Letters of Credit need not be as complex as they are made out to be. We will try and cut through the jargon, explain the acronyms, show who the parties are and explain how the letter of credit can make all the difference to the smooth transition from goods to cash in respect of the underlying trade transaction as well as having the added benefit of mitigating some risks, helping to manage the time line and importantly telling the world that your bank is backing you. Remember they are putting their name to your trade transaction with their letter of credit guaranteeing your payment to the supplier. That has to mean added value to your business. For more details click on the link below.
Documentary collections are simply where a seller/exporter of goods/service wants to send on a secured basis to a buyer, all the original commercial/shipping documents relating to the sale. The seller/exporter sends the documentation to their bank with an application form in which they record all the documents to be sent and in the application they set out how the documentation should be processed. The sellers/exporters bank will then send the documents with a collection schedule which it lists the documents and also provides the instructions to the buyers/importers bank on how the documents are to be processed, when and how the payment is to be made and what the bank should do in the event of non-acceptance/non-payment by the buyer/importer.
The method for processing the documents sent under a collection is effectively a two stage process, acceptance and payment. Thecollections have three main acronyms, D/A = Documents against Acceptance. D/P = Documents against Payment CAD = Cash against Documents.
You can also have what is described as 'Clean Collections' which are collections that are being used to present a bill of exchange or promissory note for acceptance and payment.
For more in-depth information regarding collections click on the link below.
Bank guarantees are used extensively to underwrite a variety of transactions and situations where the primary purpose is to secure the performance or other obligations of a seller to a buyer and normally in respect of the supply of services or goods or performance such as that of a piece of machinery. The idea is that the buyer (the beneficiary) of such guarantees is covered for an agreed sum of money in the event that the supplier fails to fulfil their obligations or other commitments pursuant to the terms and conditions of the agreement/contract signed between the two parties. The bank who is acting as the guarantor for the seller is not in any way connected with or bound by the underlying contract between the two parties even though this may be referred to within in the text of the guarantee.
For more information on the various forms of guarantee including the Standby Letter of Credit click on the link below.
Funding trade or put it another way bridging the working capital deficit is not rocket science but finding what is best for your business and making sure that the solution will work for you and your cash flow may take a little time. It may involve a pre-shipment or post shipment finance or a combination of both for either an import or export transaction. What you will not get despite many institutions advertising it on their websites the discounting of an LC and the reason why is very simple. The LC is an undertaking to pay and requires some action by a beneficiary which relates to an event (e.g. shipping goods against a contract or order). The beneficiary presents documents and the performance is almost complete. If it is a deferred payment or usance LC, you may be able to discount the acceptance under the LC. Apart from that you have nothing to discount as the LC in itself is not capable of being discounted. However you may be able to obtain pre-shipment finance where the source of repayment for this loan is the resultant coming from the beneficiary’s presentation of documents that fully comply with the terms of the credit. This and more about the trade finance loan and other funding solutions coming soon.
Invoice finance is a very good way for a business to borrow money using the amounts due from customers. It can help a company improve its cash flow and in doing so enable the business pay suppliers and general business overheads. Providing there are sufficient number of invoices and supplier credit is available it can help a company invest in it operations and grow more quickly than they could if they had to wait until their buyers to pay their invoices in full. This type of funding broadly falls into two categories, namely discounting or factoring. With Factoring, the funder takes the role of managing the sales ledger, credit control and chasing customers for settlement of their invoices. With Invoice Discounting, your business retains control of its own sales ledger and chases payment in the usual way.
Many of the players in the market who offer invoice finance are members of UK Finance which is the trade association for the finance and banking industry operating in the UK. They represent around 250 firms in the UK who provide credit, banking, markets and payment-related services. The organisation brings together most of the activities previously carried out by the Asset Based Finance Association, the British Bankers’ Association, the Council of Mortgage Lenders, Financial Fraud Action UK, Payments UK and the UK Cards Association. Any business that is considering IF as a source of funding are advised to check whether the lender is a member of UK Finance and comply with the industry code of practice. For more information on UK Finance go to their website https://www.ukfinance.org.uk/
More information on the merits and some of the issues will follow soon.
Supply Chain Finance (SCF) is probably the least well-known, understood and utilized funding mechanism of the main trade finance products. However it can prove to benefit the business in a number of ways beyond simply cash-flow support.
The mechanism for SCF is that the provider settles company invoices ahead of credit terms direct to the supplier. The company will repay the funder at an agreed date either on the date the invoice matures or later, ideally, in line with company receivables.
Typically, the invoice settled to the supplier is less a margin – the cost to the supplier for receiving early, and thus improving their cash-flow, but likely to be a lower cost than traditional trade finance or overdraft. Alternatively, other funders will charge a fee to the company, and a margin, if the agreed date for the repayment is increased beyond the maturity of the invoice.
The benefits of this type of funding are that this is a cost effective way for the company to improve cash-flow by gaining the ability to negotiate early settlement discounts with their suppliers. The provision of this type of funding effectively provides funding to both the supply chain and the company itself.
Many suppliers, who don’t necessarily have the creditworthiness of their customers, are able to find funding where they may not have been otherwise eligible for, and the cost of which will be based on the company not itself, and only based on the time period before the company settles that invoice. Equally, for the company, by supporting the funding for their supply chain, the certainty of supply of stock or raw materials is assured – critical for manufacturers and retailers alike.
The funders providing this type of finance do so in a variety of ways – by either taking a debenture as they would with an overdraft or by asking the company to put in place of credit insurance and/or a loan fee as a percentage of the loan provided.
If you would like to find out more and how SCF might benefit your business why not give our resident SCF specialist, Sarah Padilha a call on 07805 876633