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Trade Finance and Structured Trade Finance

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The Trade Finance and Structured Trade Finance presentation made at the NIC Entrepreneur Workshop on 28th May 2014

Published in: Business, Economy & Finance
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Trade Finance and Structured Trade Finance

  1. 1. Trade Finance and Structured Trade Finance
  2. 2. Trade Finance Products • Receivables Finance & Bill/ Invoice Discounting facilities • Documentary Letters of Credit & Documentary Collections • Guarantees & Bills Avalized. • Pre- shipment/Pre Export • Import & Post Import Finance • Stock, Commodity & Warehouse Finance
  3. 3. Why Use Structured Trade Finance?
  4. 4. Traditional lending VS Structured Finance Factors to consider Traditional Lending Structured Finance Credit Risk • Heavy reliance on the creditworthiness of the borrower • Heavy reliance on the performance of the transaction. Financial strength • Requires a strong balance sheet • Requires that the transaction be sound with readily available receivables to self liquidate the transaction. Collateral • Borrowers must provide tangible assets to securitize the borrowing • Chargeable assets are limited and are usually related to the transaction. Risk Variables • All direct and indirect (in varying degrees, depending on the financier, country and borrower concerned) factors relating to the borrower are taken into account. • All direct and indirect factors relating only to the transaction in question and not the borrower.
  5. 5. Traditional lending vs. Structured Finance (Contd.) Factors to consider Traditional Lending Structured Finance Country Risk • Country risks are deal breakers in this form of finance. • Country risks are surmountable provided the performance and risk of the transaction is acceptable. Expertise Required • Expertise required in traditional finance is relatively straight forward. • Specialized and broad expertise required in structured finance due the complexity of transactions. Costs • Costs of traditional finance relatively high. • Up- front cost may be high, however due to the lower cost of funding overall costs of the transactions are likely to be lower
  6. 6. Advantages Of Trade Finance
  7. 7. •Helps manage your costs (commission not monthly interest) •Gives control to the Supplier (“Exporter”) • Assuring the exporter of payment • Provides legal acknowledgement of existing debt • Can provide alternative means and easy access to finance • Facilitates good working capital management and as a consequence building a sizeable, strong balance sheet. • Facilitates increased turnover via access to funds for goods for sale. • Allows extension of credit terms hence increasing the supplier’s portfolio. Advantages of Trade Finance to the Exporter
  8. 8. • Gives control to the Importer (“Buyer”) • Quality assurance - The importer can link contractual requirements to the payment process through requesting specific documents e.g. Inspection certificate (SGS Cotecna, Intertek ) indicating goods meet the specific industry and customer standard. • Budgetary control & Cash flow management – especially on Capex items plant & machinery, guaranteed payment allows for assembly and completion of machinery without funds being tied up in form of deposits. • Can help obtain longer credit terms from suppliers around the guarantee of the payment obligation by the importer's bank. • Facilitates trade where the buyer (“importer”) and seller (“exporter”) have no previous relations. Advantages of Trade Finance to the Importer
  9. 9. Case Study
  10. 10. Case Study: Purchase of Equipment and conversion into a Lease What we did for the Customer Customer Issue • NIC trade finance issued an import letter of credit that was confirmed by the supplier’s bank and that was available for a period of 360 days from the bill of lading date. (deferred payment) • At maturity of the letter of credit the same was converted into a lease payable over a period of 48 months. • ABC company has won a contract to provide logistical services to a mining company for coal and has signed the contract over a period of 5 years. • ABC company has two trucks and three tippers but requires additional equipment to provide adequate capacity. • ABC company wants to ensure that the equipment supplied meets the specifications of the employer and will be able to provide service over the period of the contract. • ABC company additionally requires a moratorium ( grace period ) before the lease* payments kick in. * lease in this case as it is specialized equipment for this industry and the lease structure has tax benefits attached to it) payments kick in.
  11. 11. Customer Benefits • Timely Receipt of exact pieces of equipment ordered • ABC can negotiate credit terms with the supplier if LC is confirmed as the supplier can discount the letter of credit on presentation of documents that conform strictly to the letter of credit • Supplier risk is substituted by that of NIC bank overcoming credit and country risk. • ABC gets a moratorium ( grace period) before the interest and principal (in this case lease payments fall due. ) only paying a commission for the letter of credit. • The trucks will already have started generating income from the time of delivery to the commencement of the lease payment thus relieving pressure on much needed cash flow to mobilize the site for the contract. • In the unlikely event that the supplier goes bust or is unable to deliver ABC only loses commissions as opposed to a direct payment which would have tied up cash flows without possibility of getting subject funds back. • Letters of credit assist in managing country risk in the event that the country has foreign exchange controls thus making it easier to make payment into the country or receive foreign currency in the case of the supplier. • The lease and the payments from the contract are used as collateral to secure subject transaction. Case Study: Purchase of Equipment and conversion into a Lease (Contd)
  12. 12. Trade Finance Contacts Kevin Odero Product Manager 0723292921/020-2888499 kevin.odero@nic-bank.com Maria Mkenda Manager 0733856887/ 020-2888469 maria.mkenda@nic-bank.com Customer Contact Center : email customercare @nic-bank.com; Tel 020 2888217, 0711041111, 0732141111,SMS 20488 www.nic-bank.com
  13. 13. THANK YOU

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