Krishnakumar Duraiswamy, Head Trade Finance, ADCB

Report
Trade Finance
Innovative solutions for SMEs
Transaction Banking
26Sep2012
What is Trade Finance
Facilitates cross border and domestic trade flows
between buyers and sellers
Objectives
Mitigate Risk
Financing
Settlement
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
Operating Cycle
Buy
Sell
Inventory Holding Period
Raw Materials
Stock Period
Credit Granted
By Suppliers
WIP Progress
Period
Collect
Collection
Finished Goods Debtor Conversion
Inventory Period
Period
Working Capital Requirement
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.
Page 7
Working Capital Cycle for SMEs
Cash /
Capital
Receivables
Finished
Goods
Raw
Material
Work in
Progress
Working Capital Cycle for SMEs
Sales
Bills under Export LC
Outward Collection
Bill/ Invoice
Discounting
Cheque Purchase/
BOE Discount
Factoring
Order
L/Cs (Sight/Usance)
Raw Material
Cash/
Capital
Receivables
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
Work in
Progress
Preshipment Finance
Invoice Financing
Financial Gtees./
SBLCs
Advance payment
against Proforma
Invoice
Finished
Goods
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
Financing Receivables
(3) Pay on due date
Buyer
Seller
(1) Delivers /Ships goods
(2a) Submits
(4)invoice
Repays
(2b) Finances
Discounting
Bank
Border
How is Financing Receivables different?
Value Added Propositions
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
11
Right Product
Do you deal
with credit
worthy buyers ?
Are you facing
a working
capital
shortage?
Are you selling
to many buyers
on open
account credit
terms?
Is tied up capital
in accounts
receivables
limiting your
growth?
If the answer to any of these questions is a YES…
Financing Receivables
could 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
Disclaimer
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