Trade Finance Innovative solutions for SMEs

Transaction Banking 26Sep2012

What is Trade Finance

Facilitates cross border and domestic trade flows between buyers and sellers

Mitigate Risk

Settlement

Financing

Objectives

Balance Sheet Mgmt

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

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

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

Risks in International Trade

Buyer credit risk

Supplier performance risk

Sovereign & Country risk

Foreign exchange risk

Market risk

Working Capital Cycle

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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

Buy Sell Collect

Working Capital Cycle for SMEs

Cash /Capital

RawMaterial

Work inProgress

FinishedGoods

Receivables

Working Capital Cycle for SMEs

Raw Material

Finished Goods

Receivables

Work in Progress

Cash/ Capital

Order L/Cs (Sight/Usance)Preshipment FinanceInvoice FinancingFinancial Gtees./ SBLCsAdvance payment against Proforma Invoice

Stock HoldingImport Loans/ Loans Against Trust Receipts Preshipment FinanceUsance L/CsPurchase Invoice FinancingLoan Against ImportsWarehouse FinancingFinance against Commodity Receipts

SalesBills under Export LCOutward Collection Bill/ Invoice DiscountingCheque Purchase/ BOE DiscountFactoring

ProductionImport Loans/ Loans Against Trust Receipts (LATR)Preshipment FinanceUsance L/CsPurchase Invoice FinancingLoan Against Imports

Structured Trade Products for the whole

cycle end-to-end

Financing Receivables

(2a) Submitsinvoice

Buyer Seller

(1) Delivers /Ships goods

Border

Discounting Bank

(2b) Finances

(3) Pay on due date

(4) Repays

How is Financing Receivables different?

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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

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 Receivablescould be your solution

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?

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?

Q & A

Thank you

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