been implemented
implications of the requested wordings.
manually, but plans are in place to migrate
This not only added to the workload to the banks online platform, MaxTrad.
locally, it also made it more difficult With us being so remote from Australia
for Kingspans treasury team, based in terms of time and geography, it can be
in County Cavan, Ireland, to leverage hard for us to keep track of everything,
the Groups multiple global banking Deery says. Now they can come to us
relationships effectively and maintain in their own time zone and know that the
optimum efficiency and control. guarantee will be issued in a few days.
As RBS has a longstanding relationship We can then manage that guarantee
with the company, the Kingspan treasury through its life cycle.
team responsible for reviewing the wider With the Australian process now up and
Groups overall transaction banking running, Kingspan is considering rolling
requirements approached RBS, to discuss out the system to subsidiaries in Western
their requirements in Australia. Europe, the Middle East and Russia,
After discussing the problem in detail, the Deery says. The company has made
bank suggested a solution which could several acquisitions recently, including
both centralise the transaction application the Construction Group of ThyssenKrupp
process at the companys headquarters Steel Europe, and Dubai-based Rigidal
in County Cavan, include an electronic Industries LLC.
link with their local subsidiary in Australia The RBS solution has helped us manage
when required, and ensure fast and costs and increase control, supporting
effective processing of each new bank our growth, Deery says. As we continue
guarantee by the banks office in Sydney. to expand, the banks capabilities in all
We asked our trade finance bank in the jurisdictions are a great benefit.
UK to arrange to issue the guarantee in The bank has worked with Kingspan for a
the name of their Australian subsidiary, number of years and was able to build on
with a counter indemnity to the bank that to provide a solution that would not
from our UK company. All costs are then only cover the companys requirements in
recharged back to local subsidiary, which one country, but was also scalable, given
works for us in terms of cost and control, their continued overseas expansion. A
says Kingspan Group Treasurer Kevin similar model can be rolled out to assist
Deery. It means we have our guarantees with their transaction banking requirements
issued by our relationship bank and can in business units around the world.
will want to maximise their own organisations and systems, standardisation usually
access to liquidity. reduces both the headcount required to
For many companies, changing internal administer an activity and, if automated,
operations can improve liquidity within the the cost of operating different systems.
organisation as a whole. There are many For example, accessing all bank account
different ways to do this, including: information through a single platform
with common authorisation procedures is
Negotiate better payment terms.
much more effective in terms of managing
For a company seeking to manage its
balances and protecting against fraud,
own position, agreeing better payment
than operating a number of different
terms, whether by paying suppliers later
proprietary electronic banking systems.
or collecting payment from customers
earlier, will improve working capital Improve management of inventory.
within the organisation. Whether this Using ERP data and other information to
is possible will depend on the relative improve the management of inventory, so
bargaining positions of the company that unnecessary items are not bought
and its counterparties. For example, (thus having to be stored), can allow
supermarkets and other large retailers a company to streamline its physical
are often able to impose strict payment production processes, reducing the
terms on their suppliers. Whilst this level of working capital committed to
might improve a companys own liquidity, inventory. This is not always possible,
it will inevitably weaken that of its especially when the company has
counterparties. already streamlined its processes, or
where demand levels are uncertain or
Offer early payment discounts.
supply lead times unreliable. However,
Where better payment terms with
when improvements can be made in the
customers cannot be agreed, some
management of inventory, gains quickly
companies offer early payment discounts
feed through to working capital.
to accelerate cash collection. Care
In a similar vein, taking advantage of
should be taken to ensure sales teams
improved tracking of goods in transit will
only offer discounts that have been
both improve the use of inventory and
agreed with the treasury.
reduce the associated transit risk.
Reduce exceptions and manual
Restructure liquidity management
interventions.
processes.
One of the most significant ways a
At the other end of the scale, treasurers
company can improve its liquidity is to
can be tempted to invest significant time
reduce delays in the receipt of payment
and effort into improving the efficiency
as a result of invoice or letter of credit
of domestic and/or international liquidity
error. Any manual intervention in any
management structures. The larger and
process will increase the time taken to
more complex the organisation, the more
prepare the invoice and consequently
scope there is for gains. However, this
the time to collect payment. Treasurers
will need to be set against an increase
should consider measures aimed at
in costs in terms of both the time and
reducing errors in the preparation of
resource that such a project will require.
documents and payment instructions.
A liquidity management restructuring
This may include automating or
is most likely to provide improvements
outsourcing certain activities.
where a group has significant numbers
Standardise processes as far as possible. of bank accounts in a number of
Although it can prove difficult to arrange, locations and where there is scope to
standardisation of processes is one reduce reliance on external borrowing
technique to improve liquidity. Instead of by using cash-rich group entities to fund
having a number of different processes cashpoor ones.
Companies may also be able to arrange any established payment track record.
additional external financing, whether from For prospective customers, it may be
banks (in the form of a loan or an overdraft appropriate to seek references.
facility), the money or bond markets or from
Together this information can be used to
the sale of equity. If successful, all of these
assess and monitor current and potential
would improve the companys liquidity position.
trading partners. It is always important
However, these choices are dependent on
that any changes in metrics are fully
market appetite, and funding rates will be
understood. For example, a counterparty
determined by the individual companys
could show an increased DPO value
credit rating. Because lender appetite can
(days payable outstanding), which might
be changeable, companies tend to take
suggest a weakening credit. However, if it
advantage of receptive funding markets, even
is participating in a supplier finance scheme
if it means carrying surplus cash for a period.
operated by its main customer, this figure
Managing risk might be misleading.
To manage risk effectively, the treasurers As well as assessing counterparty risk
first job is to understand the risks to which the internally, there are a number of different
company is exposed. Having understood this, entities providing risk management
the treasurer then needs to decide how best services, including credit rating and credit
to manage that risk. checking agencies.
the world. One benefit of these agencies all its current and prospective counterparties.
is they use the same methodology when Any suggestion of a weakening credit
conducting credit checks (although there can should trigger a follow-up conversation with
be differences in the information available the counterparty as soon as possible, and
from country to country). There are also certainly before another contract is agreed.
national credit check agencies in a number
of countries, which only provide information Action to manage counterparty risk
on domestic entities. Companies trading Having identified where the company is
internationally may find these agencies exposed to counterparty risk, the treasurer
do not provide coverage for the most risky will want to evaluate the risk before assessing
counterparties, as a result of a lack of what to do.
geographical coverage. Essentially, any risk is a combination
Although the coverage is better than for of the loss to the company if a particular
credit ratings, credit check agencies cannot event occurs and the likelihood of the event
provide cover in every location or for every occurring. For counterparty risk it can be
counterparty. They may also not cover relatively straightforward to identify the direct
recently established potential counterparties cost of a failure. However, it may be more
(although there may be access to information difficult to assess indirect costs, especially if
on a new entitys directors, for example). an event affects a companys reputation. For
Although they are probably quite effective example, if a company sells into a foreign
as indicators of short-term payment track company via an import agent who sells goods
records, and are a good place to start, on to the retailer, any failure of the import
companies should not rely solely on credit agent may result in the goods being delayed
check reports when evaluating a counterparty. in delivery to the retailer or the final customer.
This may affect future sales, although the
Outsource credit support impact will be very difficult to quantify.
A third alternative for companies is effectively If a treasurer identifies a problem with a
to outsource counterparty risk advice. This current or potential counterparty, it has four
applies when companies choose to factor alternative courses of action to follow.
their invoices, as they hand over control of
Continue trading.
their sales management process to a third
All transactions involve a degree of risk.
party. Specialists in factoring companies can
As long as the treasurer assesses the
identify trends among a companys existing
risk of counterparty failure as tolerable
customers, and highlight potentially weakening
(perhaps on the basis that the impact
credits. (In the case of invoice discounting, the
of a counterparty failure would not
companys sales management process will be
result in the failure of the company), it
scrutinised by the invoice discounter, which
may be appropriate to continue without
may also provide advice on the management
implementing any particular changes.
of customers.)
The company may try to negotiate better
References from a customers bank can
payment terms by, for example, moving
be sought with the customers assistance.
from open account terms to using letters
However, these tend to be very vague, using
of credit, although this is clearly subject
statements such as We believe this customer
to negotiation as well as the availability of
is good for GBP 50,000, which do not convey
facilities on the buyer side.
much useful information.
In all three cases, the information provided Cease or reduce trading.
from external sources will only be an indication On the other hand, the treasurer may
of any weakening of credit. The treasurer and consider the potential impact of a
other officers will still need to perform their counterparty failure to be too great, given
own credit checks on these counterparties. the likely reward. In these circumstances,
Most importantly, though, the company if the terms of the transaction cannot be
should always maintain a dialogue between renegotiated, the company might be better
served to downscale or end its relationship goods or service. In most cases a company
with that counterparty. would become exposed to country risk when
it is considering expanding operations to a
Insure against loss.
new jurisdiction. However, a treasurer should
The third alternative is to arrange some
always monitor government activity; for
form of credit insurance. Credit insurance
example, it is possible that the companys
is available from both commercial insurers
goods could be caught in an emerging trade
and export credit agencies (see below).
protection dispute. Any change in government
Work with counterparty to improve should also be assessed.1
creditworthiness. In the case of country risk, the company
The final alternative is to work with the has three main choices.
counterparty to reduce the chance of
Start or continue trading.
failure. In the case of strong credits, this
The first option is to continue to trade
can include arranging a supply chain
or to pursue any plans to expand into
finance structure to support suppliers and/
a particular jurisdiction, factoring in a
or end customers (see below).
sufficient return to compensate for the risk.
Country risk
Cease trading.
The second broad type of risk that A decision to cease trading could be made.
companies face when trading internationally However, it might be difficult to resume
is country risk. This is the risk that action by trading at a later time in that country, as
the government or regulator in one of the competitors will have been able to replace
parties jurisdictions results in a counterparty the company in that market.
not being permitted to pay, or a company
having difficulty in repatriating funds from Arrange insurance.
one jurisdiction to another. Companies The third option is to arrange some form of
must also be aware that it may be difficult to insurance to protect against loss.
pursue redress through local courts in the The use of insurance to manage counterparty
event of non-payment. (This is most likely and country risk
when a company has not taken sufficient
care or advice over the preparation of It is possible to take out insurance against
contracts to meet the local jurisdictions credit and country risk. The cost of doing
standards. In some jurisdictions, political so will be related directly to the insurers
interference may affect the ability of the evaluation of the companys likely loss and the
company to seek redress. Finally, in cost of loss. In other words, for the same sum
certain circumstances, uncertainty over the insured, when a company is likely to claim
likelihood of getting redress may make the against a policy the premium will be higher
cost of funding legal action prohibitive.) than when a claim is unlikely. The key point
Companies must also recognise that in when assessing the cost of credit insurance
todays environment there is a much greater is to evaluate the cost of the premium against
focus on counter-terrorist financing and the impact of a loss if uninsured. Where
money laundering. This will add cost to the a company faces likely losses, it might be
process of establishing local bank accounts, more appropriate to self-insure, probably by
which may otherwise make collecting charging the end customer a higher price to
payment easier. reflect the risk. The big danger with reliance on
credit insurance is that a loss event may prove
Action to manage country risk to be exempt from the insurance policy, and
Treasurers will want to assess the country the insurer may be able to avoid paying.
risk associated with a particular transaction Insurance is usually available from two
before agreeing a contract. Official export 1 Aswath Damodaran provides a range of data that quantifies
credit agencies, in particular, tend to grade country risk and other measurements. It can be found at
countries according to their risk, providing an http://pages.stern.nyu.edu/~adamodar/, with the data sets
accessible from the updated data section on the main menu,
opportunity to identify a clear charge for the then look for risk premiums.
sources: commercial insurers and official confident that they will be paid, so they may
export credit agencies. The availability be prepared to extend credit terms to those
of cover from both sources varies from customers. In contrast, if the credit insurer
jurisdiction to jurisdiction, especially with refuses to offer protection against a specific
relation to any official export credit agency. customer, then the suppliers may insist on
Commercial insurers are able to cash on delivery or cash in advance, as a
offer protection against standard trade condition of trade. Such a change can have
transactions. They are typically used to a dramatic impact on the customers cash
protect the trade of consumer and some flow. The withdrawal of credit insurance
commodity goods. Trade in services can for Woolworths suppliers in the UK was
usually be insured as well, often in the form a key factor in precipitating the retailers
of a service guarantee. This insurance is insolvency in 2008.
available for domestic transactions as well as There is more detail on the use of credit
international transactions. insurance and export credit agencies on
Specialist insurance brokers also offer page 140.
protection against the wider credit risks
associated with trade. These cover the Foreign exchange risk
immediate credit risks: the failure of a Many companies need to manage foreign
counterparty to pay as a result of insolvency exchange risk as part of the process of
or default. In addition, they cover the political agreeing a trade. In most cases the foreign
risks which can prevent a counterparty from exchange risk will be a clear element in
paying. These can include government or the transaction, as the company will be
regulatory decisions, such as the imposition required to invoice or be invoiced in a
of trade sanctions and exchange controls, currency other than its operating currency. In
market conditions, such as a lack of available either circumstance there is a clear foreign
currency, and other political or environmental exchange risk to be managed.
events, such as war or earthquakes. Cover For other companies there may well
can usually be arranged for a specific be an underlying foreign exchange risk in
transaction or on a rolling basis to protect a transaction. This arises from the pricing
an ongoing trade relationship. The level of of certain inputs in another currency
cover varies but is typically arranged as a affecting the price of the good or the cost
proportion of the value of a specific contract of production. This is most common in the
or the companys turnover. case of the cost of oil, which indirectly affects
Export credit agencies only insure the cost of production through energy and
international transactions, but do offer
distribution costs.
protection against both country and
There are three different forms of foreign
counterparty risk, as long as the requirements
exchange risk that can affect companies:
of the programme are met. This insurance
transaction risk, translation risk and
can be particularly appropriate for longer-
economic risk.
term transactions, such as a companys
participation in a long-term infrastructure Transaction risk.
project abroad, or for transactions with parties This is the most apparent risk to those
located in areas not usually covered by engaged in international trade. This is the
commercial insurers (where standard policies risk that the exchange rate will change,
do not apply), or where credit check agencies adversely affecting either the funds received
have little or no coverage. or the sum to be paid out. This applies
Credit insurance can also play an in a variety of situations. It can be easily
important role in the financial supply chain. understood in an international transaction,
If suppliers are able to arrange credit where a company may find that the value of
insurance against their customers, the a foreign invoice changes so that it ends up
credit insurance acts in a similar way to paying more when importing, or receiving
a bank guarantee. The suppliers can be less when exporting, than it had originally
Case study
The buyer may want an initial bank longerterm guarantees which reflect the
guarantee for, say, 510% of the tender nature of the risks. They are also essential
value of the contract. If the company to companies tendering for business.
then wins the tender, the buyer may Holding a bank guarantee is seen by
then require a bank-issued performance the awarders of contracts as evidence
guarantee. This performance guarantee of a potential contractors ability to raise
provides reassurance to the buyer of finance, and its seriousness in pursuing
the financial capability of the supplier, the tender.
and the ability to call on the issuer of the
Bonds and guarantees are used
guarantee for an agreed percentage of
in both domestic and international
the contract in the event that the company
transactions. Obtaining a banks
fails to perform or otherwise withdraws
backing is an important part of proving
from the contract.
creditworthiness, which is critical to
These instruments are critical to the longer-term contracts where alternative
infrastructure business. They offer suppliers may be difficult to identify.
Case study
At the end of 2011, the company started preferred bidders on the tender. This
to plan its tender for the business. The support was critical, as it gave the
company needed advance payment buyers confidence that the company
guarantees and performance bonds, both could deliver according to the terms of
for terms of four years. The companys the contract. As this was the companys
bank used its local in-country office to first tender for business in that country,
issue the instruments on its behalf. the banks local branch also supported
Support from the companys bank the company by helping with the terms
helped the company to become and conditions of the contract.
decision. Treasurers will want to ensure that treasurer will often prefer a funding
a funding strategy meets as many of the solution which can grow as the company
companys objectives as possible. grows a large, committed loan facility
Liquidity. may provide guaranteed funds to support
Central to any funding decision is the need future development, but it may be more
to ensure that the company has sufficient convenient to arrange to finance invoices
liquidity to support all its activities, both or other trade documents as and when the
now and into the foreseeable future. business materialises. As far as possible,
This applies to procurement as well the treasurer will want to avoid reliance on
as supporting sales. For example, a one or two funding sources.
Case study
To resolve this gap, the manufacturer has manufacturer approves it for payment.
entered into a supply finance programme These approved invoices are then
with its bank. Under the terms of the uploaded to the bank in a file generated
programme, the suppliers are paid within by the manufacturers ERP system. Under
15 days as before, while the manufacturer the terms of the agreement the bank then
only has to pay after 90 days, giving purchases these approved receivables
time for payment to be collected from from the suppliers. The suppliers receive
its customers. Although it is similar to cash under the terms of that transaction,
a revolving credit facility, the company with the bank being repaid by the
prefers the structure, because it is viewed manufacturer after 90 days.
more positively by credit analysts. Under the programme, suppliers continue
The structure does not include all to receive payment according to existing
20,000 suppliers, but focuses on the payment terms, while the manufacturer
manufacturers most important suppliers. benefits from a liquidity boost, a critical
When it receives an invoice from concern to a company that uses cash
one of the participating suppliers, the very quickly.
existing lenders are relying on unpledged treasurers are often nervous about
assets, such as receivables, for comfort arranging all funding centrally, as it does
of unsecured overdraft facilities. The represent a significant funding risk to the
treasurer will also want to look into group as a whole.
the future when establishing a funding
Local funding opportunities.
structure to ensure that the decision does
Companies are also constrained by the
not constrain future growth or other plans.
liquidity of their local markets. This is
Size of company. a particular issue in trade, where local
The size of the company and its country subsidiaries, suppliers or customers may
(countries) of operation will determine operate in countries where access to local
some of the funding opportunities finance is particularly difficult. Treasurers
available. Commercial paper programmes need to think carefully about how to
are usually only available to the largest support transactions with entities based
companies, although in certain countries, in these locations. Export credit support is
such as France, local markets are available for certain markets. It may also
available to smaller companies on the be appropriate for companies to enter
basis of name, rather than ratings. Other into countertrade agreements in some
financing tools may not offer the level of circumstances.
funding required by larger companies.
Factoring and, to a certain extent, Guarantees.
invoice discounting fall into this category. Where funding is arranged locally, central
Creditworthiness has been seen to be treasury will need to establish whether
a factor in determining access to funds, it is going to support local entities by
especially over the last five years. guaranteeing their local borrowing. This
will reduce the cost of borrowing across
Central funding or local funding. the group, but at the cost of taking on
For international companies, treasurers more risk for the parent and reducing the
will need to identify whether it is central treasurys ability to raise funds at
appropriate to try to arrange funding the group level.
centrally, and then to fund the subsidiaries
either directly or through a liquidity Tax, accounting and other regulatory
management structure. Central funding requirements.
will usually be cheaper (assuming the Finally, all funding decisions need to be
group has the highest credit rating), taken after the impact of tax, accounting
although it can be difficult to arrange the and other regulatory requirements
level of funding needed by the group as (e.g. exchange controls) is considered.
a whole. Depending on the location of For multinational operations, these
group entities, exchange controls can implications can be complex.
make central funding strategies difficult Although some companies may have very
to manage, as it can be difficult to limited choice, whether because of their
repatriate cash to meet debt repayment location, creditworthiness or size, all these
requirements from certain locations. variables should be considered as part of the
Allowing or requiring local entities to raise wider working capital funding decision.
funds locally may be more expensive for
the group as a whole, and it can result in
Integrating the supply chain
inefficiency where some group entities are
cash-rich and others cash-poor. On the The final opportunity is to view the supply
other hand, arranging funding locally can chain as a whole, rather than see each
have significant benefits for a company entitys participation in isolation. Assessing
seeking to arrange local support for this against the three key objectives outlined
letters of credit, for instance, as local bank above, there are some definite advantages to
relationships will develop. More generally, viewing the supply chain as a whole.
Case study
from the European Banking Association can, at the very least, know when to expect
suggest a paper invoice costs between payment from their customers, reducing their
EUR4 and EUR 70 to process. This can be need to arrange precautionary finance. This
cut significantly through electronic invoicing technology is also used by banks to manage
to an average processing cost of less than supply chain financing programmes, where
EUR 1. Electronic invoicing is offered by they may allow a participating company to
both banks and specialist electronic invoicing raise funds on the strength of an approved
providers. It works by linking the data invoice. The sharing of information between
submitted by a companys suppliers or sent to companies is crucial, in that it builds trust
its customers into the companys accounting between the entities and thus allows
or ERP platform, with manual intervention financing programmes to work.
only necessary on the relatively few invoices
which need to be queried. Ultimately, this Techniques to finance the supply
interaction also means information provided chain
by other parties can be used by the company The principle behind supply chain finance is
to improve other aspects, such as the to use the strongest credit within the chain as
management of inventory. the guarantor of finance to other participants.
The next stage is for companies to This is appropriate when suppliers or
exchange documents on a third-party customers only have access to funding at
platform. The Bolero Trusted Trade Platform, much higher rates than the strongest credit
for example, allows for the electronic can access, or when they have difficulty in
exchange of trade documents between arranging any form of financing at all. These
parties. It is most commonly used in certain techniques work equally well for domestic
industry sectors, such as automobiles, and international transactions, although
where a practice of interaction has international financing structures will be more
developed. SWIFTs Trade Services Utility complex to arrange. (Exchange controls may
is a service which allows banks to exchange make such a structure effectively impossible
trade-related data using XML standard to implement in some locations.)
messages, and then to match documents Below, there are two case studies which
on behalf of their customers. Its new illustrate how supply chain finance can work.
Bank Payment Obligation (BPO) is a bank The company acting as the guarantor of the
guarantee of payment made by the buyers programme must ensure it meets at least
bank for a specific amount to a specific one of the core objectives outlined above.
bank (the sellers bank) on a specific date. Before participating, a supplier or customer
The BPO was developed by SWIFT as a must consider whether the programme is
partial extension to the TSU. (There is more appropriate. In particular it must identify
information on these technologies in the whether the risk of further integration
next chapter.) with its counterparty is outweighed by the
The final stage is for companies to relationship benefit and lower cost of funds
share information with each other on the the programme affords.
status of invoices and other trade-related This first case study shows how a
documents. Banks and specialist providers company used a supply chain finance solution
have developed services that allow suppliers to improve its working capital position. It also
to view the status of invoices submitted shows how automating existing processes
to their customers. By doing so, suppliers helped to improve efficiency.
Case study
Its solution was to work with its bank to receive payment from the bank. If not, the
create a supply chain finance solution. platform initiates an automatic payment of
The subsidiary concentrated on its core invoices on the maturity date.
suppliers (about 15% of its original The subsidiary has now extended its DPO
suppliers) and provided them with the to 90100 days, while mitigating the impact
opportunity to access cheaper funding via on its key suppliers via the supply chain
a supply chain finance programme, using finance programme. Its suppliers are able
the groups superior credit rating. to accelerate receipt of cash by receiving
A key challenge was to automate the a discounted payment shortly after the
processes. Invoices approved by the buyer has approved the invoice. As well as
subsidiary are automatically uploaded extending DPO, the automation process
to the banks own proprietary trade required an improvement in efficiency
finance platform. Once uploaded, the leading to a reduction in operational costs.
platform sends an automated notification Given its success in achieving its
to the suppliers. The suppliers can then objectives, the programme is being
choose whether to discount the approved extended to other subsidiaries within
invoices. If they decide to do so, they the group.
Process diagram
The next example shows how a is extending its own payables timings and
supply chain finance solution can provide increasing creditors, trade payables can
significant benefits to a companys get recategorised as borrowings instead.
suppliers, whilst also allowing the IAS 39 (paragraph 40 supplemented by
company to improve its own working AG62) introduces rules to determine when a
capital position. The exact structure of the liability has been significantly modified. The
programme needs to be designed with exact application will need to be confirmed
care. There is a risk that, if the purchaser with the auditors.
Case study
Supplier finance has proved to be The invoice is settled by the retailer with
particularly beneficial in accommodating the bank at the agreed maturity date.
the needs of both retailers and suppliers
The suppliers benefit because the
when the retailer extends its own terms
bank offers a discount on the whole
as it simultaneously offers the suppliers
value of the invoice (rather than the
accelerated cash receipts at a cheaper
7080% typically offered by invoice
cost of finance.
discounters). Furthermore the recourse
Once the goods have been shipped and in the event of default is against the
the retailer has accepted the suppliers retailer, not the supplier. By choosing
invoice, they will upload it to the banks to discount, the suppliers receive funds
invoice purchase system. The bank will earlier, at a discount rate that is typically
offer to pay the supplier the face value of cheaper than the suppliers own cost
the invoice, less a margin based on the of credit, being based on the retailers
retailers cost of credit. This enables the risk. The acceleration of cash also
supplier to accelerate the funds due any enables them to liquidate receivables
time from acceptance of the invoice until and free-up credit limits for further sales
the maturity by requesting to discount. opportunities.
Future developments
Although it is not possible to predict with any based Bank for International Settlements.
accuracy how the trade market might develop It complements, rather than replaces,
in future years, this chapter highlights a the previous Basel II Accord. In the EU,
number of the trends which are evident at the Basel III is being implemented through the
time of writing and which are likely to develop Capital Requirements Directive IV (CRD
over the next couple of years. IV) with the European Banking Authority
(EBA) deciding on various detailed
Impact of Basel III on Trade implementation matters.
Finance There are four main components to Basel
III. They are to be phased in by 2019. See
Introduction diagram below.
The Basel III Accord is the third in a series Amendments are being made to the
of capital accords developed by the Basel- level of capital that banks must hold. These
Basel I
Capital Rules across international banks
Published:
Flat rate 8% of exposure Minimum base of own funds in every bank
1988
mean banks will have to hold 7% of risk- for banks to hold 8% of their exposures
weighted assets in Common Equity (or Core as regulatory capital, resulting in their
Tier One capital) (inclusive of a new capital needing to hold 8% of RWAs as regulatory
conservation buffer of 2.5%, which banks may capital instead. Basel III adds to these
deplete in times of financial stress). Banks requirements, by focusing on loss-absorbing
that are classified as Systemically Important Common Equity rather than regulatory
Banks (SIBs) will be required to hold between capital. It introduces revisions that will
1% and 2.5% above the minimum Common result in increased risk weightings for some
Equity requirements. During periods of credit exposures (e.g. FI AVC), and introducing
growth an additional counter-cyclical capital additional risk components, such as the CVA
requirement of up to 2.5% may be imposed by capital charge, that cater for credit migration
local regulators. (This will have a significant, of the portfolio.
albeit indirect, effect on the way banks decide However, whereas Basel II (and Basel II.5)
to offer particular products, including trade primarily focused on capital as a prudential
finance.) These changes are being phased in measure, Basel III moves beyond this to
from January 2013. consider the broader shortcomings in the
When CRD IV comes into force (either in global financial system, addressing the need
January or July 2014), there will be changes for stable liquidity and reduced leverage.
to the calculation of risk-weighting to be Basel III changes a banks cost base
applied to some exposures (e.g. the Financial with extending trade facilities as well as
Institution Asset Valuation Correlation when taking deposits. As a result, the
(FI AVC)), as well as new risk-weighted market will have to find a new equilibrium
asset (RWA) requirements (e.g. the Credit to finance the revised cost base, either
Valuation Adjustment (CVA)). through price or finding innovative ways to
A liquidity coverage ratio (LCR) will be meet customers needs.
introduced from January 2015, under which To understand how Basel III will affect
banks will have to hold a liquidity buffer of trade finance, we need to examine three
unencumbered, high-quality liquid assets separate measures: the introduction of the
to cover net cash flows over a modelled asset value correlation multiplier for large
stressed scenario of 30 days. The full LCR financial institutions, and the new liquidity and
will be phased in between January 2015 leverage ratios.
and January 2019 using regulatory minimum
levels in each year. Financial Institution Asset Value Correlation
In addition to the LCR, a net stable (FI AVC)
funding ratio (NSFR) will be enforced from The FI AVC is one of the Basel III measures
January 2018, requiring banks to fund the intended to address the risks stemming
illiquid portion of their asset book with funding from the interconnectedness of the global
of more than one year residual maturity. financial system.
A new leverage ratio of 3% is due to It affects the cost of financing of a banks
become mandatory in 2018, although public exposure to the worlds largest regulated
disclosure of the ratio is required by 2015. financial institutions (with over EUR70billion
This seeks to ensure banks apply adequate of assets), as well as all unregulated
capital to all their exposures, including those financial institutions, as the RWAs on such
off balance sheet, and without applying any counterparties will increase by 2035%. From
risk weightings. This will have a significant a trade perspective this would impact trade
impact on banks without diversified business products, namely export letters of credit,
portfolios (e.g. trade services focused or guarantees and the short-term bilateral trade
mortgage focused). finance facility with such financial institutions.
Quality Liquid Assets (HQLA) to cover ensuring the application of adequate capital
expected net cash withdrawals during a to all exposures, including off balance sheet,
30-day period of stress. The LCR is driven e.g. trade and undrawns.
by regulator-assumed cash withdrawal rates In practice, it is expected to be applied
based on a combination of product and client at a legal entity and bank group level (i.e.
factors over a 30-day stress period. not at a product level). Whilst this would
Whilst the final requirements are subject currently include (low-risk) off balance sheet
to revision by the BCBS,1 they will include trade instruments (e.g. guarantees count
liquidity buffer requirements for core trade as equivalent to bringing on balance sheet
finance products, e.g. contingent obligations 100% of the exposure), there may be some
(in the form of import/export letters of revisions in the final CRD IV legislation.
credit and guarantees), undrawn credit and
undrawn liquidity facilities. Other regulatory pressures
LCR requirements for the treatment There are also other regulatory pressures on
of contingent obligations, which are most banks, which may have an effect on trade.
relevant for trade finance, are expected to be In the UK, the Independent Commission on
set by local regulators (for European banks, Banking (ICB) has proposed ring-fencing
this will be the EBA). It remains to be seen some core banking services. It is not yet
whether current UK liquidity regulations (e.g. clear how these proposals will affect trade
FSA Individual Liquidity Guidance (ILG)) and services: much depends on which side of any
planned CRD IV outflows are aligned for ring fence trade services fall. However, just as
trade finance contingent obligations. with the Basel proposals, any local regulatory
The Basel Committee has recommended changes will force banks to reassess resultant
that low cash withdrawal rates are assigned impact business strategy and portfolio mix,
to trade finance transactions. Both banks and given an evolving market place.
clients have to evaluate the consistency of
how national regulators are implementing this Conclusions
recommendation. While the release of the final Basel III and
In the meantime, it is important that banks CRD IV rules in 2013 will allow market
and their clients work to review existing participants to understand the detailed
facilities and limits, ensuring that they are application of the legislation, the spirit and
correctly classified (e.g. as contingent intent of the banking regulators globally is
obligations, credit or liquidity facilities). already clear. There will be a negative impact
on trade products, despite their inherently
Leverage Ratio higher liquidity and lower risk profiles. There
Distinct from the FI AVC and LCR provisions, are some strategies available to banks to
the Leverage Ratio is designed to prevent mitigate the effects of the FI AVC and LCR,
excess leverage, which was identified as one and the appropriate analysis will provide the
of the causes of the recent financial crisis. best foundation to explore new business and
Set at 33 times qualifying Tier 1 Capital, this product opportunities in the ever-evolving
is a non-risk-based measure aimed at financial marketplace.
in early 2013. There is significant overlap opportunity to develop a single unified vision
with both SEPA and the PSD, so it will be for the future payments environment in
interesting to see whether the European the EU, maximising the potential gains for
Commission decides to try to incorporate corporate treasurers as well as consumers.
some of these proposals as part of the wider There is enough certainty on the future
PSD review process. direction of SEPA for corporate treasurers
to be making and implementing concrete
Next steps plans with their banks and other partners
The European Commissions stated objective now. On the other two initiatives, much is still
underpinning SEPA, the PSD and the most under review. There is plenty of opportunity
recent consultation is for the EU to become for corporate treasurers to have input, either
the most competitive market for payments. directly or via trade and professional bodies,
These three parallel initiatives offer a great including the ACT.
Unlike open account trading, where only option but to pay if a compliant letter of
the payment element is processed by the credit is presented.
banks, the banks do play a role in transferring The Banking Commission is reviewing
information, with the buyers bank offering a other anti-money laundering and sanctions
guarantee similar to that available via a letter regulations, with a view to updating
of credit. guidance on a range of interconnected
This exchange of information also allows issues. These include checks under know-
banks to use the BPO as the basis for a wider your-customer requirements and as a
range of financing solutions, including pre- protection against false documentation
and post-shipment financing, as well as other (designed to circumvent sanctions).
services, such as risk management.
However, despite the potential Technology
advantages, there has been limited take-up
of the BPO since the Bank of China became The evolution of technology continues to
the first user in 2010. The BPO is most offer many potential efficiency gains which
commonly used between banks in China and can improve the use of working capital. The
Japan. As the next step towards trying to gains come from two main improvements.
develop its use, the International Chamber First, if used appropriately, technology is
of Commerce is working to develop a set of able to reduce processing costs, notably by
standards (similar to UCP 600 for letters of the replacement, and possible redesign, of
credit) to provide an accepted set of global manual processes. Second, technology can
rules. An ICC working group is expected to also improve the visibility of activity along a
publish a set of rules (URBPO) in early 2013. supply chain. Instead of a paper trail which
The BPO is not intended as a replacement may only be visible to one participant at
for the letter of credit, although the effective any particular time, technology offers the
bank guarantee and the use of banks as opportunity for different companies (and
intermediaries suggest that role. Instead, departments within those companies) to
the BPO is viewed as a new product to review the progress of a transaction at the
sit alongside existing letters of credit. The same time. This greater visibility offers many
development of ICC-sponsored international benefits, including a stronger relationship
standards may give the BPO the boost between customer and supplier, and more
required to expand market awareness and, financing opportunities.
consequently, use. E-invoicing
The concept of electronic invoicing is no
Anti-money laundering and
longer new, although there remain a number
economic sanctions of different market definitions. In the purest
The ICC Banking Commission has also sense, e-invoicing is a process in which an
established a working group to assess the invoice is raised, sent, received, processed
impact of economic sanctions on trade and archived electronically, although some
finance. Because sanctions can affect practitioners may refer to e-invoicing if some
the ability of banks to process payments, of these steps are performed manually.
they can have the effect of preventing These definitional differences emerge from
settlement under an otherwise compliant the wide range of solutions currently available
letter of credit. Some banks want to in the market.
protect their own positions (primarily with
respect to reimbursement due to other EU Second Directive on VAT Invoicing
banks nominated to pay on their behalf) by
inserting sanctions clauses into letters of EU Directive 2010/45/EU was adopted in
credit. Sellers should not accept sanctions 2010 for implementation at the beginning
clauses, as they override the basic principle of 2013. Among its objectives was that
of a letter of credit: that a bank has no of increasing the use of e-invoicing by
simplifying and harmonising VAT invoicing the improved visibility of status it can
rules, particularly by treating paper and offer. Because a document is prepared
electronic invoices the same, and by electronically, it can be more easily
removing the need for electronic invoices tracked via the invoicing platform. This
to be authenticated either by an advanced allows suppliers to know when an invoice
electronic signature or EDI. This should has been approved, and when to expect
make it easier for small and medium- payment. It also allows all parties to
sized enterprises to invoice electronically, dispute any items more quickly, allowing for
and reduce barriers to cross-border a faster resolution, and ultimately reducing
electronic invoicing in the EU. However, the cost of unnecessary shipments.
although the European Commission has
Opportunities for financing.
issued guidance to Member States, there
Finally, the use of e-invoicing offers
remains significant scope for different
opportunities for more varied invoice-
interpretations of the Directive and the
based financing. Because e-invoicing
guidance as the Directive is translated into
accelerates invoice approval, it extends
national legislation.
the time in which an approved invoice
can be financed. Whether e-invoicing
Companies are likely to gain from e-invoicing is performed on a bank platform or
in three main areas: on a third-party service, banks will be
able to see whether an invoice has
Efficient processing.
been approved much more quickly,
One of the initial attractions of e-invoicing
and without the need for any further
is the opportunity to reduce processing
documentation; at this point, funds can
costs associated with preparing, sending
be released to suppliers against the
and processing paper documents. Where
approved invoice. Solutions are also
invoices can be automatically approved,
available which prepare an electronic
via an inbuilt validation process, this will
bill of exchange from the e-invoicing
reduce costs even further.
solution, allowing a supplier to raise
However, a partial e-invoicing solution
funds from any party prepared to
(where paper documents are involved in
discount the bill.
the process) may reduce process costs
at one point, but increase cost elsewhere. The evolution of the e-invoicing environment
For example, the Danish governments is in its early stages. There is, though, little
decision to accept e-invoices led to doubt that all of these potential gains will
the emergence of scanning bureaux, materialise over time. At present, a lack of
shifting the burden of processing from the standardisation means there are still many
government to its suppliers. different solutions in the market place. These
will rationalise over time, as competition
Improved visibility.
coalesces the market around a smaller
One of the main benefits of e-invoicing
number of solutions.
across a supply chain comes from
Mark Ling: Economic commentary across Europe is the same. There is no expectation
that we will return to pre-2008 economic growth in the near future, if at all. The news
from economies further afield is that UK and European companies cannot expect to be
able to increase exports rapidly either. So, to increase profitability, companies have a
powerful incentive to try to identify ways to make current processes much more efficient.
Improving the efficiency of the supply chain is one way that corporate treasurers
can work to add value to their businesses. In this discussion, we will look at three
elements supply chain finance, the use of purchasing cards and e-invoicing to
identify ways in which these techniques can be used to add value across the length
of a supply chain.
also be that buyers are prepared to share in The late payment directive (2011/7/EU)
some of this risk going forward, to make the also has the potential to disrupt existing
proposition more acceptable to the lenders. supply chain finance programmes.
MH: To give an illustration of what is possible: detail which gives buyers a greater level of
one buying company developed an invoice management information for spend analysis.
matching system across SAP. In this system, a P-cards can work well for low-value
manufacturer can generate an invoice, receive transactions. In the UK, the average
it, and it is auto-matched and automatically transaction size is GBP 200. It is also
approved by the buyer in under 13 seconds. possible to use P-cards for highervalue
Achieving this level of efficiency is expensive, transactions (up to GBP 100,000).
and there are many barriers to this type of Transactions limits can be set at individual
interaction, especially on a cross-border basis. cardholder level for added control.
At this point, such systems are only realistic The merchant fee paid by suppliers
considerations for the biggest suppliers. is a fixed percentage of the value of the
By improving the efficiency of the invoice transaction unlike the costs of supply chain
flow, it should then be possible to finance financing, which vary according to risk and
the supply chain more effectively too. By the funding term.
incorporating validation into e-invoicing, this
reduces the requirement for intervention in Using the two together
the process, accelerating approval. For a corporate treasurer looking to
implement a solution for the whole purchase-
Helping small suppliers to-pay solution, the two financing techniques
Because of cost barriers, supply chain do not currently provide a complete solution.
finance can only typically be applied The largest suppliers (between 20 and 40%
to between 20 and 40% of a buyers of spend) can be brought into a supply chain
procurement spending. Companies also finance structure, with P-cards suitable for
want to consider how to help those suppliers the smallest suppliers (generally about 2%
whose volumes are not large enough to be of spend). However, suppliers between the
included in the supply chain finance structure. two are not supported: the P-card is too
expensive, but they are not big enough for
Tom Kelly: P-cards are a solution which can supply chain finance. Some companies
assist here. Unlike supply chain finance and use gains from supply chain finance to
e-invoicing, there is an established set of support these suppliers, often by offering
standards via Visa and MasterCard. P-cards settlementdiscounts.
are also widely accepted, meaning they can
be used to make a wide range of purchases. ML: The challenge for all participants is to
The use of P-cards also generates data develop a solution which bridges the gap
which can be used to analyse procurement between the two extremes. Should banks
spend and to do a retrospective audit. try to develop a solution which covers the
P-cards also offer enhanced levels of full range of payments? Can this be a single
security for the buyer, compared with other solution? Or will it be a solution which
payment types. Suppliers that accept cards includes different payment paths, where the
payment have already been validated by their transaction size determines the process?
acquiring bank. Moreover, an issuing bank Banks also need to be aware of a potential
can exercise chargeback rights in certain reputational risk if they withdraw from offering
circumstances. The card processing method supply chain finance solutions. To get desired
also means, unlike an invoice, that it is not balance sheet treatment, supply chain
necessary to individually pre-approve any finance is uncommitted. If a bank withdraws
P-card transaction. from the market, any supply chain funding
Additionally if a supplier has HMRC VAT lines it offers will collapse.
approved software, it does not issue VAT Ultimately, any successful solution will
invoices for P-card purchases. Instead, give the supplier a degree of flexibility. The
buyers are sent VAT reports electronically by supplier will want to be able to control the
their issuing bank. These reports can be used timing of the payment and, crucially, the level
to reclaim VAT. They also include line item of merchant fee or other financing costs.
Increased flexibility well come to you The training allowed for
Great value to maximise your training budget discussion and debate on
issues relevant to Accent and
Expert trainers - extensive industry experience provided a good knowledge
base to aid future strategic
www.treasurers.org/inhousetraining thinking on treasury matters
This chapter examines the different terms according to whether payment is made in
of payment used in trade and explains how cash or by acceptance of the bill of exchange.
documents are used in each context. In In both cases, once the buyer has title to
particular, it concentrates on how documents the goods, the seller will either have cash
can be used by both the buyer and the seller or a signed bill of exchange as evidence of
to manage the risks associated with each payment or a promise to pay.
term of payment.
Documentary credit
The four types of payment term Under the terms of a documentary credit
(or letter of credit, L/C), the balance of the
In any trade there is a risk to the seller or risk assumed shifts more towards the buyer
exporter and the buyer or importer. The four (the applicant), compared with both open
main types of payment term (discussed in account terms and a documentary collection.
Chapter 3) represent different balances of A documentary credit is a legal obligation of
this risk between the two parties. the bank that has issued the credit to pay
Open account trading funds to the seller (the beneficiary) upon
receipt of certain specified documents. As
Under open account terms, the seller assumes long as the seller provides the bank with these
the majority of the risk in the transaction. The documents, the bank will pay the agreed
goods or services are provided in advance, funds. However, the buyer does derive some
with the buyer promising to pay within a pre- benefit from the use of a documentary credit,
agreed period. Once the goods have been as the seller will need to ensure the terms of
dispatched, the seller has very little control the credit are met in order to receive payment.
over the contract, as the buyer will have control
of the goods. In the case of the provision of Payment in advance
a service, the provider has even less control, At the other end of the scale, the buyer
as the buyer will already have consumed the assumes the majority of the risk in the
service before payment is made. transaction. The seller will only dispatch the
Documentary collection goods on receipt of settled funds from the
buyer. Once the buyer has submitted the
Under the terms of a documentary collection, funds to the seller, the buyer is exposed to a
the sellers exposure is reduced, compared range of risks associated with the transaction,
with open account trading. The seller prepares from insolvency of the seller to failure to
a set of documents which are forwarded to the deliver the goods or provide the service.
sellers bank. The sellers bank forwards these
documents to the buyers bank, together with
Shipping terms
instructions for payment. The buyers bank
will exchange the documents for either a cash Incoterms
payment or future payment by way of a bill International Commercial Terms (Incoterms)
of exchange, drawn on the buyer. The buyer were developed by the International Chamber
exchanges the collection documents for the of Commerce to help both parties to an
shipped goods. The risk to the seller varies international transaction understand precisely
EXW Required to to make the Responsible for loading and removing the goods
(Ex Works) goods available to the from the point of delivery.
buyer either at the sellers Solely responsible for arranging all relevant
own warehouse or at documentation, including import and similar
another place named in the licences, for insuring the goods in transit and for
contract. all transportation costs.
This is the only Incoterm which requires the buyer
to arrange for export clearance.
FCA Required to deliver the goods to a shipping Responsible for all other
(Free Carrier) company named by the buyer at the place documentation, for insuring
named in the contract. the goods in transit and for
Responsible for delivery of the goods to the all transportation costs from
Used for the named point to the final
all forms of named point.
destination.
transport. Arranges export clearance.
FAS Required to deliver the goods alongside Responsible for all further
(Free Alongside a ship at a port located in the sellers own transportation costs, from
Ship) country. the loading of the goods
Used only for Responsible for delivery of the goods to the onto the ship to the final
goods shipped named ship. destination, for all other
by water documentation and for
Usually responsible for arranging export insuring the goods in transit.
(including inland clearance.
waterways).
FOB Required to deliver the goods onto a ship at a Responsible for all further
(Free on Board) port located in the sellers own country. transportation costs to the
Used only for Responsible for delivery and for loading the final destination, for all other
goods shipped goods onto the named ship. documentation and for
by water insuring the goods in transit.
Usually responsible for arranging export
(including inland clearance.
waterways).
CFR Required to deliver the goods to a named port Assumes any risk of loss
(Cost and located in the buyers own country. once the goods have been
Freight) Responsible for ensuring the delivery of the loaded on board the ship at
goods to the destination port. This includes the port of origin, so should
arranging export clearance and any other arrange transit insurance
Used only for for the goods.
goods shipped export requirements.
by water Not obligated to arrange any transit insurance Takes control of the goods
(including inland for the goods, although many exporters at the destination port and
waterways). choose to arrange their own insurance. is responsible for managing
the import process.
CIF Required to deliver the goods to a named port Does not assume any risk
(Cost, Insurance located in the buyers own country. of loss until such time as
and Freight) Responsible for ensuring delivery of the goods the goods are unloaded
to the destination port. This includes arranging at the destination port,
export clearance and any other export but many importers
Used only for nevertheless choose to
goods shipped requirements.
arrange their own insurance
by water In contrast to CFR, the seller assumes the risk of the goods whilst in
(including inland of loss or damage to the goods until they are transit.
waterways). unloaded at the port of destination, and should
arrange any transit insurance for the goods. Takes control of the goods
at the destination port and
is responsible for managing
the import process.
CPT Required to deliver the goods to a named port Assumes any risk of loss,
(Carriage located in the buyers own country. once the goods have been
Paid To) Pays for delivery of the goods to the loaded on board the ship
destination port. This includes arranging export at the port of origin (or
clearance and any other export requirements. otherwise been accepted
Used for for carriage), so should
all forms of Not responsible for any loss or damage in arrange transit insurance
transport. transit, so is not required to arrange any for the goods (although this
transit insurance for the goods, although is not required).
many exporters choose to arrange their own
insurance. Takes control of the goods
at the destination port and
Responsibility for the goods ends once the is responsible for managing
goods have been accepted for carriage by the the import process.
shipping company.
CIP Required to deliver the goods to a named port Assumes any risk of loss
(Carriage and located in the buyers own country. once the goods have been
Insurance Responsible for ensuring delivery of the goods loaded on board the ship at
Paid To) to the destination port. This includes paying the port of origin (or otherwise
for all transit costs, as well as arranging export been accepted for carriage).
Used for clearance and any other export requirements. Although the seller arranges
all forms of Is obligated to arrange any transit insurance transit insurance, many
transport. for the goods. importers choose to arrange
their own insurance for the
goods in transit.
Takes control of the goods
at the destination port and is
responsible for managing the
import process.
DAP Required to deliver the goods to a named destination, usually Takes control of the
(Delivered in the buyers own country. (This term can be used for goods at the named
at Place) delivery to any named place.) destination.
Responsible for ensuring delivery of the goods to the named Manages the import
Used for destination point. This includes arranging export clearance process, including the
all forms of and any other export requirements. unloading of goods,
transport. Responsible for any loss or damage to the goods in transit, so and transportation
should arrange insurance (although are not required to do so). of the goods to their
final destination.
DAT Required to deliver and unload the goods to a named Takes control of the
(Delivered terminal (this can include a named warehouse or quay) goods at the terminal
at Terminal) located in the buyers own country. and is responsible for
Responsible for ensuring delivery of the goods to the managing the import
terminal. This includes arranging export clearance and any process.
Used for
all forms of other export requirements.
transport. Responsible for any loss or damage to the goods in transit, so
should arrange insurance (although are not required to do so).
Responsible for meeting the costs of unloading.
DDP Required to deliver the goods to the final destination selected Takes delivery of the
(Delivered by the buyer. goods at the final
Duty Paid) Responsible for ensuring delivery of the goods to their final destination.
destination. This includes arranging export clearance and Not responsible for
Used for any other export requirements. managing the import
all forms of This is the only Incoterm which places responsibility for process, but may
transport. managing the import process and paying costs of import on need to provide the
the seller. seller with certain
documents to
Responsible for any loss or damage to the goods in transit, so comply with import
should arrange insurance (although are not required to do so). regulations.
Benefits Insurance
Where used, Incoterms clearly identify which Trade, especially international trade, exposes
party is responsible for the goods at each both exporter and importer to a range of
stage of the shipping process. Because risks, all of which need to be understood and,
Incoterms are widely accepted throughout the possibly, managed.
world, they can be used for the overwhelming There are essentially three risks: that
majority of trades. As international standards the goods will be damaged or lost in transit;
they can also be transmitted electronically that there will be an economic, political or
using EDI, as long as both parties agree, regulatory change (new exchange controls or
reducing the cost of preparing and using import licence requirements, for example) in
paper documentation. the other country (country risk) which results
in loss to one or other party; and that the
Potential problems
counterparty to the transaction will fail.
As with most internationally agreed The risk of loss or damage in transit can be
standards, there are some circumstances managed by arranging some form of transit
which are not covered by Incoterms. In insurance. Both parties may want to consider
addition, both importer and exporter should arranging their own insurance against this
ensure Incoterms are recognised in the loss, as the effect of any consequent loss
counterpartys country, as the terms are will be different for the exporter and importer.
not recognised in some locations. Even The exporter will have to accept an impact on
in situations or locations not covered by cash flow (except in the case of payment in
Incoterms, they can still be used, although advance). The importer may have to cut back
there is scope for confusion between the on production whilst an alternative source of
parties over the division of responsibilities. supply is found.
Moreover, disputes may be difficult to resolve The risk of loss from country risk is more
in court, should the need arise. In these complex, as it requires an assessment
circumstances both parties may benefit from of the likelihood of the counterpartys
arranging their own additional insurance to government imposing new trade restrictions
cover their positions. (such as exchange controls or import
There are additional costs which are not restrictions). It is possible to arrange
covered by Incoterms. Depending on the insurance to protect against loss caused by
term used, this might include the cost of regulatory change from both export credit
insuring the goods and the cost of shipping agencies and private insurers.
goods from the factory to the shipper, or The risk of loss as a result of counterparty
from the port to the importers warehouse. failure varies according to the payment
Both parties need to consider these terms used. Under open account terms,
additional costs when, in the case of the much of the risk is faced by the exporter.
exporter, setting the price or, in the case of The importers creditworthiness is central
the importer, agreeing the contract. to the risk of the transaction. Chief of this
is the risk that the importer will receive the
Assessment goods but either will not pay, will not pay in
Incoterms ease the process of agreeing the full, or pays late (possibly incurring costs for
detail of a contract to supply a consignment the exporters accounts receivable team).
of goods, by identifying clearly which party If the importer fails before title of the goods
is responsible for each stage of the shipping is exchanged, the exporters position is
process. Although some Incoterms make stronger, but only if an alternative customer
clear which party is responsible for the can be found. This depends in part on the
goods at every stage, there is not always lifetime of the goods being sufficient for that
a requirement for that party to arrange to happen (difficult with certain items, such
insurance. Both parties should therefore as perishable foods) and on there being
consider arranging their own insurance for alternative customers (difficult in highly
the whole process. specialised industries). The exporter of a
be necessary for exchange control or letter of credit (L/C) is used, it will specify which
other import control purposes. form of bill of lading (see below) is required.
process, especially when the documents and allows the seller to predict the timing
need authentication by a third party. of the collection of payment.
Collection against acceptance.
Documentary collection Under these circumstances the documents
A documentary collection shifts the balance are exchanged for a bill of exchange. The
of risk from the exporter slightly towards bill of exchange will have been accepted
the importer, compared with open account (signed) by the importer, indicating
terms. Unlike the latter, where the goods payment will be made on the future date
are exchanged on presentation of the indicated on the bill of exchange. This
appropriate document of title, under a allows the importer to manage its cash
documentary collection the importer takes flow, whilst providing additional security to
control of the goods on presentation of the seller in the form of the accepted bill.
an appropriate document of title (typically, This also allows the seller to predict the
the same documents which would be timing of the collection of payment.
presented under open account terms)
together with some form of commitment Note: in some cases, a clean collection
to pay (typically a bill of exchange). (See process is used whereby only the bill of
page 111 for more information on how a bill exchange is passed between the banks.
of exchange works.) The documents of title are sent directly
from the seller to the buyer and there is no
A bill of exchange link between the two. A clean collection is
therefore more like open account trading,
1
Drawee
Drawee as the seller can take title of the goods
Drawer
Drawer 2 without committing to making a payment.
(Acceptor)
(Acceptor)
(Seller)
(Seller) 3 Buyer
Buyer
exchange, which is a commitment to pay If the buyer accepts a bill, the buyers
at the maturity of the bill. Once the buyer bank will hold the bill until maturity and then
has fulfilled its obligations to either pay present it to the buyer for payment. Under
or accept the bill, the buyers bank will a documentary collection, the buyers bank
release the documents to the buyer, giving does not guarantee payment of an accepted
the buyer control of the goods. bill, unless the bill is avalised.
Case study
Case study
The company now has a single central The bank provides a single consolidated
framework agreement with its bank. bank guarantee facility and a personalised
As well as the core products this also trade finance portal for the company and
covers contingent liabilities, and offers its subsidiaries worldwide. As part of the
standard terms and conditions. The move, the company has created a new
treasurer no longer has to negotiate trade finance support organisation, with
with multiple local banks around the national co-ordinators in major countries
world. The margin has been agreed and a central desk assisting smaller
centrally, so any deal is the same, markets. This is important, because trade
whether it is initiated in Shanghai or and project finance is tied closely to local
Singapore. contracts and local businesses.
There are a number of different types of be able to reclaim funds from the seller
letter of credit: in the event that funds are not received
from the buyers bank.
Terms of payment
Sight payment. Revocable or irrevocable
Under these circumstances, the documents Any letter of credit issued under the terms
are exchanged for immediate (sight) of UCP 600 (the Uniform Customs and
payment. In some cases, payment will be Practice for Documentary Credits, issued by
made against a bill of exchange, although the International Chamber of Commerce)
this will depend on the agreement between is assumed to be irrevocable. This means
the parties. This provides relative security the bank issuing the L/C must pay the seller
of payment for the seller, as long as the according to the terms of the L/C, as long as
required documents are in order, and the buyer presents the required documents.
allows the seller to predict the timing of the Changes can only be made to these terms
collection of payment. with the consent of all participants.
Payment at term. An issuing bank (or the buyer) can
Payment will be made at a specified date change the terms of a revocable L/C without
in the future. This is usually calculated the consent of the other party. This clearly
from the date the documents are weakens the effect of the guarantee of
presented to the issuing bank or the date payment for the supplier. For this reason
on the bill of lading, depending on the revocable letters of credit are usually only used
terms on the letter of credit. between companies within the same group.
Case study
Although the confirmed letter of credit was the company able to manage a
offered the company a guarantee of contract of this size and manufacture the
payment, this was conditional on the valves, but it would also be able to present
terms of the letter of credit being met. the necessary documents under the terms
However, in order to be able to meet the of the L/C. Once satisfied on both counts,
terms of the L/C, the company needed to the bank provided a facility using the
finance the sourcing and manufacturing confirmed L/C (which was a commitment
of the valves. The company approached from the buyers bank) as security. A
its bank to ask it to finance production of funding structure was provided which
the valves. enabled the company to fund payments to
key component suppliers.
Before offering the necessary finance, the
bank needed to be sure the company had As a result of the success of this structure,
the ability to fulfil the contract. Critically, the UK company was able to tender for a
the bank needed to ensure that not only contract worth GBP 15 million.
Other types of letters of credit for the profit made by the third party, and
Transferable. the dates will differ, to take into account
This is used where a supplier sells the the different shipment periods and time
product to the buyer through a third party. frames for the presentation of documents.
This allows the third party to provide A transferable letter of credit must be
payment under the letter of credit issued explicitly stated as such (using the word
by the buyers bank and also, if necessary, transferable) at the time of issue.
to keep the identities of the supplier Back-to-back.
and the ultimate buyer confidential from A back-to-back L/C is sometimes
each other. This works when there is used when there are three parties to a
no difference between the terms and transaction, but a transferable letter of
conditions used when the goods are first credit is not suitable. It is in effect two
sold by the supplier to the third party separate L/Cs. The first is issued by the
and then subsequently sold by the third ultimate buyers bank to the seller. The
party to the ultimate buyer. There are two second is then issued by the sellers
major exceptions: the price of the goods bank to its supplier. The arrangement
will be lower for the transaction between is considered a back-to-back L/C if
the supplier and the third party (and the the first L/C is used as security by the
value of the L/C will usually reduce when sellers bank for the second L/C. In
transferred to the supplier), to account contrast to the transferable L/C, the
Case study
Standby letters of credit are being used to reduce costs for traders holding
accounts with exchanges and clearing houses. Arranging standby L/Cs allows
a trader to withdraw cash from accounts held with the exchange. This cash is
then available to meet any of the traders other liquidity requirements. Any cash
requirements arising from a trade at central counterparts can then be met by
drawing against the standby L/C facility.
Banks will typically charge an Current low rates of interest may make these
arrangement fee as well as annual solutions more expensive, even though the
commissions for the standby L/C facility. technique, especially the reduction in credit
However, if the trader commits to holding risk, is still valid. In addition, beneficiaries
some of the cash balances with the bank of standby L/Cs may experience pressure
offering the standby facility, these fees on counterparty limits as a result of falls in
can be negotiated down, or the return banking sector credit ratings. The impact of
on any cash held can generate a slightly current market conditions, and any changes,
higher return. will need to be considered carefully in any
solution developed.
bank) will issue a letter of credit in favour Common errors include the following:
of the seller. This is sent to the sellers
An incorrect number of, or wrongly
bank (the advising bank).
titled, documents presented.
4. Sellers bank advises seller of receipt of No additional documents should be
letter of credit documents from buyers presented, and the seller should take
bank. care to provide the agreed number of
The sellers bank receives the L/C from originals and copies of the required
the buyers bank. The sellers bank will documents.
then check the content of the L/C before
Inconsistent details across the
passing it to the seller.
different documents required.
Depending on the circumstances, the
The goods must be correctly and fully
sellers bank (or another bank) will confirm
described on the invoice to match
the L/C before passing it to the seller.
the description given on L/C. The
5. Seller checks detail of received letter of transport document must accurately
credit. describe the method of transport used,
The seller should check the detail of the including details of all parties to the
received L/C (see checklist, page 102). shipment. The insurance document
If there are discrepancies between the must show the appropriate cover
terms agreed in stage 1 and the detail of (usually starting on or before the date
the L/C, the seller should ask the buyer of shipment). Any bill of exchange
to amend the L/C, otherwise the seller is should be drawn in line with the terms
running the risk of non-payment. Only the and conditions of the L/C, for the
buyer has the authority to ask its bank to correct amount and with appropriate
amend the L/C. endorsements. All documents should
6. Seller ships goods. be dated.
Once the seller is happy with the terms Unauthorised changes made to
and conditions of the L/C, it will ship documents.
the goods according to the terms of the If any changes have been made to
contract, as listed on the L/C. This may be any documents, they must be properly
to a named warehouse or storage facility authenticated.
close to the buyers location.
8. Seller sends prepared documents to its
7. Seller prepares required documents. bank.
Once the goods have been sent, the Once prepared, the documents must be
seller must also prepare all the necessary forwarded to the sellers bank. The seller
documents for submission to its bank. must ensure the documents are received
These documents need to be presented in by the bank by the expiry date on the letter
the form required by the L/C so that they of credit. This must also be within any
match the terms and conditions. Under the limits established either by the transport
terms of a documentary credit, the buyers documents (usually 21 days, unless
banks responsibility is to ensure payment otherwise stated) or by any import licence
is only made when the seller provides requirements.
documents which match those listed on The seller should also confirm its
the L/C. settlement instructions for this transaction.
Case study
9. Sellers bank checks received documents documents. This course of action is only
and sends them to buyers bank. appropriate if the seller can present new
The sellers (advising) bank will check documents within the timeframe shown on
the received documents against the the letter of credit. If this is not possible,
requirements of the letter of credit. or if the differences are minor and there
If the advising bank approves the is a good relationship between the buyer
documents, it will forward them to the and seller, the advising bank may ask the
buyers (issuing) bank. Depending on the issuing bank to authorise payment despite
agreed payment terms (if payment is at the differences.
the exporters bank), the advising bank The alternative is for the advising
may then also pay the seller. (sellers) bank to send the documents to
If the advising bank identifies the issuing (buyers) bank on inspection.
differences between the presented This protects the sellers interests, because
and required documents, it may advise the issuing bank will still hold the title to the
the seller to amend and represent the goods until the buyer authorises payment.
However, the issuing bank is only required arrangements, otherwise payment may
to make payment if authorised by the be withheld.
buyer, who may refuse to accept delivery
Time limit both parties must agree the
of the goods, or may seek to reduce the
time limit for the operation of the L/C. The
purchase price in exchange.
seller must be able to present the all the
10. Buyers bank checks documents and required documents by the deadline listed
arranges payment. on the L/C, otherwise payment could
If the buyers bank is happy there are no be withheld. This time limit should be
differences between the presented and agreed to allow for the compilation of all
required documents, it will arrange for the documents as well as the production
payment by the buyer in exchange for the and shipping of the consigned goods.
release of the documents. The release of Any export and import processes, such
documents to the buyer allows the buyer as getting appropriate licences, should
to take ownership of the goods. also be considered before the time limit
In the event of discrepancies, the is agreed.
buyers bank will take instructions from the
Revocability L/Cs agreed under
buyer, depending on the circumstances.
UCP 600 rules are irrevocable, unless
11. The buyers bank will then pay the otherwise stated.
sellers bank.
Confirmation the seller will also want
If the seller has not already been paid
to consider whether to ask its bank to
by its bank, it will receive payment at
confirm the L/C.
this stage as well. This is usually when
payment is at the importers bank (i.e. What can go wrong
when the documents are presented to
Under the terms of a documentary credit, the
the importers bank).
banks are only concerned with the exchange
Checklist for the letter of credit of documents. Although the buyers bank
does offer a guarantee of payment, this is
The following points should be negotiated
on receipt of agreed documents, rather than
between the parties and then checked by the
on receipt of a certain set of goods. The
seller on receipt of the L/C from its bank:
significant risk to the buyer is therefore that
The details of the parties to the contract the received goods are not as expected. The
both should be listed correctly, as significant risk to the seller is that it does
otherwise payment could be withheld. not submit the required documents either
accurately or in time, or that the buyers
Face value of credit both parties need
bank does not honour the letter of credit. The
to agree the value of the L/C to be issued.
seller can protect itself against dishonour
This will be the invoice value (less any
by the buyers bank by asking its bank to
negotiated discount) plus any additional
confirm the letter of credit.
costs (not bank charges). It should be
stated in the currency of the transaction. International standards
Bank charges only the agreed charges Most internationally applied letters of credit
should be listed on the L/C. conform to the Uniform Customs and
Practice for Documentary Credits (UCP)
Payment terms at sight, or after a
standardised by the International Chamber
specified period; arrangements for
of Commerce. The current version of the
payment (at what point will the buyers
standards is the sixth, known as the UCP
bank pay the buyer when documents are
600, and was adopted on 1 July 2007.
presented to the exporters bank, or to the
Alongside these standards there is a set of
importers bank?).
standards for banks to follow when assessing
Shipment terms again, these need the compliance of documents to UCP 600,
to match the agreed transportation the International Standard Banking Practice
Introduction
There are many different techniques that The alternative is to finance each
a company can use to finance trade. transaction separately. For example, a
These generally fall into either of two main company could choose to discount the
approaches. invoices, or negotiate the trade documents
One approach is to finance trade from the associated with each distinct transaction.
companys general working capital facility. As with any financing decision, there
For example, an overdraft or general bank are advantages and disadvantages to each
line of credit will support any working capital technique. Some techniques will not be
requirement that arises, including the time available to some companies, depending
between the payment to a supplier and on their location, creditworthiness or size.
collection of payment from its customer. Selecting one technique to finance some trade
transactions may have other implications
Working capital for the business as a whole. For example,
discounting liquid invoices may result in
cheaper financing of a particular transaction,
but may prompt a bank to require additional
Pu security on assets protecting another line of
h
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rc
ha
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to
Overdraft Allows a company to run its Available in most Relatively flexible and usually
current or checking account locations, although they available (where permitted) to
with a debit balance. are prohibited in some companies of all sizes. Easy
However, may be repayable jurisdictions. to establish and operate.
on demand.
Often used where the The nature of the A useful technique which
Commodity financing
used when a buyer and on both parties agreeing parties are unknown to each
escrow
These provide a range Most countries operate Suitability will vary according to
of support for companies some form of export the terms of the scheme offered
Export credit
seeking to expand their credit scheme. The in the relevant country. In most
schemes
Overdrafts
Overdrafts can be an effective way to finance through either market practice or regulation.
working capital. Where offered, they are Some countries prohibit companies from
usually relatively flexible, although this will arranging any unsecured overdrafts. In
depend on any terms and conditions applied Venezuela, for example, account holders
by the bank offering the facility. are prohibited from writing cheques with
insufficient funds to support them.
How it works Their availability may be restricted to
An overdraft facility allows a company to short periods. Some banks may only offer
run its current or checking account with a unsecured overdrafts for periods up to
debit balance. Overdraft facilities should be about a month; for longer periods, they
pre-arranged and are sometimes offered by may insist on converting the arrangement
banks without the need for formal security. to secured borrowing. In some countries,
Where available, overdrafts are usually such as Poland, banks require companies
renewable on an annual basis, although to clear their overdraft facilities once a year.
in certain jurisdictions a bank may require Banks can withdraw overdraft facilities on
funds to be repaid before a facility is demand. A bank is most likely to withdraw
renewed. In some locations it is common such facilities from a company which relies
practice to turn an informal overdraft into on them, simply because such companies
a committed facility after a period, often a represent the greatest counterparty risk
month (see next section). to the bank. In 2009 a number of UK
companies reported that their banks had
Advantages withdrawn part of their overdraft facilities
Overdrafts are easy to operate. Because when the UK government arranged a
they are often unsecured, overdraft moratorium on the payment of VAT.
facilities can be set up fairly quickly However it occurs, any withdrawal of
without the need for complex legal overdraft facilities from a company which
documentation. relies on them (whether as a permanent
They provide an additional comfort barrier source of funds or as the funding of last
for companies operating internationally resort) will put significant pressure on that
that face a degree of uncertainty in the companys cash flow. This is particularly
timing of the receipt of payments from the case when the bank gives very short
their counterparties. However efficient a notice of the withdrawal of facilities, as the
companys collection process, there is company has little time or opportunity to
always the risk that a payment due will be arrange alternative funding.
received later than expected. An overdraft Because they are unsecured, overdrafts
facility means payments can still be are often a relatively expensive method of
disbursed on the strength of an anticipated arranging finance. For example, overdrafts
collection, without the risk of dishonour by in Mexico are usually charged at more than
the bank. double the prevailing rate on treasury bills.
They often do not require formal security. The regulatory treatment of overdrafts is
This means assets can be used as less favourable than other techniques,
security for other financing opportunities. such as invoice discounting. To cover
However, the overdraft provider may the capital costs associated with such a
restrict the companys ability to assign its facility, banks are more likely to impose a
more liquid assets to other lenders. facility fee and a non-utilisation fee.
Overdrafts can be arranged by companies They can indicate a degree of
of all sizes. inefficiency within the companys
treasury department. The existence of
Disadvantages overdraft facilities can weaken pressure
Overdrafts are not available everywhere, on treasurers to manage cash tightly,
Case study
One particular concern for the customer but with a further two tranches available at
was to avoid incurring an unnecessary the customers election within 30 days of
increase in costs associated with an two specific pre-agreed dates, to coincide
increased facility that might not see full with the forecast increase in demand.
utilisation at the outset, but with the
anticipation that utilisation would rise as From the banks point of view, the
additional demand and/or higher prices restructured facility better reflected the
kicked in. The banks solution was to amount of debt required, whilst the
replace the existing overdraft structure, customer could confidently seek out new
which had suited the ongoing operational business opportunities in the knowledge
needs of the business thus far, with a that additional financing would be
smaller overdraft combined with a new available as and when required, with the
revolving credit facility arranged with core added benefit of only paying for the level
facility limit to be available immediately, of facilities actually being used.
Case study
Factoring
Debt factoring is a technique that allows left with the assets if invoices remain unpaid.
a company to raise finance against the (This is because in such industries it can be
anticipated cash inflows expected from sales. difficult to find an alternative purchaser for
The finance raising company, usually a small these assets, especially if the items have to
to medium-sized entity, sells its invoices to be recovered first.) In all cases, factoring is
a factor (the entity offering the finance). In available to companies trading on some form
return, the factor will manage the process of of credit, with a delay between the issuance
collecting the invoiced receivables from the of the invoice and receipt of the cash.
companys customers. The company should perform its own
Factoring services are available from both credit check of the factoring company. If the
specialist factoring companies as well as factoring company fails, the agreement is
bank subsidiaries. likely to leave any moneys due to the factor,
not the company raising finance. Failure of the
How it works factor may result in failure of the company.
Factoring is a long-term arrangement The factoring company will also set limits
between the company seeking to raise to the agreement. At the very least, the factor
finance and the factor. It is typically used to will set a limit with regard to the maximum
effectively speed up cash collection, reducing advance relative to the value of the invoices.
the reliance on loan finance to bridge the This will vary, but will typically be in the range
gap between the issue of the invoice and the 8090%. In addition, the factor may impose
receipt of cash. Because the management a limit to the absolute level of credit that it is
of the sales ledger is effectively outsourced prepared to advance to the company.
to the factoring company, the company also The agreement should consider
benefits from reduced internal administration whether the factor will have recourse to
costs, although this arrangement may give the borrower in the event of non-payment.
rise to customer service problems. Non-recourse factoring represents a
When seeking to establish a factoring greater risk to the factor, so it is more
arrangement, the company will need to identify expensive than recourse factoring. In
whether it can proceed, especially if alternative addition, a factor may only offer recourse
funding arrangements, such as overdrafts factoring, for example if there is a pattern
or term loans, are in place. This is because of non-payment, or the factor considers the
pledging invoices to the factoring company risk of non-payment to be too great.
will affect the way the companys liquidity is It is important to negotiate appropriate
viewed by the other finance providers. A term terms with the factor before entering into the
loan agreement may also explicitly limit or agreement. In particular, the process through
prohibit a factoring arrangement. which the factor goes to approve invoices for
In order to be suitable for a factoring factoring needs to be appropriate, ensuring
arrangement, the factoring company will the company benefits from being able to raise
want to explore the companys business, cash on the greatest number of invoices. Any
including its cash flow, before entering into an credit limits imposed by the factoring company
agreement. In general terms, companies with should be assessed for the same reason.
high volumes of standard invoices are more The factors method of advancing payment
suitable for factoring than companies which must also be understood. If recourse factoring
generate small and infrequent numbers of is agreed, the two parties must agree the
high-value invoices. This is because the risk point at which a debt is considered unpaid.
to the factor of the standard invoices can be Finally, the company must understand the
more easily assessed. Moreover, where the nature of the agreement period, especially
company seeking finance is in a specialised the notice that both parties must give to end
industry, or the items being factored are the agreement (bear in mind the factor may
perishable, the factor will be nervous of being also decide to end the agreement).
When comparing the cost of factoring the factor. The finance charge (the interest)
against, for example, overdrafts, it is may be lower for factoring than for an
important to recognise that factoring includes overdraft, because the factor has security in
the credit management element, although it the form of the invoice.
does require the company to sell invoices to
Invoice discounting
Invoice discounting is similar to factoring, in companies that are suitable for financing by
the sense that the finance is provided against a factoring company (see above) are also
the sale of a companys invoices. Unlike suitable for invoice discounting. However, the
factoring, there is no credit management invoice discounter will also assess the quality
service, so the company retains responsibility and effectiveness of the companys accounts
for collecting payment from customers and receivable processes before entering into an
maintaining the companys sales ledger. agreement, as these will remain under the
Like factoring, invoice discounting control of the company.
allows the company to receive cash very The invoice discounter will also set limits
shortly after raising an invoice. However, to the agreement. At the very least, the
this arrangement is not usually disclosed discounter will set a limit on the maximum
to customers, as the company retains advance relative to the value of the invoices.
responsibility for collecting the payments and This will vary, but will typically be in the range
chasing bad debts, and the invoice discounter 8090%. In addition, the discounter may
has no direct relationship with the companys impose a limit on the absolute level of credit
customers at all. That said, the invoice it is prepared to advance to the company.
discounter will assess the quality of the As with factoring, the invoice discounter will
companys customer base before agreeing to seek security from the underlying assets. If
offer finance. these may be difficult to recover and sell to
Invoice discounting is commonly available other parties in the event of non-payment, an
to slightly larger companies than can access invoice discounter may refuse to agree terms,
factoring. This is partially because the or may only do so on a lower proportion of
invoice discounter will want to be confident the invoice value.
in the companys track record of collecting It is important to negotiate appropriate
on the invoices. terms with the invoice discounter before
Invoice discounting is available from entering into the agreement. In particular, the
subsidiaries of banks as well as from process by which the discounter approves
specialist providers. invoices needs to be appropriate, ensuring
the company benefits from being able to
How it works raise cash on the most number of invoices.
Invoice discounting is a long-term financial Any credit limits imposed by the invoice
arrangement between the company seeking discounting company should be assessed for
to raise finance and the invoice discounter. the same reason. The discounters method of
As with factoring, it is used to accelerate advancing payment must also be understood.
cash collection, reducing the reliance on loan Finally, the company must understand the
finance to bridge the gap between issuing the nature of the agreement period, especially
invoice and receipt of cash. the notice which both parties must give to end
When seeking to discount invoices, the the agreement. (Bear in mind the discounter
company will need to identify whether it can may also decide to end the agreement.)
proceed, especially if alternative funding As with factoring, the company should
arrangements, such as overdrafts, are in also perform its own credit check of the
place. This is because pledging invoices to invoice discounter. However, because the
the invoice discounter will affect the way the company retains control of the sales ledger
companys liquidity is viewed by the other in invoice discounting, the impact of the
finance providers, or may breach undertakings invoice discounters failure would be less
given to other providers of finance. devastating than a factors failure. This is
In order to be suitable, the invoice because the companys customers still make
discounter will want to explore the companys payments through the company (rather than
business, including its cash flow, before to the invoice discounter). In the event of the
entering into an agreement. In general terms, failure of the invoice discounter, the company
would face the loss of its working capital invoice discounting services as the borrower
finance. (Under a factoring arrangement, is not committed to a particular invoice
the company would face the loss of both discounter. Instead, participants in the auction
the receivables, taken as security, and the bid against each other on both the proportion
revenue stream from its customers.) The of the value of the invoice and the discount
accounting treatment will vary according to charge, to the benefit of the borrower, as long
the terms of the agreement. In most cases, as a lender is available to lend against the
invoice discounting agreements do not fully invoice. At present, these services are only
transfer the risks and rewards associated suitable for SMEs, with financing primarily
with the invoices to the discounter, so the provided by high-net worth individuals and
company has to account for the funding as a hedge funds.
loan. Because of the potential complexity of
individual transactions, specialist accounting Advantages
advice should always be sought. There are a number of advantages from
invoice discounting.
The invoice discounting process It provides clear working capital finance
A typical invoice discounting process is as at the time it is needed, not according
follows. to the terms of a loan agreement or
The company raises an invoice. overdraft.
The invoice is sent to the customer and Finance is provided against invoices so,
copied to the invoice discounter. subject to any credit limit, finance can be
The invoice discounter approves the available as a company grows.
invoice and pays the agreed proportion to Invoices are reserved for short-term
company. working capital financing, meaning other
The company collects payment from assets such as property are available
its customer, with the cash going into to secure other, perhaps longer-term,
a designated account over which the financing.
discounter has priority rights. Once Once the invoice has been approved, the
payment is received, the company refunds company has access to cash which can
the invoice discounter, including fees and then be recycled back into the business.
interest charges. In some cases payment There is no requirement to use overdrafts
will be advanced on a monthly basis. If or other unsecured funding to bridge delay
the value of invoices issued has increased in payment terms.
over the month, the discounter will pay the The scrutiny of the invoice discounter
company. If the reverse is the case, the can help to improve the companys credit
company will repay the discounter. This management policies and accounts
will be at the same proportionate discount receivable processes.
rate as initially agreed. Unlike factoring, invoice discounting is
usually not disclosed to the companys
The invoice discounter will levy interest clients, meaning the company maintains
charges and a fee. Interest charges will be the critical trading relationship with its
set at a pre-agreed margin over the relevant customers throughout the sales process.
local base rate, and will be charged on the
amount outstanding. Fees are usually a Disadvantages
function of the companys turnover (anything As with any other form of financing, there
from under 1% of turnover to 2%), and are disadvantages to the use of invoice
perhaps the number of customers or invoice discounting.
cycles per year, which may be stepped to Invoices are among the most attractive
adjust for a companys growth. formal or informal sources of security for
Since 2008, invoice discounting services lenders. It may be difficult to raise other,
have become available via internet-based especially short-term, finance if invoices
auction sites. These differ from traditional are committed to an invoice discounter.
By analysing customers payment less likely to work if the invoice values are
practices the invoice discounter could put toosmall.
pressure on the company to reduce sales Invoice discounting will be cheaper
to certain of them. than a factoring arrangement, although it is
In a weak trading environment, important to recognise that factoring does
increasing proportions of the companys include the credit management element. The
cash will be spent on interest payments finance charge (the interest) may be lower
to the invoice discounter. for invoice discounting than for an overdraft,
If the invoice discounter fails, this can because the discounter has security in the
cause serious problems for the company form of the invoice.
as the company is dependent on it for Many companies prefer to use invoice
working capital finance. discounting than factoring, because the
It can be difficult to end a discounting company continues to manage the customers
relationship as the company will rely on and the sales ledger. However, companies
the cash from the invoice discounter to will need to be prepared for the invoice
fund working capital. discounter to examine their accounts
receivable and credit management processes
Evaluation before agreeing to extend finance.
Invoice discounting works best for companies Auction-based invoice discounting is still
where the company has a relatively large a new product. It does offer the opportunity
number of customers all trading on the same for better financing rates without the risk
terms, and where the accounts receivable associated with a commitment to a single
function can be demonstrated to be effective invoice discounter. However, the flexibility
and efficient. comes with the risk that funding against any
It is less effective where the company particular invoice (or set of invoices) may not
is reliant on a small number of customers be available at very short notice, or only at
(or one major customer) or where each very high cost.
customer has negotiated its own terms. It should be noted that both factoring and
Although large numbers of standard invoice discounting receive more favourable
invoices are appropriate as a basis for treatment than an overdraft, under the Basel
invoice discounting, the relationship is regulatory regime.
Securitisation of receivables
Larger companies that generate a sufficient technique can be used. It also shows how
volume of receivables may be able to raise the proceeds from a transaction can be used
finance through securitisation. The following in a variety of ways.
case study is an example of how this
Case study
The group wanted to open a EUR 250 million funding facility by securitising
trade receivables denominated in EUR and USD. The receivables were
originated by the groups operating subsidiaries in the USA and a number of
European countries.
The groups bank and another two (indirectly in the case of Italy and the
banks arranged for the establishment USA). The structure is operated without
of a special purpose vehicle (SPV) in recourse to the company, which receives
Ireland. Using funds raised via the issue funds at the cost of the CP issuance plus
of A1/P1-rated commercial paper (CP) a credit-related margin on any drawn
into the asset-backed commercial paper funds. This facility has freed cash for the
(ABCP) market, the SPV purchases the distribution company and allowed it to
receivables directly from the company refinance some acquisition financing.
Advantages Disadvantages
There are a number of advantages for a As with any other form of financing, there
company to extend finance along its supply are disadvantages to the use of supply chain
chain. finance.
There are significant cash flow benefits Participants may face a significant initial
to all participants. The strongest credits set-up cost, although this may be reduced
will still have access to bank and other if technology changes are included as
external funding when markets reduce the part of a wider project.
availability of liquidity to weaker credits. Suppliers may be nervous about
By exchanging information on approved committing to a financing structure
invoices, all participants have greater operated by a core customer, especially
visibility along the supply chain. This builds when they have limited access to other
trust between all the participants and allows sources of finance. They may be wary
for disputes to be resolved more quickly. of sharing too much information with
Together, this helps to reduce the trade their counterparts, and be suspicious
risks associated with the transaction. that once they are tied into the structure,
Because the flow of information is the customer will try to negotiate further
improved, all participants can manage discounts in price.
their cash flows more efficiently. Suppliers The buying company will need to take
can anticipate more accurately when care when establishing the structure to
they can expect payment from their ensure that its trade creditors are not
customers. In the case of participation in reclassified as a debt to the financier.
the programme, the suppliers will be able The company sponsoring the structure
to arrange payment usually within two may find it more difficult to raise other
or three days of submitting an invoice. finance, as some of its credit capacity
Whether they choose to participate or not, in the market will be used up in
the suppliers only need to participate in effectively supporting finance provided
the supply chain finance programme when to other entities.
it suits them, not as a precaution.
The buying company has greater Evaluation
confidence that its suppliers will have As long as all parties are happy with the
access to liquidity, helping to minimise the concept of supply chain finance and its
risk of supplier insolvency. requirement for sharing information, it can
Because this financing is arranged on provide a significant number of benefits for
invoices, suppliers are free to use other all participants.
assets to secure other borrowings, For a programme to be successful, there
potentially a more efficient use of assets. must be an established trading relationship
The buying company may also be able to between both parties. Both parties must feel
amend its purchase contract terms so as confident that the structure is in their mutual
to improve its own working capital position interest, in both the short and longer terms.
or pricing. If structured appropriately, a supply chain
In accounting terms, the supplier can finance programme will improve liquidity
achieve cash earlier than normal, and along the supply chain, mitigate risk between
record that as settlement of a receivable the participating parties and enhance sales
rather than as new borrowings indirectly via a more efficient use of financial
Finally, these improved efficiencies resources in the production process.
will result in more efficient production, As a theoretical concept, supply chain
improving the products competitiveness finance should be attractive to all parties
in the end market. Fewer resources need involved. Although the number of supply
to be set aside to manage risk. Working chain finance programmes continues to grow,
capital funding at almost every stage will overall the take-up remains relatively low.
be cheaper. When programmes have been established, it
can be difficult to bring suppliers on board, its suppliers cash flows in a similar way to a
as a result of a combination of suppliers supply chain finance structure.
suspicion and work required to permit them to All these factors together suggest a
participate. In July 2010 a working group set greater role for supply chain finance in the
up by the Bank of England and chaired by the future. At present, supply chain financing
ACT concluded that growth in this technique structures are being developed largely
would be slow and would benefit from at the behest of the largest companies.
increased standardisation of the product and As discussed elsewhere in this book, the
a better level of background understanding motivations for developing such structures
amongst companies. In October 2012, David are varied, whether to improve liquidity in
Cameron provided further backing for supply the supply chain, to mitigate risk or, in some
chain finance as a way to support small cases, to enhance sales.
and medium-sized enterprises. A group of The following case study illustrates how
38 companies supported a Supply Chain one company has used a supply chain finance
Finance scheme, recommended by the structure to manage its own working capital
Breedon Taskforce on Non-bank Lending. more efficiently, while reducing risk along its
It is possible to arrange a similar structure supply chain at the same time. Critically, the
without using a third party supplier through solution includes a significant integration of
the use of early payment discounts or cash management and trade finance activity,
dynamic discounting. These would have to which is made possible by improvements
be initiated by the supplier and effectively in technology over recent years. Over time,
result in the buyer funding the supplier for as it becomes easier to share information
the period covered by the discount. This between companies as electronic messaging
is effective for the supplier as long as the is standardised through the use of XML and
discount rate is less than its external funding other technologies, this form of cooperative
rate. The buyer benefits by strengthening working will become common.
Case study
The solution involved the division its involvement in the accounts payable
centralising its treasury operations and process. The company uploads all of its
establishing a true end-to-end payables approved invoices (payables) automatically
solution, including a supply-chain finance from the companys ERP system to its
(SCF) programme. As part of this process, bank on a daily basis. Invoices relating
the company was able to automate a to suppliers which participate in the SCF
number of its cash and trade processes, programme are filtered by the bank on
including its accounts payable function. receipt to its trade platform. Other invoices
Central to the success of the SCF is are forwarded directly to the banks cash
the way the company has minimised management system.
Once the invoices from suppliers in the The banks cash management system
SCF appear on the banks trade platform, generates a series of reports back to the
suppliers have the option of selling them company, giving the latter visibility on all
to the bank to accelerate cash receipt. the flows it requires. Once the system has
If the supplier chooses a discounted executed the payment run on behalf of the
payment, the bank pays on a next-day company, all payments are automatically
basis. The bank then collects payment reconciled, whether the supplier is part of
from the companys cash management the SCF programme or not.
account on the invoice due date.
As a result of implementing the SCF
If the supplier does not discount programme, the company strengthened its
the invoice, payment information relationships with its strategic suppliers,
is uploaded to the banks cash all of which were able to participate. With
management system. This then initiates the bank placing the credit risk on the
payment from the companys account company when financing its suppliers,
to the supplier on the invoice due the company was able to reduce the risk
date. Invoices relating to suppliers not of supplier default. At the same time, this
participating in the SCF programme are supply-chain financing element allowed
paid via the banks cash management the division to mitigate the impact on
system as normal. From the companys suppliers from extending days payable
perspective, only one file is uploaded outstanding (DPO) by up to 90 days
to the bank, which then manages the (thereby improving its working capital).
entire payables process, including those Finally, the automated solutions and
suppliers participating in the SCF. This the reduction in the number of bank
reduces the companys workload and relationships have given the regional
minimises the touch points between treasury much greater visibility and control
bank and corporate. over the groups European operations.
Cash management and accounts payable process with supply chain finance
Match invoice to PO
Discounted
Match invoice to goods
payment
receipt
Non-SCF invoice file
Obtain authorisation PaymentNon-discounted
updateinvoices
Release for payment
Regular
Prepare/review payment
payments Non-discounted
proposal
payment
Execute payment run Electronic
Bank statement
banking
Regular payment
system
Case study
The company opted for an approximate the company to improve its DSO via a 90%
MXN 900 million revolving receivables utilisation rate. This has also allowed the
purchase programme, in which all company to meet its balance sheet and
receivables are sold on a non-recourse working capital objectives.
basis. Eligible receivables are investment
The bank has also been able to provide a
grade debtors (with a minimum credit rating
USD 100 million supplier finance solution.
of BBB ). To be considered as eligible
So far, the company has introduced
for purchasing under the programme, the
more than 60 of its core suppliers (from
tenor of any receivable cannot be more
different countries around the globe) who
than 120 days.
are able to view purchase orders and
Under the programme, the company invoices online via the banks electronic
sells eligible receivables to the bank at a trade platform. This has improved the
discount to the face value. The company efficiency of the accounts payable side
then collects payment from its debtors, by reducing errors and delays, whilst
via a centralised bank account, which it simultaneously building trust with the
then uses to credit the bank on the agreed companys core suppliers and extending
payment date. This project has enabled its DPO.
These case studies show how larger structure, there are operational risks which all
companies can benefit from supply chain parties need to consider before deciding to
finance solutions. There are other examples participate. However, it does seem likely that
in this book showing how smaller companies, uncertainty in the banking sector, combined
especially SMEs, without as much access to with technological improvements, will result in
finance solutions can also benefit from supply a greater use of supply chain finance.
chain finance solutions. As with any financing
Forfaiting
Forfaiting is a similar technique to invoice exporter will need to approach a forfaiter
discounting, and is usually applied to and to disclose the details of the transaction,
international trade, although it is possible shipping and the importer. In addition, the
to arrange it on domestic transactions as forfaiter will want to know the credit terms
well. Unlike invoice discounting, the finance agreed, including whether any guarantees
is usually arranged on presentation of a support the importer (in the form of a letter of
debt instrument, rather than an invoice. credit, for example) before offering details of
Instruments suitable for forfaiting include the likely charges.
bills of exchange, promissory notes and The next stage is for the forfaiter to agree
other similar documents that are a legally to purchase the debt instruments associated
enforceable obligation to pay. (In other with the transaction. Once the forfaiter
words, with invoice discounting the finance makes a commitment to do so, the exporter
is arranged against an instrument provided is also committed to the sale. It is important
by the seller, usually an invoice; in forfaiting therefore that the detail of the sale of the
the finance is arranged against an instrument debt instruments is carefully negotiated. In
provided by the buyer, such as a bill of particular, care must be taken to describe
exchange.) To be suitable for forfaiting, the accurately the nature of the underlying
instrument must be transferable. transaction in the agreement. This must match
Because forfaiting is arranged using the the detail provided in the debt instrument and
payment obligation as the security, rather other documents the forfaiter will want to see
than the invoice itself, forfaiting is always before settling the commitment.
offered without recourse to the seller/exporter At the same time, the details of the
(which sells the debt to its bank or finance forfaiting agreement must be agreed.
company, the forfaiter). However, in most This will include the precise detail of the
cases the debt is supported by some form of instrument to be purchased, the process by
bank guarantee, providing extra security to which the forfaiter will assess accompanying
the forfaiter. The bank guarantee can be in a documents before releasing funds, any
variety of forms, including a standby letter of interest charges (these can be floating or
credit facility, an avalised bill of exchange or fixed), the denomination of the payment from
an explicit guarantee. The forfaiter assesses the forfaiter to the exporter, and the deadline
its exposure to risk on the basis of the credit for the submission of documentation by the
status of the bank providing the guarantee. exporter.
Forfaiting is usually arranged against Once agreement with the forfaiter is
receivables over a period of two or more reached, the exporter can agree and finalise
years, although shorter terms can be the contract of trade with the importer.
possible. Forfaiting transactions are usually Depending on the nature of the transaction,
arranged in an international currency, a letter of credit or other guarantee may be
typically EUR or USD, with a typical minimum used in the contract. After shipping the goods,
transaction of EUR 100,000/USD 100,000, the exporter will receive documents from the
up to a maximum of a few hundred million in importer (or the importers agent). On receipt,
either currency. the exporter will forward these documents
to the forfaiter. The forfaiter will examine
How it works the documents against the terms of the
As with factoring and invoice discounting, commitment to purchase the debt obligation.
for forfaiting to be available, the underlying If the forfaiter is satisfied, the funds will be
transaction will need to be arranged on released to the exporter. The forfaiter then
credit terms. collects payment from the importer, with
Whilst in the process of arranging the the debt obligation (and, where used, bank
transaction with the buyer/importer, the seller/ guarantee) acting as security.
Commodity financing
Commodity financing is a technique Insurance will also need to be arranged.
employed by companies to finance the Identifying the potential risks which need
importation of raw materials or other critical to be insured against needs careful
input for production. As with other trade attention, especially when a commodity
finance techniques, the core process is is being transported internationally. This
designed to finance the working capital is particularly the case when goods are
which would otherwise be tied up in the raw being exported to new markets, where
materials or other inputs. local business practices and customs
Commodity financing is often used where regulations may differ. Where warranties
the underlying goods are raw materials, or pledges form part of a transaction, both
sometimes perishable, easily moved and parties must take care to comply with the
saleable in their current state (rather than details, otherwise insurance companies
as a finished product), tradable and where may refuse to pay, in the event of loss.
a terminal market exists to hedge price risk.
Metals and oil-related products are both Advantages
typically financed this way. Third-party finance frees up working capital
otherwise tied up in commodities and
How it works raw materials. This has potential benefits
There are many different ways of structuring throughout the supply chain, especially
a commodity financing transaction. At its where finance may be needed to extract
simplest, commodity financing allows one the resources, whilst the entity extracting
party to purchase a commodity from the the raw material may have a poor or
producer and hold it until the goods can be limited credit history and access to limited
sold on. It eliminates credit risk for parties local finance. It is particularly beneficial to
along the supply chain, as the financier acts traders in these commodities, as traders
as the trusted party to provide payment to typically have limited equity bases and
the producer and guarantee payment from therefore limited opportunity to access
the final recipient. The financier is protected other more traditional sources of finance.
by taking security over the commodity for the Commodity finance typically involves
period it is being financed. financing stock at the outset. This then
The nature of the commodity being converts into a receivable. When the
financed usually determines whether receivable is repaid, this brings the
the financier wants to take control of the transaction to a close. In effect, this
commodity itself as security for the finance, structure closely aligns the funding to the
and also what sort of financing is required. commodity being financed.
When arranging commodity finance, Banks and other financiers may be
both parties must take care over a number happier to lend against unprocessed
of details. materials, as they have a wider potential
Whether security is required by the market if they need to realise the security
financier. If so, will title over the to repay the loan.
commodity suffice, or does additional Finance is available on a whole range of
security need to be arranged? A number commodities, from agricultural products
of banks secure the financing on a pledge through precious and non-precious metals
of the goods. This means the borrower to oil-related products.
fulfils the transaction, but the bank retains
ownership in the event that the transaction Disadvantages
is not repaid. (Technically this is not the If the price of the commodity is volatile, it
same as taking title.) This would, though, can be difficult to arrange finance for its
give the bank the option of selling the purchase (without also tying in a hedge of
commodity in the event of default. the underlying commodity).
Case study
Leasing
Leasing is a technique which allows a The precise distinction between finance
company to have access to a particular and operating leases is determined by the
asset, while paying for it over an extended local accounting rules. Under International
period (rather than up front). The precise Financial Reporting Standards (IAS17), a
accounting treatment, including whether the finance lease is a lease contract which fulfils
asset is recorded in full on the balance sheet one or more of the following conditions.
along with a notional financing loan, depends The borrower takes ownership of the asset
on the way the prevailing local accounting at the end of the term.
rules view the terms of the lease agreement The borrower has the option of buying the
(i.e. whether the agreement is considered a asset for below its fair market value.
finance lease or an operating lease). From a The term of the lease represents almost
working capital perspective, this means cash all the economic life of the asset.
is available for other purposes. The net present value of future payments
How it works by the borrower at the beginning of the
lease under the terms of the lease is equal
All leases allow the borrower (lessee) to or close to the fair value of the asset.
use a particular asset, which is owned by a
The asset cannot be used by another
specialist finance company (lessor) for the
borrower unless major changes are made
term of the lease.
to the asset.
There are essentially two types of leases,
finance leases and operating leases, which A finance lease will have a larger impact on a
have slight differences between them. companys balance sheet than an operating
Generally speaking, an asset used on an lease, reflecting the fact that the borrower is
operating lease will have a significant residual assuming most of the risk of the transaction.
value at the end of the term. This allows the The effect of a finance lease is to increase
lessor to sell the asset to the borrower or a both assets and liabilities on the balance
third party at the end of the term. On the other sheet. There will also be an impact on the
hand, a finance lease tends to be structured cash flow statement, with both the interest
in such a way that the lessor recoups its charge and the asset value being recognised.
investment in the asset over the term of the However, proposals first issued by the
lease, at the end of which the asset has very International Accounting Standards Board
little residual value. These differences result in 2009 will change the distinction between
in the borrower assuming different risks finance leases and operating leases. These
depending on the type of lease used. proposals will mean that operating leases
Under the terms of a finance lease, will also be capitalised on the balance sheet
the borrower is usually responsible for of the lessee along with the recognition of a
maintenance of the asset under the corresponding liability. A second exposure
agreement. As a result, the borrower draft is due to be released in 2013. In this
assumes most of the risk associated with draft, the accounting treatment is expected
the transaction. Under an operating lease, to be determined by the extent to which the
the finance company can be responsible lessee consumes the asset. For example, a
for maintenance. Because the contract will property lease (where the asset value does
be structured such that the asset has a not change significantly over the lease term)
significant residual value at term, the finance should be accounted for differently than an
company needs to be able to realise that equipment lease (which may have a low
value, whether by selling the asset to the residual value).
borrower or a third party. Consequently the Leasing can be used to facilitate trade.
finance company is assuming much of the The further element for the borrower is
risk associated with the contract under the to establish whether to lease from a local
terms of an operating lease. finance company or on a cross-border basis.
Project finance
Project finance is usually arranged to finance and/or a time limit, for instance up to ten years.
large-scale construction and manufacturing The remainder is controlled by a new entity
projects, including roads, mineral extraction which will take ownership of the project after
plants, power stations and pipelines, as well as the time limit has been reached. In the case
ships and aeroplanes. Because of the nature of countertrade, the country which is seeking
of the assets or even business that is being to finance the project will not need to find the
financed, project finance is not always defined funds to construct the original project.
as a trade finance technique.
The scale of these projects, which typically Advantages
involve a large number of different companies, Because the project is managed by a
means a separate entity is usually established separate legal entity, participants are able to
to manage and fund the project. keep those activities separate and at arms
length from the rest of the company.
How it works
Funds do not have to be arranged locally.
The underlying principle is that the separate Because of the existence of a separate
entity is legally independent from all the legal entity, funds can usually be arranged
participants. This entity accepts funds from on international markets, either through
banks and other sources. In turn, it funds the loans or bond issues. These funding
various participants to perform their tasks. streams are not dependent on the appetite
The entity will enter into contracts with those of individual local markets, which is
participants, who will commit to providing a especially important for infrastructure-type
set service by a predetermined date. If the projects in relatively small countries.
contractors do not complete their work by that The separate legal entity also helps to
date, the entity will have recourse to them. manage the country risk associated with any
Once the project has been completed, the project, especially when significant funds
financiers will receive revenue from its ongoing are injected into the project from abroad.
operation. There is no further recourse to the
contractors. Disadvantages
There are variants of project finance Despite the arms-length structure, it can
structures which are particularly suitable to be difficult to manage country risk. This
financing projects in developing countries. is particularly the case for high-profile
Buildoperatetransfer schemes involve the infrastructure projects, where the local
same underlying structure, a legally separate government may be tempted to interfere in
entity established to build the project, but this the progress and operation of the project.
is granted the right to operate the completed Project finance relies on significant legal
project for an agreed period of time, before documentation to protect the interests of
control of the project is transferred to the all participants. This can take some time to
government or other body for a specified sum agree initially. In the event that one party
(sometimes zero). does not meet its commitments, seeking
Countertrade is a feature of some projects resolution can also be difficult and costly in
in developing countries. Again, the underlying terms of time and money.
structure is the same, with a separate legal
entity being responsible for delivery of the Evaluation
project. In this case, the financiers will be Project finance is best suited where a discrete
repaid by taking control of the output of the project can be identified and where a number
project. For example, in the case of a project of different companies will be participating in
to build a mine to extract copper, the financiers the construction process.
would receive the raw copper, which they For companies seeking to participate in a
could then sell on the open market. This could construction project abroad, it provides the
be subject to an output limit, for example the mechanism to hold the project at arms length,
financiers have control of 25% of the output, reducing country risk.
Case study
One of the companys large strategic suppliers wanted to be paid faster as part
of its cash management strategy.
The European supplier had previously This means the supplier now receives
been supplying materials on 105 days cash immediately. The structure has also
open account terms. It approached the benefited the UK companys cash flow, as
UK company with a request for earlier it was able to negotiate improved payment
payment. The UK company agreed terms to 165 days, at which point it pays
to consider the request because it the full amount of the invoice amount to
recognised the importance of the supplier the bank to complete the payment circle.
to its own business. In this instance the solution remains trade
payable in the UK companys books.
The UK companys bank worked together
with both companies to develop a This structure is based on leveraging the
EUR10million supply chain finance creditworthiness of the UK company, which
solution. Under the terms of the structure, means the European company has access
the European supplier submits its invoices, to funding at rates which it may not be able
as before, to the UK company. The UK access. Furthermore, the bank has no
company approves the invoice and recourse to the European supplier in the
then uploads it to the banks proprietary event of default by the UK company. Both
platform. Both companies have access to companies benefit from the arrangement
the platform, which allows them both to by seeing improvements in cash flow and
verify which invoices have been approved. working capital metrics. The structure has
also strengthened the trading relationship
On receipt of the approved invoices, the
between the two companies and their
bank pays the supplier the full face value
respective supply chains.
of the invoice, less an agreed discount.
access to liquidity became harder. With in the supply chain. For international
suppliers wanting payment sooner and trade, the other major risk to manage
customers taking longer to pay, in both is that of foreign exchange risk. Again,
cases because of their own weakening transactions can be structured in such a
liquidity positions, any structure which way as to minimise the impact of foreign
accelerates cash into a companys exchange risk.
business will reduce pressure on raising
Enhance sales.
finance elsewhere.
The third major objective is for a company
Mitigate risk. to finance its customers via a structured
Many companies look to structured transaction with a bank. This can allow
trade finance to help them mitigate the company to extend payment terms
the risks associated with trade. Chief to its customers, which may be helpful
of these risks is that of non-payment in an environment where their cash flow
at some point along the supply chain. is under pressure. At the same time, the
Transactions can be structured to protect finance deal may accelerate the inflow of
against non-payment, perhaps by cash to the company, allowing it to shorten
transferring risk to the strongest credit payment terms for its suppliers.
Case study
under a variety of tenors ranging from payment by one of the buyers, the bank
30 to 60 days. The programme was follows up directly with the buyer for
structured to offer additional terms of up payment, after notifying its customer
to 180 days. The company is still paid on of the delinquency. The bank and the
its standard terms of 3060 days from company have developed a mutually
invoice/onboard bill of lading date. The agreeable arrangement for follow-up
bank takes ownership of the receivables on late payments, including when the
at this time and finances the buyers for exercise of any drawing under the
the difference between the original and guarantee may occur. Late interest is
extended tenors. Both parties benefit from billed to the buyers but is also ultimately
this arrangement. First, the companys the companys responsibility.
customers benefit from financing at very
favourable rates compared to local rates. The structure took about three months
Second, the company benefits from no to negotiate. Initially launched to support
impact to its days sales outstanding US customers, the programme was later
(DSO) and not having to carry the expanded to Western Europe and Latin
receivables on its balance sheet for America as it became clear it would
extended periods. Instead, the receivables benefit customers around the world,
are carried as a contingent liability in the especially those in countries with very
footnotes. Obviously, this form of financing high interest rates. The programme
does not qualify for a true sale opinion currently operates in two currencies, USD
under existing accounting standards, but it and EUR, though it can operate in more.
does move the receivables off the balance The company has noted the goodwill
sheet and into the notes. the programme has engendered with its
The companys side-guarantee may or customers. Another, unexpected, benefit
may not be disclosed to buyers in the is that in paying the bank rather than the
financing agreement they sign with the company, the customers appear to be
bank. However, in the event of non- more disciplined in making timely payment.
Trade-related escrow
An escrow account is used when a buyer agreement with the bank (or other provider)
and a seller both want to protect themselves that will set out the terms and conditions
against counterparty risk. In the case of the under which the bank will release cash (or
buyer, an escrow account allows the company deposited documents) to the seller. When
to protect itself against the risk that it pays for the bank receives cash from the buyer it will
substandard goods. In the case of the seller, advise the seller. The seller will then send the
an escrow account provides the company goods or perform the service under the terms
with a guarantee of payment. The bank at of the contract. On receipt of advice from the
which the escrow account is established acts buyer that the seller has met the conditions
as the intermediary between the two parties, of the transaction, the bank will then release
minimising the risk of loss to both. the cash or documents to the seller. The
Escrow accounts are most commonly documents needed by the bank will be listed
used in new trading relationships where two in the escrow agreement and may include a
parties are not well known to each other delivery note, proof of acceptance and/or an
and third-party credit assessments are not inspection certificate.
readily available. The bank will charge an initial fee for
arranging the escrow account and further
How it works fees for every release of payment under the
An escrow account can be established by agreement. Such fees will vary according to
either party, which then asks the counterparty the sums released and the complexity of the
to transact through that account. The conditions which have to be met for release
two parties will then enter into an escrow to be made.
Case study
balances held in an escrow account, for example a month. During this period,
subject to the agreement between the neither the buyer nor the seller has access
three parties. to that cash, and no compensatory interest
As long as the initial agreement permits, is being earned by either party. This
an escrow account can be used to additional cost should be included when
manage a series of ongoing transactions evaluating the potential benefits of an
between the same buyer and seller. escrow agreement.
The initial escrow agreement can be Residual counterparty risk remains.
used to establish a long-term trading Although the escrow arrangement
relationship between two unknown parties. reduces the counterparty risk, events
Escrow accounts can be used to manage outside the arrangement can occur that
online transactions, for example. result in loss to one or other party. For
Sellers can send goods or perform a example, the buyer may be delayed in
service, knowing that funds have been authorising the release of payment, or
deposited in the escrow account by the may refuse to pay at all, adding cost
buyer. to the seller. On the other hand, the
Buyers can refuse to permit the bank to buyer may discover problems with the
release payment if the received goods are consignment after the release of the
wrong, faulty or substandard. cash.
Escrow arrangements offer no protection
Disadvantages against damage in transit. Both parties
As with any technique, there are some will want to arrange transit insurance to
disadvantages. protect against the consequential loss in
Escrow accounts can be difficult to set the event of the goods being damaged
up quickly. in transit.
The arrangement is only as secure as the
third-party provider. Both buyer and seller Evaluation
should evaluate the credit risk of the bank Escrow agreements provide both parties with
(or other provider) before entering into an the opportunity to reduce the risk of loss as
escrow arrangement. a result of counterparty failure. They are best
The agreement can give rise to cash flow suited where the two parties are unknown to
problems. Some banks may only pay each other. As the two parties get to know
interest on balances held in an escrow each other, reliance on the escrow agreement
account for a specified period of time, can be ended.
risk of the buyer and the horizon of risk. Overseas Investment Insurance.
UKEF takes the documentation risk and This provides protection against loss of
will provide an unconditional guarantee equity investments in, or loans provided
to the financing bank. UKEF usually has to, foreign entities by a UK entity, as a
recourse to the exporter in the event of a result of war, expropriation, the imposition
default caused by the non-performance of of new exchange control restrictions or
the exporter. a breach of government undertakings.
Protection is offered up to a maximum of
Supplier Credit Financing Facility.
90% of the amount insured.
Under this facility, UKEF provides
guarantees to banks which have Short-term
purchased any bills of exchange or
Letter of Credit Guarantee Scheme.
promissory notes issued to a UK
This is accessed through an exporters
exporter on behalf of or by the importer,
bank. This allows a UK exporters bank
or where the bank has provided a loan
to share the credit risk with UKEF when
to the importer. The contract between
confirming a letter of credit issued by a
the exporter and importer must have
bank in a number of emerging markets.
a minimum value of GBP 25,000 or its
foreign currency equivalent. Credit can Bond Support Scheme.
be extended to buyers up to a maximum This scheme provides a guarantee to a
85% of the contract value, and the bank that it will receive amounts it has
payment period must be at least two paid to a bondholder if a bond is called
years. Premium is payable based on the and it cannot recover the amount paid in
country and credit risk of the buyer and full from the exporter. UKEF shares the
the horizon of risk. UKEF does not take risk with the bank for up to 80% of the
the documentation risk. value of the bond.
Lines of Credit. Export Working Capital Scheme.
UKEF can provide a guarantee to a bank This provides a guarantee to a bank to
of a qualifying loan issued to an overseas meet a proportion of losses it may suffer
bank to support a foreign purchaser of UK if the exporter fails to repay a working
exports. The loan must be for a minimum capital facility made available to fulfil a
of two years and in support of a contract specific export contract. UKEF is able to
with a minimum value of USD 25,000. provide cover for up to 80% of the value of
The buyer must make a downpayment of the facility.
at least 15% of the value of the contract.
Export Insurance Policy.
If the borrower defaults, UKEF makes
This provides protection against an
payment to the financing bank. A premium
importers failure to pay under the terms of
is charged by UKEF.
an agreed contract. It also protects against
Project Financing Facility. certain specified political risks. Most types
UKEF offers a guarantee to banks of goods and services can be covered,
providing loans to a major infrastructure although for exports of non-capital goods
project abroad. The guarantee is on a and services, the exporter must be unable
similar basis to that offered under UKEFs to receive cover from the commercial
buyer credit facility (see above). insurance market. Protection is available
for up to 95% of the contract value.
Bond Insurance Policy.
This provides protection against an Under all of its facilities, UKEF requires a
unfair call under the terms of a bond or minimum of 20% of the contract value to be
guarantee or in the event a call is made sourced from the UK. Subject to risk capacity,
as a result of actions by the foreign the balance can be considered for support.
government (such as the withdrawal of an As an indication of the differences
export licence). between ECAs, the US ECA (the Export-
Import Bank of the United States) offers the Most ECAs provide a range of different
following services: services to support the export of
Pre-export financing to US exporters of capital goods or services, typically
certain qualifying goods and services; in circumstances where commercial
A range of export credit insurance policies; insurance is difficult to arrange.
A variety of loan guarantees;
Disadvantages
Guarantees to international lessees who
lease US-produced capital goods via The rules governing a specific countrys
finance leases, up to a contract value of ECA can be restrictive and difficult to
USD 10 million; and meet. As a result the ECAs offering may
Direct fixed rate loans for terms of over not match the exporters needs.
seven years to international buyers of Obtaining ECA support can be time-
US capital equipment and services, consuming, depending on the nature of
usually with a minimum contract value of the contract which needs support.
USD10 million, up to a maximum 85%
of the contracts value (or 100% of the Evaluation
value of the US content of the contract). A Export credit support can be an invaluable
downpayment of 15% of the contract value support to exporters seeking to manage
must be made by the buyer before the counterparty and country risk when
loan can be extended. exporting to a new country. It often provides
support in situations where commercial
Advantages insurance or credit support is prohibitively
ECAs provide significant support to expensive.
exporters in their jurisdiction. It is particularly However, it can be difficult to establish
useful for companies exporting for the first compliance with the often very strict rules
time (especially if they are SMEs). It is also ECAs apply. For instance, some ECAs
useful to companies exporting to a new require exported goods to meet country of
country, especially where counterparty risk origin requirements. This can be difficult
or country risk is difficult to evaluate, or in the case of manufactured goods, where
where commercial insurance or support is the inputs are sourced from many different
relatively expensive. locations around the world.
Case study
Steve Hinch, Cambridge Glasshouses the UK, removing the risk of non-payment.
Financial Director, wanted to obtain Second, the bank provided additional
working capital finance from a working capital finance by accelerating
USD2.6million advance payment. (An the release of funds to Cambridge
advance payment is sometimes held by Glasshouse. Instead of having to wait the
a bank as security.) He worked with his full 45-day credit period from the date of
bank, NatWest (part of RBS Group), to shipment, the bank advanced the funds,
access an advance payment guarantee less a discount and without recourse, from
under the UK Export Finances (UKEF) the date of shipment. Finally, the banks
Bond Support Scheme. Under the specialist document preparation team
terms of this guarantee, UKEF provided worked with Hinch and his team to ensure
security to Cambridge Glasshouses there were no discrepancies when they
bank for 80% of the value of the advance had to present documents under the terms
payment. The bank guided Hinch and of the letter of credit.
his team through UKEFs application
Working with our bank was crucial to
process, and then approached the
the success of this project, says Steve
buyers bank in Qatar to negotiate
Hinch. They both helped us to navigate
the terms of the bond. As a result, the
the complex process to access UKEF
bank was able to provide Cambridge
support and provided additional working
Glasshouse with USD1.8million of
capital. Their support was also vital when
working capital finance.
it came to preparing the documents
Cambridge Glasshouse also used its required under the letter of credit. As a
bank to maximise the benefits from the medium-sized business, we did not have
approximately USD 10 million letter the expertise in-house. Using the banks
of credit the buyers Qatari bank had specialists saved us time and eliminated
opened in the companys favour. First, the very real risk of non-payment under
NatWest confirmed the letter of credit in the letter of credit.
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Appendices
Country Profiles
Common Calculations
Glossary
Argentina
Economic and trade overview
Key figures
Economy 2011 Trade 2011 (USD billion)
GDP (USD) 448 bn Goods Exports 83
GDP per capita (USD) 10,993 Imports 71
GDP volume growth (year-on-year) + 8.9% Net + 13
Population 40.77m Services Exports 14
MMR (year average) 9.98% Imports 16
Exchange rate ARS / USD (year average) 4.1101 Net 2
BoP (goods, services & income) as % of GDP 0 Source: IFS, IMF, January 2013
Bank accounts
Resident companies can hold local currency Resident and non-resident companies
(ARS) bank accounts outside Argentina. can hold USD and EUR-denominated
Resident companies can hold foreign currency time deposits and, with prior approval
bank accounts within and outside Argentina. from the BCRA, deposit accounts in other
Non-resident companies can hold local foreign currencies as long as identification
currency bank accounts within and outside requirements are met.
Argentina.
Trade information
Key trading partners
Argentina imports exports
Imports by origin Exports by destination
Trade information
Key trading partners
Australia imports exports
Imports by origin Exports by destination
currency
Foreign
Foreign
EUR
certain circumstances.
Austria applies controls to the foreign
currency assets of resident private pension Resident
funds, which are not permitted to exceed company
30percent of the funds total assets. Non-resident
N/A
company
EU 72.5% EU 70.5%
Switzerland 5.4% Switzerland 5.1%
China 4.8% USA 4.5%
USA 2.9% China 2.6%
Russian Russian
2.0% 2.3%
Federation Federation
Other 12.4% Other 15.0%
Licences None.
currency
Foreign
Foreign
EUR
EU 68.1% EU 72.2%
USA 5.7% USA 5.1%
China 4.3% India 2.3%
Russian China 2.1%
2.7%
Federation
Switzerland 1.6%
Japan 2.0%
Other 16.7%
Other 17.2%
Bank accounts
Resident companies can hold local currency reinsurance companies and re-insurance
(BRL) bank accounts outside Brazil. brokers.
Foreign currency bank accounts can be Non-resident companies can hold local
held by the following resident persons currency bank accounts in Brazil.
or entities in Brazil: authorised foreign Foreign currency bank accounts can
exchange dealers, Brazilian citizens abroad, be held by the following non-resident
the Brazilian Post Office Administration, persons or entities in Brazil: foreign
credit card companies, companies citizens travelling through Brazil,
involved in energy sector projects, tourist international organisations, embassies,
agencies that are not permitted to deal in foreign delegations, foreign transportation
foreign exchange, insurance companies, companies and re-insurance companies.
Trade information
Key trading partners
Brazil imports exports
Imports by origin Exports by destination
EU 20.5% EU 20.7%
USA 15.1% China 17.3%
China 14.5% USA 10.1%
Argentina 7.5% Argentina 8.9%
South Korea 4.5% Japan 3.7%
Other 37.9% Other 39.3%
Trade information
Key trading partners
Chile imports exports
Imports by origin Exports by destination
Bank accounts
Local currency (RMB) bank accounts Non-resident companies can also hold local
cannot be held outside China by resident currency bank accounts within China.
companies. Non-resident companies can Subject to approval from SAFE, resident
open RMB trade current accounts outside companies can hold foreign currency bank
China with domestic banks for the purposes accounts both within and outside China.
of cross-border RMB settlement.
Trade information
Key trading partners
China imports exports
Imports by origin Exports by destination
EU 12.1% EU 18.8%
Japan 11.2% USA 17.1%
South Korea 9.3% Hong Kong 14.1%
Taiwan 7.2% Japan 7.8%
USA 7.1% South Korea 4.4%
Other 53.1% Other 37.8%
Trade information
Key trading partners
Colombia imports exports
Imports by origin Exports by destination
The Czech Republic trades freely with fellow The EU maintains 74 free trade zones, with
EEA member states as well as Switzerland. ten located in the Czech Republic.
currency
Foreign
CZK
EU 64.3% EU 83.0%
China 12.5% Russian
3.2%
Federation
Russian
5.4% USA 1.9%
Federation
Japan 2.1% Switzerland 1.7%
USA 2.0% China 1.0%
Other 13.7% Other 9.2%
currency
Foreign
Foreign
DKK
EU 70.6% EU 59.4%
China 6.9% Norway 6.2%
Norway 4.5% USA 5.1%
USA 2.7% China 2.2%
Russian Russian
1.9% 1.9%
Federation Fderation
Other 13.4% Other 25.3%
EU 29.4% EU 31.3%
USA 10.7% India 7.3%
China 9.1% Saudi Arabia 6.1%
Kuwait 4.7% United
5.2%
States
Turkey 4.4%
Turkey 4.9%
Other 41.7%
Other 45.2%
currency
Foreign
Foreign
EUR
EU 60.9% EU 53.6%
Russian Russian
18.2% 9.3%
Federation Federation
China 3.6% USA 4.8%
Norway 2.9% China 4.6%
USA 2.3% Norway 2.8%
Other 12.1% Other 24.9%
currency
Foreign
Foreign
EUR
EUR
Resident
company
Non-resident
N/A
company
Eu 58.9% EU 60.9%
China 8.0% USA 5.6%
USA 5.6% China 3.2%
Russian Switzerland 3.1%
2.8%
Federation
Russian
Switzerland 2.3% 1.8%
Federation
Other 22.4% Other 25.4%
Germany trades freely with its fellow EEA The EU maintains 74 free trade zones,
member states as well as Switzerland. including five located in Germany: the
free ports of Bremerhaven, Cuxhaven,
Deggendorf, Duisburg and Hamburg.
currency
Foreign
Foreign
EUR
EU 54.8% EU 58.2%
China 8.9% USA 7.0%
USA 5.5% China 6.1%
Switzerland 4.2% Swizterland 4.5%
Russian Russian
3.3% 3.3%
Federation Federation
Other 19.5% Other 20.9%
currency
Foreign
Foreign
EUR
EU 51.9% EU 49.9%
Russian Turkey 7.8%
9.5%
Federation
USA 5.4%
China 5.9%
Singapore 2.6%
Iran 4.5%
Macedonia 2.5%
Saudi Arabia 3.2%
Other 31.8%
Other 25.0%
Currency and exchange controls the stability of the HKD through the linked
exchange rate mechanism.
Official currency: Hong Kong dollar (HKD).
Hong Kong does not apply exchange controls.
Exchange rate arrangement: currency
board system. The system uses a monetary
base that is matched by USD reserves at Bank accounts
an exchange rate of HKD 1 to USD 7.80. Resident companies can hold local currency
Trading is permitted to fluctuate between (HKD) bank accounts outside Hong Kong.
USD 7.75 and 7.85 per HKD 1. Resident companies can hold foreign
Hong Kongs monetary base is comprised currency bank accounts both within and
of notes and coins, outstanding Exchange outside Hong Kong.
Fund bills and notes, and the aggregate Non-resident companies can hold local
balance of banks clearing accounts held at currency bank accounts both within and
the Hong Kong Monetary Authority (HKMA outside Hong Kong.
www.info.gov.hk/hkma). Non-resident companies can hold foreign
The HKMA is responsible for maintaining currency bank accounts in Hong Kong.
currency
Foreign
Foreign
HUF
EU 69.5% EU 76.2%
Russian Russian
8.7% 3.2%
Federation Federation
China 6.0% Ukraine 2.0%
South Korea 2.1% USA 2.0%
USA 1.9% United Arab
1.8%
Emirates
Other 11.8%
Other 14.8%
Bank accounts
Resident companies cannot hold local Residents are permitted to open and hold
currency (INR) bank accounts outside India. foreign currency bank accounts outside
Approval is usually needed from the RBI for India for current and capital account
resident companies wanting to open foreign transactions so long as they remit not more
currency accounts, within or outside India. than USD200,000 or its equivalent in foreign
Foreign currency accounts are available currency each financial year. Remittances
domestically to residents holding an account over USD 200,000 or for other purposes
with an AD. These accounts are non-interest require RBI approval.
bearing and can be used for funds resulting Non-resident companies can hold local
from the export of goods and services, legal currency bank accounts and foreign currency
transactions with non-residents in India and bank accounts in India.
the remitting of balances from travel abroad.
Trade information
Key trading partners
India imports exports
Imports by origin Exports by destination
Trade information
Key trading partners
Indonesia imports exports
Imports by origin Exports by destination
currency
Foreign
Foreign
EUR
EUR
Resident
company
Non-resident
N/A
company
EU 62.3% EU 57.8%
USA 12.2% USA 23.1%
China 5.3% Switzerland 4.0%
Norway 2.4% Japan 1.9%
Japan 1.6% China 1.8%
Other 16.2% Other 11.4%
International/Regional memberships Italy trades freely with its fellow EEA member
European Union (EU): founding member states as well as Switzerland.
since 25 March 1957. Italy is also a member The EU has in place bilateral trade
of the European Economic Area (EEA). agreements with 36 countries and regional
International Monetary Fund (IMF): trade agreements with a number of trading
since 27 March 1947. blocs.
currency
Foreign
Foreign
EUR
EUR
Resident
company
Non-resident
N/A
company
EU 53.2% EU 55.4%
China 7.3% USA 6.1%
Russian Switzerland 5.5%
4.5%
Federation
China 2.7%
USA 3.3%
Turkey 2.5%
Switzerland 2.8%
Other 27.8%
Other 28.9%
Licences None.
Some raw materials for foreign processing Items prohibited for national security, or for
and re-importation. moral reasons, to protect and intellectual
property rights in accordance with UN
Security Council resolutions.
Additional prohibited imports: commodities
such as firearms, opium and other narcotics.
Exports
Items that are prohibited in accordance with
UN Security Council resolutions.
Trade information
Key trading partners
Kazakhstan imports exports
Imports by origin Exports by destination
EU 30.1% EU 53.8%
Russian China 17.7%
22.8%
Federation
Russian
China 16.5% 5.3%
Federation
Ukraine 5.7% Canada 4.3%
USA 5.5% Israel 2.2%
Other 19.4% Other 16.7%
Cash imports and exports by residents and With the exception of trade credits, all
non-residents over USD 10,000 must be financial and commercial credits to residents
reported to the South Korean customs office. from non-residents over USD 30 million must
be notified to the Ministry of Strategy and
Bank of Korea approval (www.bok.or.kr) is
Finance (MOSF www.english.mosf.go.kr).
required for all individuals domestic and
foreign currency transfers abroad exceeding
USD 50,000 or equivalent.
Bank accounts
Resident companies can hold local currency Resident companies can hold foreign
(KRW) bank accounts outside South Korea. currency bank accounts both within and
outside South Korea.
Trade information
Key trading partners
South Korea imports exports
Imports by origin Exports by destination
Imports Exports
Bill of lading, customs import declaration and None.
delivery order.
Financing requirements for imports/
Exports exports
Packing list, bill of lading and a customs None.
export declaration.
Prohibited items
Licences
Imports
Imports
Items restricted for reasons of national
Rice. security, economic protection, for moral
The Korea Trade Commission can recom- reasons or to protect the safety of plants and
mend quotas for imports that it considers animals.
unfair under international trade practice.
Exports
Exports Items restricted for reasons of national
Most items for export do not require a security, economic protection, for moral
licence. reasons or to protect the safety of plants
and animals.
Export bans are in place for environmental
reasons on 11 items.
currency
Foreign
Foreign
EUR
EU 75.6% EU 78.8%
USA 5.3% USA 3.5%
Switzerland 1.9% Switzerland 2.9%
Japan 1.6% China 1.4%
China 1.6% Hong Kong 1.1%
Other 14.0% Other 12.3%
Trade information
Key trading partners
Malaysia imports exports
Imports by origin Exports by destination
Trade information
Key trading partners
Mexico imports exports
Imports by origin Exports by destination
Myanmar pursues many of its trade Myanmar does not have a national export
objectives through its membership of ASEAN credit insurance provider.
(www.aseansec.org). The Thilawa Special Economic Zone (SEZ)
As a member of ASEAN, Myanmar is is currently being established in Myanmar
committed to the ASEAN Free Trade Area and will be the countrys first operational
(AFTA) Common Effective Preferential Tariff trade zone, offering companies based in the
(CEPT) scheme. This lowers all intra-regional zone exemption from trade tariffs. Further
tariffs on trade between Myanmar and other trade zones are planned for the port of
ASEAN member states (Brunei Darussalam, Yangon and in Dawei.
Bank accounts
Resident companies cannot hold local Non-residents are permitted to hold local
currency (MMK) bank accounts outside currency accounts domestically but all
Myanmar. credits and debits from these accounts are
Resident companies who earn in foreign subject to authorisation. Accounts can be
exchange and national companies can hold converted into foreign currency with approval
foreign currency bank accounts both within from the CBM.
and outside Myanmar, subject to approval. Non-resident diplomatic mission and
Resident local currency accounts are international organisation personnel are
convertible into foreign currency for the permitted to hold foreign currency accounts,
payment of official expenses, subject to but only with the Myanmar Foreign Trade
approval from the Myanmar Ministry of Bank (www.myanmar.com/finance/dept_
Finance and Revenue (MFR) mftb_01.html).
(www.myanmar.com/finance/dept_cbm.html).
Trade information
Key trading partners
Myanmar imports exports
Imports by origin Exports by destination
Exports
Bill of lading, packing list and an
authorisation letter.
currency
Foreign
Foreign
EUR
EUR
Resident
company
Non-resident
N/A
company
EU 53.2% EU 74.1%
China 9.3% USA 4.5%
USA 7.5% Russian
1.5%
Federation
Russian
4.2% Switzerland 1.5%
Federation
Japan 2.8% China 1.5%
Other 23.0% Other 16.9%
Trade information
Key trading partners
New Zealand imports exports
Imports by origin Exports by destination
currency
Foreign
NOK
EU 62.8% EU 81.2%
China 9.1% USA 5.6%
USA 5.4% China 1.8%
Canada 4.1% Canada 1.6%
South Korea 2.7% Japan 1.2%
Other 15.9% Other 8.6%
Trade information
Key trading partners
Pakistan imports exports
Imports by origin Exports by destination
Documentation Exports
Imports None.
Bill of lading, delivery order, certificate of
origin, commercial invoice, a customs import
declaration, insurance certificate, and a
packing list.
Exports
Bill of lading, certificate of origin, commercial
invoice, a customs export declaration,
pre-shipment inspection report, insurance
certificate, packing list and a foreign
exchange authorisation.
Bank accounts
Resident companies can hold foreign from authorised agent banks (AABs) and
currency bank accounts in the Philippines AAB-forex corporations.
as well as foreign currency bank accounts Non-resident companies can hold local
outside the Philippines, provided they are currency (PHP) and foreign currency bank
not funded with foreign exchange purchased accounts in the Philippines subject to some
conditions.
Trade information
Key trading partners
Philippines imports exports
Imports by origin Exports by destination
Imports None.
currency
Foreign
Foreign
Finance (www.mofnet.gov.pl).
PLN
PLN
Residents require authorisation from the * Prior approval from the NBP is required by residents wishing
to hold accounts in countries outside the EEA or OECD.
Polish Financial Supervision Authority (PFSA)
Residents must provide the NBP with quarterly balance reports
in order to issue/sell securities abroad as do on any accounts held outside Poland.
non-residents investing in Poland.
EU 58.6% EU 77.1%
Russian Russian
12.6% 4.7%
Federation Federation
China 8.8% Ukraine 2.6%
USA 2.3% Norway 2.1%
South Korea 2.2% USA 2.0%
Other 15.5% Other 11.5%
currency
Foreign
Foreign
EUR
EU 72.8% EU 72.5%
Nigeria 2.7% Angola 5.5%
China 2.6% USA 3.5%
Brazil 2.5% Brazil 1.4%
Angola 2.0% Mexico 1.1%
Other 17.4% Other 16.0%
currency
Foreign
RON
RON
EU 72.6% EU 71.1%
China 4.6% Turkey 6.2%
Kazakhstan 4.2% Russian
2.3%
Federation
Russian
3.8% Ukraine 1.8%
Federation
Turkey 3.5% USA 1.8%
Other 11.3% Other 16.8%
currency
Foreign
RUB
RUB
EU 43.4% EU 48.4%
China 16.9% China 7.3%
Ukraine 7.0% Ukraine 3.8%
Japan 5.3% USA 3.4%
USA 4.5% Turkey 3.2%
Other 22.9% Other 33.9%
World Trade Organization (WTO): GCC member states have signed bilateral
since 11 December 2005. trade agreements with several countries and
negotiations are ongoing with the European
Government trade policy Union and ASEAN. In 2009 the GCC signed
Much of Saudi Arabias trade policy is a free trade agreement with the European
directed through membership of the GCC Free Trade Association (EFTA).
(www.gccsg.org/eng/index.php). Saudi Arabia also has a number of
As a GCC member, Saudi Arabia is able to independent bilateral trade agreements.
trade with other GCC member states (Qatar, Saudi Arabia maintains one free trade zone
Kuwait, Oman, Bahrain and the UAE) without located at the Jeddah Islamic Sea Port.
Bank accounts
Resident companies can hold foreign local currency bank accounts in Saudi Arabia
currency bank accounts within and outside for business or credit reasons with appropriate
Saudi Arabia. documentation and approval from SAMA.
Non-resident companies based in other GCC Non-resident (non-banking) companies
member states can hold foreign currency and based outside the GCC can hold foreign
Trade information
Key trading partners
Singapore imports exports
Imports by origin Exports by destination
Trade information
Key trading partners
Singapore imports exports
Imports by origin Exports by destination
currency
Foreign
Foreign
EUR
EU 53.1% EU 84.5%
Russian Russian
11.2% 3.7%
Federation Federation
South Korea 6.4% China 2.6%
China 6.1% USA 1.6%
Taiwan 1.6% Turkey 1.4%
Other 21.6% Other 6.2%
South Africa trades freely with its fellow National export credit insurance providers:
SACU (www.sacu.int) member states. The Export Credit Insurance Corporation of
SACU member states have also established South Africa (ECIC www.ecic.co.za);
common external tariffs. Credit Guarantee Insurance Corporation of
Africa (CGIC www.creditguarantee.co.za).
SACU has established a free trade
agreement with EFTA (the European Free The state-owned Industrial Development
Trade Association) and a trade, investment Corporation of South Africa (www.idc.co.za)
and development co-operation agreement provides state-supported medium to long-
(TIDCA) with the USA. South Africa has also term finance for exports of manufactured and
established a TIDCA with the European Union. capital goods, and for contractors engaging
in construction overseas.
South Africa trades freely with its fellow
SADC (www.sadc.int) member states, apart South Africa is home to four industrial
from Angola, the Democratic Republic of development zones (in Richards Bay; Coega,
Congo and the Seychelles, which have yet near Port Elizabeth; Elidz, in East London;
to join the free trade area. Approximately 85 and next to Johannesburg International
percent of all items traded between SADC Airport) in which no import duties or VAT are
member states are now exempt from tariffs. applied on assets and machinery.
Bank accounts
Resident and non-resident companies Africa. These accounts are not permitted to
cannot hold local currency (ZAR) bank exceed the equivalent of ZAR 5 million.
accounts outside South Africa. Non-resident companies can hold local
Resident companies can hold foreign currency (ZAR) and foreign currency bank
currency bank accounts in South Africa and, accounts in South Africa.
with Reserve Bank approval, outside South
Trade information
Key trading partners
South Africa imports exports
Imports by origin Exports by destination
EU 30.6% EU 22.3%
China 14.2% China 13.4%
USA 8.0% USA 9.0%
Japan 4.7% Japan 8.2%
Saudi Arabia 4.5% India 3.6%
Other 38.0% Other 43.5%
Exports Exports
Agricultural and manufactured products Exports that are prohibited in accordance
exported to countries outside SACU. with UN Security Council resolutions.
Permits from the Department of Defence:
military equipment, armaments and
ammunition.
currency
Foreign
Foreign
EUR
EU 53.8% EU 66.8%
China 7.9% USA 3.5%
USA 4.0% Turkey 2.0%
Russian Morocco 1.9%
2.6%
Federation
Switzerland 1.8%
Algeria 1.9%
Other 24.0%
Other 29.8%
currency
Foreign
Foreign
SEK
EU 68.7% EU 54.6%
Norway 8.4% Norway 9.4%
Russian USA 5.9%
5.5%
Federation
China 3.2%
China 3.9%
Russian
USA 3.0% 2.2%
Federation
Other 10.5% Other 24.7%
currency
Foreign
CHF
EU 78.0% EU 56.9%
USA 5.0% USA 10.3%
China 3.4% China 4.2%
Japan 2.2% Hong Kong 3.8%
Kazakhstan 1.0% Japan 3.2%
Other 10.4% Other 21.6%
Bank accounts
Resident companies can hold local currency Non-resident companies can hold local
(TWD) bank accounts outside Taiwan. currency deposit accounts in Taiwan, but
Resident companies can hold foreign cannot hold domestic currency cheque
currency bank accounts both within and accounts.
outside Taiwan. Non-residents are also permitted to hold
foreign currency bank accounts in Taiwan.
Licences None.
Trade information
Key trading
Thailand partners
imports exports
Imports by origin Exports by destination
Currency and exchange controls residents are obliged to register all securities
to be issued or sold overseas.
Official currency: Turkish lira (TRY).
Exchange rate arrangement: free floating.
Bank accounts
The Central Bank of the Republic of Turkey
(www.tcmb.gov.tr) and Turkish Treasury Permission to hold currency accounts
(www.treasury.gov.tr) manage the countrys
Within Outside
exchange controls.
Turkey Turkey
Commodity credits from residents to
currency
currency
Foreign
TRY
EU 37.9% EU 47.0%
Russian Iraq 6.2%
9.9%
Federation
Russian
China 9.0% 4.4%
Federation
USA 6.7% USA 3.4%
Iran 5.2% United Arab
2.7%
Emirates
Other 31.3%
Other 36.3%
currency
currency
residents to residents must be registered
Foreign
Foreign
UAH
UAH
with the NBU, except for loans obtained
under state guarantees.
Commercial loans from residents to non- Resident
No *
residents may only exceed 180 days with company
NBU approval. Non-resident
* * No N/A
company
* Permitted with NBU approval.
Trade information
Key trading partners
Ukraine imports exports
Imports by origin Exports by destination
Russian Russian
35.3% 29.0%
Federation Federation
EU 31.2% EU 26.3%
China 7.6% Turkey 5.5%
Belarus 5.1% India 3.3%
USA 3.1% China 3.2%
Other 17.7% Other 32.7%
International Monetary Fund (IMF): GCC member states have signed bilateral
since 22 September 1972. trade agreements with several countries, and
negotiations are ongoing with the European
World Trade Organization (WTO):
Union and the Association of Southeast
since 10 April 1996.
Asian Nations (ASEAN). In 2009 the GCC
Government trade policy signed a free trade agreement with the
European Free Trade Association (EFTA).
Much of the UAEs trade policy is directed
through its membership of the GCC National export credit insurance provider:
(www.gccsg.org/eng/index.php). Export Credit Insurance Company of the
Emirates (www.ecie.ae).
As a GCC member, the UAE is able to trade
with other GCC member states (Bahrain, The UAE maintains 36 free trade zones.
Kuwait, Oman, Qatar and Saudi Arabia) Abu Dhabi Industrial City and the Al Ain
without investment and service trade barriers. Industrial City operate as special economic
Through the GCC common market, launched zones within the UAE.
currency
controls.
Foreign
Foreign
GBP
GBP
Resident
company
Non-resident
N/A
company
EU 51.3% EU 53.4%
China 9.0% USA 13.3%
USA 8.1% China 3.0%
Norway 6.0% India 1.8%
Japan 2.1% Switzerland 1.8%
Other 23.5% Other 26.7%
Trade information
Key trading partners
USA imports exports
Imports by origin Exports by destination
Trade information
Key trading partners Tariffs/Taxes
Not available. Imports
Most custom duty rates for importing goods
Principal exports into Uzbekistan are applied ad valorem at
Cotton, gold, energy products, mineral fertilisers, five levels: zero, 5, 10, 20 and 30 percent of
ferrous and non-ferrous metals, textiles, food customs value. The average weighted tariff
products, machinery and cars. rate is 14.84 percent.
VAT of an additional 20 percent is applied to
Documentation
some products.
Imports A duty worth 0.2 percent of the customs
Commercial invoice, customs declaration, value (ranging from USD 25 to USD 3,000) is
bill of lading, packing list, certificate of origin, levied on the customs processing of imports.
certificate of conformity, inspection report,
Exports
transit document, legal resolution, and sales
purchase contract. None.
Bank accounts
As of July 2012, resident companies and accounts in Venezuela. Account holders may
individuals and non-resident companies move funds via partial or total withdrawals in
participating in strategic public investment local currency at the official exchange rate.
projects for the development of the national Non-resident companies can hold local
economy may hold foreign currency currency bank accounts in Venezuela.
Trade information
Key trading partners
Venezuela imports exports
Imports by origin Exports by destination
Information on exports from Venezuela is not
USA 27.9% available.
EU 13.8%
China 12.0%
Brazil 8.6%
Colombia 4.2%
Other 33.5%
The SBV permits authorised credit Permission is required from the SBV for
institutions to enter into forward and swap financial institutions wishing to import foreign
transactions between the VND and foreign currency in excess of USD 5,000 or its
currency with maturities of between three foreign currency equivalent.
days and one year. For resident entities, all proceeds originating
from current transactions must be repatriated
immediately.
Trade information
Key trading partners
Vietnam imports exports
Imports by origin Exports by destination
This figure shows that on average the will vary significantly from industry to industry.
company pays its suppliers in 84 days. This For example, manufacturers of large items,
figure needs to be measured against the such as aeroplanes, will expect to have
companys previous DPO figures and, where higher DIO measurements than retailers.
possible, against DPO measurements of the In general terms, the DIO measurement
companys main competitors. is of most use as a comparison with
In general terms, the higher the DPO, previous figures. A rising DIO indicates a
the better for the company, as it suggests weakening in the markets appetite for a
the company is able to hold onto its cash companys product, as it suggests goods
for longer. There are many reasons why a are sitting longer in the warehouse. A falling
companys DPO may change in an economic DIO is most likely to indicate an increase
cycle. For example, a relatively high DPO may in demand for the companys products or
suggest the companys procurement team has an improvement in the efficiency of the
been able to negotiate better payment terms companys production process.
with its suppliers. On the other hand, it may However, if the company cuts production
also suggest difficulties in realising the cash to levels in response to a previous weakening
meet payment obligations. in demand, this will also lead to a fall in DIO.
A relatively low DPO may suggest Therefore the treasurer should ensure the
suppliers have reduced their willingness reasons behind any change in DIO are fully
to offer credit to the company or it may understood.
suggest suppliers are offering discounts for When using DIO there will always be
early payment. a compromise between the need to hold
The treasurer will want to identify the sufficient inventory so as to be able to meet
reasons behind any changes in the DPO over sales requests, with all the associated
time. Any suggestion that suppliers are facing storage costs and the impact on working
difficulties will need investigation and may capital, and selling inventory as quickly as
warrant action being taken to support the possible to free up cash.
supply chain.
Cash conversion cycle
Days inventory outstanding The cash conversion cycle uses these
DIO measures the efficiency of a companys three concepts to measure the companys
production process. It is also referred to efficiency in turning inputs into cash. It is
as the inventory period, the days sales of calculated using the following equation:
inventory or stock turnover.
This is calculated by using the following CCC = DIO + DSO DPO
equation: Consider a company with a DSO of46.2days,
DIO = [average inventory / cost of goods a DPO of 83.6 days and a DIO of 109.5 days:
sold in period (excluding VAT or sales CCC = 109.5 + 46.2 83.6 = 72.1 days
taxes)] number of days in period
This figure suggests it takes the company
So, consider a company with an average just over 72 days to purchase its raw
USD 16.5 million inventory with annual sales materials and convert them into cash. This is
of USD 55 million: also the minimum working capital financing
which will be required, as it represents the
DIO = (16,500,000 / 55,000,000) 365
point between the cash going to the supplier
= 109.5 days
and being received from the customer.
This figure shows the company holds In order to minimise the level of external
inventory for, on average, just under 110 funding the company needs to arrange, it
days. It needs to be measured against the needs to try to reduce the CCC figure. This
companys previous DIO figures and, where can be done by:
possible, against DIO measurements of the agreeing extended credit terms with its
companys main competitors. The DIO figures suppliers, increasing DPO;
reducing the level of inventory held (either accelerating the receipt of cash, either by
by adopting a more just-in-time approach reducing credit to its customers or raising
to manufacturing or by reducing the volume finance off the strength of its issued
of goods manufactured), reducing DIO; or invoices, increasing DPO.
All Risks Insurance Insurance of the physical possibility to buy the leased equipment on
damage to a project. a specified option date at a predetermined
Asset Financing A type of financing whereby a price that is considerably lower than the
lender is given a charge over a specific asset expected fair market value.
or group of assets that are being financed Bargain Renewal Option A provision in the
by the underlying loan. The typical assets lease contract offering the lessee the
charged are those used to generate working opportunity to renew the contract on a given
cash as well as property and fixed assets. option date and at a rental rate below the
Assignment Transfer of rights over project expected fair market rate.
contracts as security for lenders. Barter The exchange of commodities, property
At Sight A negotiable instrument that or services that are deemed to be of equal
requires payment upon presentation of the value, without money changing hands.
instrument. Bid Bond Bond that acts as a guarantee that
Aval A guarantee on a negotiable instrument the bidder will, at the bid price, enter into
which states that the party providing its aval and comply with a contract. Also known as
will pay the instrument upon its maturity if the tender bond.
drawee or obligor fails to fulfil their obligation. Bill of Exchange Payment order written by
Avalisation The act of making an aval on one person (the drawer) directing another
a negotiable instrument. When overseas person (the drawee) to pay a certain
companies are the obligors on negotiable amount of money at a specified future date.
instruments, the provision of an aval by It designates a named beneficiary but is
a bank is often necessary to make the transferable by endorsement. Widely used
instrument acceptable for discounting. to finance trade and, when discounted with a
Back-to-Back Lease An agreement under which financial institution, to obtain credit. See draft.
an intermediate lessor adopts responsibility Bill of Lading A document issued by a carrier
for an existing lease and ensures that the which is evidence of receipt of goods,
final lessee agrees to the leases criteria. and is a contract of carriage. If issued in
Back-to-Back Letter of Credit A letter of credit negotiable form (i.e. to order), it becomes
backed by another letter of credit with the documentary evidence of title to the goods.
same terms and conditions. Blank Endorsement A signature (e.g. on the
Bank Bills Generic term for a discountable back of a cheque) endorsing the execution
commercial bill issued or accepted by a bank. of a transaction by the party in possession.
See bankers acceptance and trade bill. BLT (Build-Lease-Transfer) Similar to a BOT
Bank Draft A draft drawn by a bank on itself. or BRT project, except that a lease of the
The draft is purchased by the payer and sent project site, buildings and equipment is
to the payee, who presents it to his bank granted to the private sector during the term
for payment. That bank presents it to the of the project.
payers bank for reimbursement. Also known Bonded Goods Imported goods that are held
as bank cheque, cashiers cheque, tellers in a dedicated storage area at port of entry,
cheque and treasurers cheque. called a bonded warehouse, whilst awaiting
Bank Guarantee A guarantee issued by a payment of duties. Generally, the person
bank. See guarantee. responsible for storing the goods has to put
Bank Payment Obligation ((BPO) A bank down a bond that guarantees customs the
guarantee of payment made by the buyers payment of any due duties when and if the
bank for a specific amount to a specific bank goods are collected for commercialisation
on a specific date. within that countrys domestic market.
Bankers Acceptance (BA) A negotiable time Bonded Warehouse A secure warehouse
draft drawn and accepted by a bank to pay licensed by customs to store goods on which
the face amount to the holder at a specified duty has not yet been paid.
time in the future. See draft. BOO (Build-Own-Operate) A method
Bargain Purchase Option An option included in of financing projects and developing
the lease contract that allows the lessee the infrastructure, in which a private company
Collecting Bank In a transaction involving a consignee) under agreement that the agent
documentary collection, any bank other than sell the merchandise for the account of the
the remitting bank involved in the collection exporter. The consignor retains title to the
of a draft and/or documents. goods until the consignee has sold them.
Commitment Fee The fee payable on the 2)The shipment of goods to the buyer.
unutilised amount of a committed facility. Consignment Note A document issued by
Commitment fees are usually calculated a carrier to confirm receipt of goods to be
daily and paid quarterly. transported to an agreed destination. This
Commercial Invoice A document detailing the document states the terms on which the
goods and services that have been sold and carrier undertakes the transport.
the payment that is due. Consular Invoice A document required by
Committed Credit Facility An arrangement some countries describing a shipment of
between a borrower and a lender, whereby goods and showing information such as
the lender enters into an obligation to provide the consignor, consignee, and value of the
funds upon request by the borrower, provided shipment. Certified by a consular official,
the conditions precedent and any ongoing a consular invoice is usually used by the
agreed conditions and covenants in the loan countrys customs officials to verify the
agreement have been and are being met. value, quantity and nature of the shipment.
The borrower pays a commitment fee on the Contract Bond A surety bond that acts as a
undrawn portion of the committed facility. Also written guarantee that a trade contract will
known as a committed line of credit. be honoured.
Completion Guarantee An undertaking to Contract Hire An agreement to hire/lease
provide compensation if construction of the vehicles for a fixed period against regular
project is not completed by a specific time. rental payments that incorporate the
Confirmed Irrevocable Letter of Credit A anticipated cost of maintenance for the hire
letter of credit that cannot be terminated period and also the final residual value.
or modified without the agreement of all The lessee also has to observe a number
parties (irrevocable), and where a bank has of other contractual obligations (e.g. not
promised to honour the payment on behalf to exceed a certain mileage). Upon expiry
of the issuing bank (confirmed). of the contract period, the equipment is
Confirmed Letter of Credit A letter of credit returned to the contract hire company.
where a bank has promised to honour the Contract Purchase As in contract hire but,
payment on behalf of the issuing bank. upon expiry of the contract period, the
Confirming Bank In a transaction involving a lessee has the right but not the obligation
letter of credit (L/C), the confirming bank is a to buy the vehicle at the agreed option
bank that promises to honour the payment to purchase price stipulated in the contract.
the beneficiary on behalf of the issuing bank, Correspondent Banking An interbank
subject to the terms of the L/C. arrangement where one bank provides
Confirming House A company that payment and other services to another
intermediates between an exporter and bank, which is generally located in another
an importer and confirms orders from the financial centre.
importer for the goods, finances transactions Counterpurchase An aspect of countertrade
and accepts the credit risk involved. in which a supplier undertakes to purchase
Conforming Bid A bid that meets the procuring from a country a specified quantity of goods
authoritys necessary criteria. Bids which or to engage services offered by the country
do not comply with these criteria may be as a condition of securing business.
rejected by the authority before assessment. Countertrade Any form of reciprocal or
Consignee The party to whom or to whose compensatory trade arrangement agreed
order a carrier must deliver goods at the between an exporter and a buyer.
conclusion of the transport. Covenant An agreement by the borrower to
Consignment 1) Delivery of merchandise from perform certain acts (such as the provision
an exporter (the consignor) to an agent (the of financial information), to refrain from
of payment or the buyers written promise to allow invoices (bills) to be created, sent,
pay on a specified future date. received, processed and paid via the internet.
Documentary Credit A written promise by Endorsee The individual or legal entity that
a bank to pay a beneficiary subject to acquires ownership of a specific amount of
submission of the required documents. funds through the endorsement of a cheque,
Documentary Draft A bill of exchange bill of exchange or promissory note.
accompanied by shipping documents that Endorsement A signature required for the
confer title to goods. This type of bill of movement of funds by cheque, bill of
exchange is less risky, as the shipping exchange or promissory note.
documents are sent to the remitting bank Endorser The individual/legal entity that signs
rather than directly to the buyer/importer. a document (i.e. cheque) and by doing so
The latter needs to pay or accept the draft relinquishes ownership to a specific amount
for future payment before being able to of funds.
collect the documents and therefore the Enterprise Resource Planning (ERP)
goods. See clean draft. Company-wide software module that
Documents against Acceptance automates and integrates all functions of a
(D/A) Instructions given by an exporter to business, including support functions such
their bank that the documents attached to a as human resources, thereby allowing a
time draft for collection are only deliverable company to better identify, plan and manage
to the drawee against the drawees its resources.
acceptance of the draft. Escrow (Escrow Account) Money, securities,
Documents against Payment Instructions documents or real estate held by a
given by an exporter to their bank that the third party to be returned once specific
documents attached to a sight draft for predetermined criteria are met. It also refers
collection are only deliverable to the drawee to borrowers accounts established as
against payment. security for debt service or maintenance of
Draft A written order given by the issuing party the project.
(the drawer) to another (the drawee) to pay Estimated Residual Value The estimated value
a party identified on the order (payee) or the a leased asset will have on the expiry of the
bearer a specified sum, either on demand lease contract.
(sight draft) or on a specified date (time Estimated Useful Life The time period during
draft). See bank draft, bill of exchange, which a tangible fixed asset is assumed
cheque and bankers acceptance. to be useful for the companys operations.
Drawee The party required to pay the amount The estimated useful life of an asset can
owed on a cheque/draft. be used to calculate the maximum period
Drawer The party which issues the cheque/ of a tax lease or to specify the type of lease
draft and is subsequently paid by the (e.g. capital lease) or to determine the
drawee. depreciation method to be applied on the
Drawback A refund on duty paid on imports leased asset.
that are later exported. Exchange Control The control/restriction on
Drawee Bank The bank on which a cheque or the inflow and outflow of currency by a
draft is drawn the payers bank. sovereign state.
Effective Lease Rate The effective rental rate Export Buyer Credit A loan, made on behalf of
paid by the lessee on a lease agreement, a supplier of goods in an export situation to
taking account of the timing and differing the overseas buyer, to allow the buyer to pay
size of payments. for the goods.
Electronic Bill Presentment and Payment Export Credit Agency A government-affiliated
(EBPP) The methods and processes that institution that has, as its mission, to
allow invoices (bills) to be created, sent, promote the exports of that country by
received, processed and paid via the internet. providing export credit guarantees.
Electronic Invoice Presentment and Payment Export Credit Guarantee Similar to export
(EIPP) The methods and processes that credit insurance, but is generally a
Holder in Due Course The party that receives lessee has to make regular rental payments
or acquires title to a cheque, bill of exchange at predetermined rates to the lessor.
or promissory note. Lease Line A lease line functions in the same
House Bill of Lading A bill of lading issued way as a bank line of credit. It permits the
by a freight forwarder rather than by the lessee to add assets to the existing lease
carrier. Freight forwarders will normally have agreement without having to enter into a
possession of the bills of lading issued by new contract or negotiate new terms and
the carriers, and will then issue their own conditions.
bills of lading to cover the various goods that Lease Purchase A full-payout lease with a
make up the total shipment. lease term related to the underlying assets
Import Licence A document issued by the estimated useful life and where title of the
government that authorises the licensee to asset is passed to the lessee at the end of
import (usually specific) commodities, goods the lease on payment of a nominal figure.
or services. Lease Rate The rate on periodic rental
Import Quota A restriction imposed by a payments made by the lessee for the use of
government on the total volume or value of the leased equipment.
an import. Lease Schedule A schedule underlying a
Incoterms (Incoterms 2010) International master lease agreement and providing
standard trade definitions developed detailed information on the contract terms,
and promoted by the ICC (International including rental payments and rights with
Chamber of Commerce) to facilitate regard to the use of the leased asset.
international trade. Lease Term The length of a lease agreement
In-house Factoring Centres The centralisation and the (minimum) period during which
of trade receivables within an organisation the lessee has the right to use the leased
so as to optimise the collection process. asset and has to make rental payments on a
Insurance Certificate Written evidence, regular basis. Also known as base term.
supplied by the exporter or freight forwarder, Legalised Invoice A commercial invoice that
that the exported goods are insured for has received the legal endorsement from
transport. The certificate will cross-reference the importers country. This is usually done
a master insurance policy. via the diplomatic representative of the
Internal Factoring The sale or transfer of importers country in the exporters country.
the title of the accounts receivable from Lessee The party in a lease contract which
an exporting company to an affiliate or is given the right to use and to possess an
subsidiary who collects from an importing asset owned by the leasing company for a
subsidiary. specified period in exchange for periodic
Invoice Discounting A method of funding for a rental payments.
company when it sells outstanding invoices Lessor The legal owner of the asset leased to
to a finance house unbeknown to the debtor. the lessee for a specified period. The lessor
Irrevocable Letter of Credit A letter of credit may also be a leasing company that buys
that once issued can only be cancelled the equipment and rents or leases it to other
with the consent of all parties to the credit, parties. The lessor offers the lessee the right
including the beneficiary. to use the property during the lease term.
Irrevocable and Unconditional Transfer A Letter of Credit (L/C) A promissory document
transfer which cannot be revoked by the issued by a bank to a third party to make
transferor and which is final. a payment on behalf of a customer in
Issuing Bank The bank issuing a letter of credit accordance with specified conditions.
(L/C). It is obliged to pay if the documents Letters of credit are frequently used in
stipulated in the L/C are presented. international trade to provide a secure way
Lease A contract according to which the owner for an exporter to receive payment from
of an asset (the lessor) offers the right to an importer via the importers bank. L/Cs
use the asset to another party (the lessee) can also be issued by companies, but this
during a certain period. In return for this, the is rare.
Letter of Undertaking A substitute for a bill of can be freely transferred, such as a bill of
exchange or draft usually used in countries exchange.
where those instruments attract taxation. By Negotiated Procedure A tendering procedure
signing the letter of undertaking, the importer permitting the procuring authority to
undertakes to pay the collection amount on negotiate detailed pricing and other terms
a specific date. with prospective contractors.
Limited Recourse A lending arrangement Net Lease A lease in which the lessee has to
whereby the lender is permitted to request insure the leased asset and is responsible
repayment from the sponsor if the borrower for its maintenance as these services are not
fails to meet their payment obligation, provided for in the lease agreement.
provided certain conditions are met. Nominated Bank A bank designated by the
Generally, limited recourse only applies to a issuing bank of a letter of credit which is
specific and limited amount. authorised to pay; to accept draft(s); to
Liquidated Damages (LDs) Specified amount incur a deferred payment undertaking; or to
that a contractor has to pay if an agreed negotiate the letter of credit (L/C).
performance is not met. Non-full Payout Lease In contrast to a full
Maintenance Bond A bond supplying funds for payout lease, the cash flows earned from
the maintenance of equipment or property. this type of lease do not cover the various
Maintenance Reserve Account The reserve costs of the lessor, such as acquisition,
account of cash balances set aside to financing and administration costs. In such
cover a projects maintenance and repair a case the lessor relies on its ability to
expenses. anticipate accurately the residual value of
Master Lease An umbrella agreement allowing the equipment to make its profit (or it will
the lessee to add further assets to the rely on a guaranteed buy-back, e.g. from the
existing lease agreement simply by entering original supplier).
a description of the respective equipment Non-recourse Factoring The sale or transfer
into a supplementary lease schedule. The of title of a companys accounts receivable
new schedule is subject to the original terms to a third party (factor) where the latter is
and conditions of the master lease. not permitted to request repayment from
Monoline Insurance Credit insurance provided the seller if the debtor fails to meet their
to lenders or bondholders for a project payment obligation.
companys debt. Non-recourse A lending arrangement where
Negative Pledge A covenant whereby a the lender is not permitted to request
borrower undertakes not to allow the creation repayment from the parent company if the
or subsistence of secured debt or, if the borrower (its subsidiary) fails to meet their
borrower has the right to issue secured debt payment obligation, or in which repayment is
in the future, not to secure such new debt limited to a specific source of funds.
without offering the same security equally (i.e. Notify Party The name and address of the
pari passu). Negative pledges are normally party to be notified when commodities or
subject to numerous exceptions. goods arrive at their destination.
Negotiating Bank A bank assigned in a letter of O&M (Operations and Maintenance)
credit to give value to the beneficiary against Agreement The contract for operating and
presentation of documents. maintaining a project.
Negotiation Credit Under a negotiation credit, Open Account Under an open account
the exporter receives a credit from the sale, goods/services and accompanying
authorised negotiating bank on presentation documents are supplied to the buyer with
of the stipulated documents and, where payment due at a later date (however
applicable, a draft. If the negotiating bank generally no more than 180 days after the
has not confirmed the credit, it has the right invoice date) without the existence of a
to seek recourse from the exporter if cover is formal debt instrument.
not forthcoming. Open-end Lease The opposite of the closed-
Negotiable Instrument A title document which end lease: a lease agreement that offers
the possibility for the lessee to extend the committed to paying rentals and fulfilling all
contract term after a certain period of time other obligations of the lease contract.
and at predetermined conditions. Prior Deposits A government requirement that,
Open Insurance Policy A marine insurance as a condition of importing, the importer
policy that applies to all shipments made by deposit in a commercial or central bank a
an exporter over a period of time rather than specified sum of money. The deposit, which
to one shipment only. generally represents a percentage of the
Operating Lease A lease where the lessees total value of imported goods, is due upon
payments do not cover the full cost of the granting of an import licence and will be held
asset. The operating lease is classed as a until completion of the import transaction.
true lease (USA). The lease is normally for Deposits do not attract interest and thus
a period which is shorter than the assets represent a real cost for the importer.
useful life and the lessor retains ownership Production Payment A payment securing the
of the equipment during the lease term and right to a specific percentage of a product or
after it expires. Anticipated maintenance and service.
other costs can also be built into the rental Pro-forma Invoice An advance copy of the final
payable by the lessee. invoice. Often used by importers to apply
Order Bill of Lading A negotiable bill of lading for letters of credit and for foreign exchange
made out to the order of the shipper. allocation in countries where that is required.
Output Specification Refers to the Project Finance A form of financing projects,
requirements, specified by the procuring primarily based on claims against the
authority, on what they want the project to financed asset or project rather than on
accomplish. The prospective contractors the sponsor of the project. However, there
must then resolve how the requirements will are varying degrees of recourse possible.
be best met. Repayment is based on the future cash
Packing List A list detailing the contents of a flows of the project.
consignment. Promissory Note A written promise by a
Partial Shipment A shipment that is less than borrower to repay a loan in accordance with
the total quantity ordered. the specific details of a contract.
Payable through Draft (PTD) A draft that Protest An action required to be taken in some
is only payable via a nominated bank. countries in order to protect ones rights to
Depending on the conditions attached to the seek legal remedies when a collection or
draft, the nominated bank may be the paying negotiable instrument is dishonoured.
bank or only act as the collecting bank that Purchase Option An option permitting the
presents the draft for payment. See draft. lessee to buy the leased asset at a specified
Performance Bond A bond issued by an price or at the fair market value at the end
insurance company to cover a specified loss of the lease term. See lease purchase, hire
if the EPC contractor fails to complete the purchase.
construction of the project. Purchase Option Price (Purchase Option
Performance Guarantee An undertaking that Value) The price at which the lessee has the
a project will be completed adequately by option to buy the asset on a specified date
the contractor, and cover against loss if the (normally at the end of the lease).
contractor fails to do so. Red Clause Letter of Credit A letter of credit
Presenting Bank The bank responsible that permits the beneficiary to receive
for contacting the buyer (importer) and advance payment before shipment has
submitting documents for payment or taken place, usually against the beneficiarys
payment acceptance. See collecting bank. certificate confirming its undertaking to ship
Primary Period The initial period of a finance the goods and to present the documents in
lease during which the lessee pays rentals compliance with the terms and conditions of
that will fully amortise the initial cost of the letter of credit.
the equipment plus interest. The lessee is Recourse Factoring The sale or transfer of
title of the accounts receivable to a third arrangement that provides the borrower
party (factor) where the latter can request with a degree of flexibility by allowing
repayment from the seller if the debtor fails the borrower to draw and repay different
to meet their payment obligation. amounts for different periods throughout
Recourse (Vendor Recourse) In a leasing the life of the credit facility. There is no
context, refers to the lessors right to return requirement for a revolver to be fully drawn.
assets to the manufacturer or distributor Revolving Letter of Credit A letter of credit
in the event of a lessee defaulting on in which the amount is renewed without
payments. The manufacturer/distributor requiring any specific amendments to the
may also be responsible for re-marketing letter of credit. It is usually used where
said assets. regular shipments of the same goods or
Reimbursing Bank In a letter of credit, a commodities are made to the same importer.
correspondent bank of the issuing bank that Sea Waybill (SWB) Similar to a bill of lading
is designated to make payments on behalf but without offering title of goods; it is used
of the issuing bank to the negotiating or for maritime transports. It allows the importer
claiming bank. to collect the goods against identification.
Remitting Bank In a transaction involving a They are useful for companies that trade
documentary collection, refers to the bank internationally with themselves between
institution that is responsible for sending a geographical areas where payment for
draft overseas for collection. exports is not a problem.
Renewal Option A provision in a lease contract Secondary Period Period following the primary
giving the lessee the opportunity to renew/ period of a finance lease.
extend the contract on a specific option date Shipping Certificate Used by several futures
and at a predetermined rental rate. The exchanges, a shipping certificate is a
option date generally falls just prior to or at negotiable instrument issued by exchange-
the date of expiry. approved facilities that represents a
Rentals The periodic payments required in commitment by the facility to deliver the
leasing agreements. Rentals can be fixed or commodity to the holder of the certificate
floating. under the terms specified therein.
Reserve Tail Proven reserves available after Shipside Bond / Shipside Bank Guarantee A
all the projects funding is repaid. joint undertaking by an importer and its
Residual Sharing An agreement between bank issued in favour of the freight carrier
the lessor and another party to divide the so as to allow delivery of goods prior to the
residual value of the lease between both submission of the required original shipping
parties. If not carefully drawn up, such documents, such as the bill of lading,
arrangements may have negative tax invoice, etc.
implications. Sight Draft A draft required to be paid upon
Residual Value The value of a leased asset presentation.
upon expiry of the lease contract. Silent Confirmation The confirmation by a
Residual Value Insurance An insurance that bank of payment under a letter of credit that
acts as coverage against an unforeseen loss is not disclosed to the letter of credit issuing
in value of leased property upon expiry of bank.
the lease contract. Special Purpose Vehicle (SPV) A private
Revocable Letter of Credit A revocable letter company that has been set up with the
of credit can be amended or cancelled specific and sole objective of carrying out
at any time by the importer (unless a given project. Upon completion of the
documents have already been taken up project, it may also be contracted to provide
by the nominated bank), without requiring a service associated with the project to the
the exporters consent. Because revocable procuring entity.
letters of credit offer little protection to the Sponsor The developer of a project, who
exporter, they are not often used. normally supplies part or all of the equity
Revolving Credit Facility A borrowing financing.
Standby Facility A line of credit supplied by Subsidised Lease A lease that is financed
a bank which is not expected to be drawn, via captive finance companies (or captive
apart from in exceptional circumstances. finance arms) where an element of the sale
Standby Letter of Credit (SBL/C) A letter profit can be used to subsidise the rentals
of credit issued to ensure the financial payable by the lessee.
performance of a banks customer to a third- Supplier Credit A credit extended to the
party beneficiary and which is only drawn overseas buyer by the supplier. See export
upon in the event of non-performance. buyer credit.
Stale Bill of Lading A bill of lading that is not Supply-or-Pay Contract An agreement by
available at the time of a consignments a supplier to provide a product/service at
delivery, thereby delaying the transfer of specific intervals at a predetermined price
ownership, or a bill of lading that is presented or, if this is impossible, to pay for alternative
after the expiry of a letter of credit. provisions.
Standard Shipping Note (SSN) A standardised Tax Indemnity Clause A clause that is
document, completed by the exporter or incorporated in a tax-based lease to allow
freight forwarder for all non-hazardous the lessor to adjust rental payments in the
consignments, which principally serves event of any changes in the tax regulations
to tell the destination port how the goods in order to maintain the lessors original
should be handled. anticipated return from the lease.
Step-up / Step-down A provision in a lease Tax Lease (Tax-based Lease) A lease where
contract according to which the amount of the lessor benefits from tax depreciation as
the monthly payments increases (step-up) owner of the assets and builds these benefits
or decreases (step-down) during the lease into the rentals payable by the lessee.
period. Tax Variation Clause A clause inserted into a
Stepped Rentals (Step Rentals) In a lease to enable the lessor to vary the rentals
structured lease, rentals can vary during the if there are any changes in the tax rates or
lease period. Generally, the rental payments system.
increase as the lease period progresses. Technology Refresh Option An option in a
Step rentals are generally used for tax lease agreement permitting the lessee
savings or cash-flow purposes. to upgrade the leased assets at certain
Step-in Rights Right under a direct agreement intervals of the lease period in exchange for
for the funders to take control of the an increase in the original lease term and/or
operation of a project contract. amended payment conditions.
Stipulated Loss Value A schedule in a lease Termination Schedule The part of a leasing
contract recording the book values of the contract that stipulates the value of the
underlying asset during the lease term, the leased assets throughout the leasing
amounts of depreciation, its residual value, period. This section is added in case
possible tax benefits, and the obligations the lease allows the lessee to terminate
of the lessee in case of loss of or damage the leasing contract before its expiry in
to the leased property. Provides the sum order to protect the lessor from loss of
payable on early termination of a lease. Also investment. It values the transfer or resale
known as insured value or casual value. value of the leased asset throughout the
Structured Lease A lease where the rentals leasing period. If the asset is sold below
payable by the lessee are tailored to match the price given in the schedule, the lessee
the cash flows generated by the assets is liable for the difference; however, if the
under lease. Can apply to seasonally used asset is sold at a higher price, the lessor
assets, e.g. combine harvesters or charter keeps that difference.
aircraft etc. Termination Value A provision in a lease that
Sub-lease A leasing contract that transfers a allows the lessee to terminate the lease
number of the lessors rights to another. This during the lease term if the leased asset
does not affect the validity of the contract becomes obsolete or does no longer fit
between the original lessee and lessor. in with the lessees requirements. The
cost for the lessee resulting from such a Uniform Rules for Contract
termination is spelled out in the termination Guarantees Guidelines issued by the
schedule. International Chamber of Commerce (ICC)
Through-put Contract A contract where the that aim to provide consistency of practice
obligors must pay for the shipment of and a fair balance between the interested
specific quantities of products, such as oil or parties in the use of contract guarantees.
gas, over specific periods via a pipeline. Upstream Guarantee Guarantee issued by a
Time Draft A draft that is payable at a specified company, usually an operating subsidiary, to
time in the future. support its parent companys obligations.
Tolling Contract A contract in which raw Usance The length of time allowed for a letter
materials or other input supplies are of credit or negotiable instrument to be paid.
provided at no cost to a project that is paid Usance/Time Draft A draft that is payable after
for processing them. a set period of time.
Trade Acceptance/Bill A bill of exchange used Value Date The day on which a transaction is
in international trade. settled, the payer is debited and the payee
Trade Credit Credit extended by the company credited. These days may differ if there is
selling the goods to another company to float.
enable it to buy goods/services from the Variable Rate An interest rate that changes
party that is extending the credit. periodically in line with market rates.
Trade/Commercial Letter of Credit A promise Vendor Lease A contractual agreement
document issued by a bank to a third party between a vendor of equipment and
to make a payment on behalf of a customer a leasing company where the latter
in accordance with specified conditions. undertakes to lease the vendors assets in
Frequently used in international trade. order to promote the latters sales. This type
Transferable Credit Funds available via a letter of arrangement is comparable to a lease
of credit which can be transferred from one financed via captive finance companies. Also
beneficiary to another. known as lease asset servicing.
Uncommitted Line of Credit A credit line that Waybill A document similar to a bill of lading
carries no obligation for the bank to provide prepared by a transportation line at the
funds at the borrowers request and that can point of shipment, for use in the handling
be cancelled without notification. of the shipment, setting out such matters
Uniform Customs and Practice for as the point of origin and destination and a
Documentary Credits An International description of the shipment.
Chamber of Commerce (ICC) publication Working Capital The short-term assets a
listing the regulations for letters of credit that company has at its disposal to produce
are required to be subject to its rules (often further assets. These include items such as
known as UCP 600). cash, accounts receivable, inventory and
Uniform Rules for Collections Guidelines marketable securities. The amount by which
issued by the International Chamber of these exceed the companys short-term
Commerce (ICC) that outline standard liabilities is the net working capital or net
documentary collection practices. current capital.
The Royal Bank of Scotland is a top seven The bank helps clients access its
trade finance provider globally. With a international network, reduce risk, provide
worldwide presence in the major trading liquidity, strengthen trading partner
economies, and expertise on the ground in relationships, and release working capital
both developed and emerging markets, the thus enabling clients to develop and grow
bank has a proven capability to facilitate business profitably and securely overseas.
international trade through superior products,
technology and execution. Enquiries:
RBSs customer focused approach Mark Ling,
to trade enhances its client knowledge, Head of Trade & Supply Chain Origination
becoming a long term strategic partner Transaction Services, UK
creating solutions that draw on the banks The Royal Bank of Scotland
comprehensive product set from traditional 250 Bishopsgate
paper-based documentary credits, bonds London
and guarantees and trade finance to EC2M 4AA
sophisticated international supply chain Britain
finance solutions. This supports our
customers to meet their needs across Email: mark.ling@rbs.co.uk
the full spectrum, ranging from small and Phone: +44 207 678 3734
medium-sized enterprises through to Mobile: +44 771 1005417
multinational organisations. www.rbs.co.uk/international
As the UKs leading corporate bank,
our trade advisors combine an in-depth
understanding of trade and working capital
cycles with an intimate understanding of the
needs of UK businesses that are conducting
business internationally.
Industry Accolades
Quality Leader in Large #1 Large Corporate Trade Best Bank for Liquidity Best Supply Chain Finance
#1 Domestic Cash Manager #2 Regional Cash Manager Corporate Trade Finance Finance Market Penetration Management Provider
United Kingdom Western Europe in the UK in the UK Western Europe Western Europe
2012 2012 2012 2012 20062013 20082012
www.treasurybestpractice.com
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Enrolment deadlines
15 March and
15 September
For more information please visit
www.treasurers.org/certitm