trade finance innovative solutions for smes transaction banking 26sep2012
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Trade Finance Innovative solutions for SMEs Transaction Banking 26Sep2012 Slide 2 What is Trade Finance Facilitates cross border and domestic trade flows between buyers and sellers Mitigate Risk Settlement Financing Objectives Balance Sheet Mgmt Slide 3 International Trade Buyers and sellers exchange goods for payment across national borders Includes services Also forms of counter trade where trade is reciprocal and payment is not made across borders Slide 4 Problems SMEs face in International Trade Buyer and seller unknown to each other Language, laws, customs, regulations Transportation systems Buyers want time to pay while sellers want immediate payment Transfer of funds Foreign exchange Tariff barriers Politics Country stability Slide 5 Importance of Contract in Trade All trade transactions are subject to contractual agreement (sales contract) between the buyer and the seller Sales contract should include Method of dispatch Documents required Specification of party bearing the related costs Methods of payment Slide 6 Risks in International Trade Buyer credit risk Supplier performance risk Sovereign & Country risk Foreign exchange risk Market risk Slide 7 Working Capital Cycle Page 7 Debtor Conversion Period Raw Materials Stock Period WIP Progress Period Finished Goods Inventory Period Credit Granted By Suppliers What ties up cash? Increasing assets (inventory holding periods & debtors) Decreasing liabilities. The longer the stock & cash conversion periods the more cash is used. A reduction in credit can lead to crisis and pressure on bank facilities. Inventory Holding Period Working Capital Requirement Collection Operating Cycle BuySellCollect Slide 8 Working Capital Cycle for SMEs Cash / Capital Raw Material Work in Progress Finished Goods Receivables Slide 9 Working Capital Cycle for SMEs Raw Material Finished Goods Receivables Work in Progress Cash/ Capital Order L/Cs (Sight/Usance) Preshipment Finance Invoice Financing Financial Gtees./ SBLCs Advance payment against Proforma Invoice Stock Holding Import Loans/ Loans Against Trust Receipts Preshipment Finance Usance L/Cs Purchase Invoice Financing Loan Against Imports Warehouse Financing Finance against Commodity Receipts Sales Bills under Export LC Outward Collection Bill/ Invoice Discounting Cheque Purchase/ BOE Discount Factoring Production Import Loans/ Loans Against Trust Receipts (LATR) Preshipment Finance Usance L/Cs Purchase Invoice Financing Loan Against Imports Structured Trade Products for the whole cycle end-to-end Slide 10 Financing Receivables (2a) Submits invoice BuyerSeller (1) Delivers /Ships goods Border Discounting Bank (2b) Finances (3) Pay on due date (4) Repays Slide 11 How is Financing Receivables different? 11 Compared with other traditional lending facilities such as overdraft or short term loans which offer limited funding against receivables, Financing Receivables can advance funds up to 90% of the invoice value Large number of buyers covered under the facility Higher limits are assigned on the basis of : Quality of receivables Underlying goods and services Management of the company Our new credit methodology is a move away from sole balance sheet assessment to focus on your quality of receivables as well as strength of your relationship with buyers Value Added Propositions Slide 12 Right Product If the answer to any of these questions is a YES Do you deal with credit worthy buyers ? Is tied up capital in accounts receivables limiting your growth? Are you selling to many buyers on open account credit terms? Are you facing a working capital shortage? Financing Receivables could be your solution Slide 13 Case Study 1 Platinum Traders import Mobile Phones from Korea and re-export to GCC countries. The following is the information on their working capital Total annual imports are AED 100 M. Goods are purchased four times a year, on the first day of each quarter commencing 1st January. Order for each quarter is AED 25M Suppliers are paid on 30 days D/A basis from the date of AWB/bill of lading Normally it takes 5 days for the documents to reach Monthly sales are AED 10M Half the sales are on Cash basis and the balance on one-month credit to various buyers Assuming the company wants to finance the working capital What facilities will the Bank propose to the company? How will the Bank structure them? Slide 14 Case Study 2 Lucky Star Ltd. manufactures ceramic tiles for exports and domestic sales. The annual sale of Lucky Star is AED 60m. About 70% of sales are exported. On an average it takes 90 days for the company to receive export sales receipt, from the date that shipping documents are available The company requires to finance their export sales What facilities can the Bank provide to finance their export receivables? Slide 15 Q & A Slide 16 Thank you Slide 17 Disclaimer This document has been prepared by Abu Dhabi Commercial Bank PJSC (ADCB) for information purposes only. The information, statements and opinions contained in this presentation do not constitute a public offer under any applicable legislation or an offer to sell or solicitation of an offer to buy any securities or financial instruments or any advice or recommendation with respect to such securities or other financial instruments. 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