FINANCING THE SALE OF GOODS SEMINAR

 

Buddy Baker

+1-847-830-3038

buddy.baker@gtrisk.com


  I.    Choosing Credit/Payment Terms (Overview of Days 1 & 2 for New Participants)

II.    Why Customers Want Financing from Their Suppliers

    A.    Looks better on the balance sheet than bank debt

    B.    May be tapped out with their bankers

    C.    Lower rates than available from their bankers

    D.    May not be allowed to borrow locally in dollars

    E.    Arbitrage opportunity

III.    Impact on Sellers of Offering Financing

    A.    Increases risk

    B.    Increases DSO

    C.    Impairs balance sheet ratios

    1.    reduces corporate cash and/or

    2.    increases debt

    D.    Increases costs

    1.    direct: financing costs money

    2.    indirect: worsened balance sheet may cause overall corporate borrowing to cost more

    E.    But… increases sales!

IV.    Picking a Financing Structure

    A.    What are your objectives?

    1.    I’ve got cash and I’m willing to take the risks—I’ll match whatever anyone else is offering

    2.    I don’t have excess cash but I need to compete—I need new ways to fund foreign receivables

    3.    I need to compete but I’m concerned about my balance sheet—I’m interested in ways to get my foreign receivables off my books

    4.    I want to expand my exports but I don’t want to increase my risks

    B.    Major variations in financing structures: customer’s perspective

    1.    How long before the customer pays?

        Rule of thumb: Financing should not exceed the time for the goods to generate cash for the customer—anything more is a straight loan

    2.    Does the customer have to get his bankers involved?

        a)    L/Cs

        b)    guarantees (avals)

    3.    Does the customer have to sign anything?

        a)    time drafts

        b)    promissory notes

    C.    Major variations in financing structures: exporter’s perspective

    1.    considerations

        a)    Where will the funding come from?

        b)    What will the funding cost?

        c)    Will the financing be on-balance-sheet or off?

        d)    Can the remaining risks be reduced or eliminated?

        e)    How much work is involved, both up-front and ongoing?

    2.    alternatives

        a)    Carry it internally (cash rich)

        b)    Use the receivable as collateral in order to borrow (still on the books)

        c)    Sell the receivable (off the balance sheet)

            (1)    non-recourse

            (2)    limited recourse

V.    Building Blocks of Trade Finance

    A.    Security interest laws

    1.    assignment of rights in trade receivables

    2.    assignment of proceeds of letters of credit

    B.    “True sale” accounting standards

    C.    Negotiable instruments

    1.    What does “negotiable” mean?

        Title transfers by endorsement and delivery

    2.    requirements for negotiable instruments

        a)    sum certain

        b)    payable on demand or at a fixed maturity

        c)    unconditional

        d)    signed

        e)    payable to order or to bearer

    3.    holders’ rights

        a)    recourse (for dishonor)

        b)    holder-in-due-course rights (in the case of disputes)

    4.    examples of negotiable instruments

        a)    checks

        b)    promissory notes

        c)    trade acceptances

        d)    bankers’ acceptances

    D.    Letters of credit

    1.    commercial

    2.    standby

    E.    Credit insurance

    F.    ECA programs

VI.    Financing Documentary Collections

    A.    How sight drafts work

    B.    How time drafts work (getting the buyer’s signed promise to pay)

    C.    Avalized drafts and forfaiting (adding a bank guarantee)

    D.    How “export bills financing” works

VII.    Financing Letters of Credit 

    A.    Basic mechanics and principles of letters of credit

    1.    structure and flow

        3 parties: applicant, beneficiary, issuing bank

        3 contracts: contract of sale, L/C application, L/C

    2.    principles

        a)    independent

        b)    documentary

    3.    objective: shift the risk from the buyer to the buyer’s bank

    B.    International letters of credit

    1.    adding a nominated bank

    2.    how letters of credit are available

    3.    rights of a negotiating bank

        a)    L/C must call for drafts

        b)    L/C must be available by negotiation

        c)    L/C must be available with negotiating bank

    4.    negotiation without recourse (“silent confirmation”)

    5.    negotiation with recourse

        a)    only available from a relationship bank

        b)    similar to depositing a check with recourse

        c)    speed up cash flow

        d)    centralize international banking needs with one bank

    6.    the value of receiving “freely available” letters of credit

    7.    using shippers’ indemnities

    C.    Usance letters of credit

    1.    L/Cs with time drafts vs. deferred payment L/Cs

    2.    significance of whom drafts are drawn on

        a)    obligations of the drawee

        b)    fixing maturity

    3.    discounting accepted drafts

    4.    L/C re-financing vs. time drafts

    5.    effect of “discount charges for buyer” clause

VIII.    How Credit Insurance Facilitates Financing

    A.    What is trade credit insurance?

    1.    insures receivables against nonpayment by buyers

    2.    involves risk sharing

    3.    does not cover disputes

    B.    Major providers

    1.    private insurers

    2.    ECAs

    C.    Risks covered

    1.    commercial risks

        a)    insolvency

        b)    protracted default

    2.    country risks

        a)    transfer risk

        b)    government moratorium/exchange controls/discharge of debt

        c)    contract frustration

        d)    civil turmoil

    D.    Principles

    1.    credit limits

    2.    named-buyer coverage (“European-style” coverage)

    3.    discretionary credit limits & deductibles (“American-style” coverage)

    E.    Types of policies

    1.    “whole turnover”

    2.    key-account

    3.    single-buyer

    F.    Policy variables

    1.    cancelable or non-cancelable limits

    2.    “risk attaching” or “loss occurring”

    3.    insured percentage

    4.    annual deductible

    5.    non-qualifying loss amount

    6.    individual buyer limits

    7.    discretionary limit

    8.    insurer’s maximum policy liability

    9.    covered terms of sale

    G.    Credit insurance and banks

    1.    credit insurance enhances your own creditworthiness

    2.    some banks will purchase insured receivables with limited recourse

    3.    asset-based lenders and banks that securitize receivables require credit insurance on foreign receivables and buyers with large concentrations

    4.    banks do not like deductibles or the conditions that accompany discretionary limits and non-cancelable limits

    5.    the bank may be made the loss payee or, in some cases, a joint insured

IX.  Financing Open Account Sales

    A.    Asset-based borrowing

    B.    Factoring

    C.    Sale of individual receivables

    D.    Sale of receivables covered by standby L/Cs

    E.    Sale of insured receivables

    F.    Bankers’ acceptances not under L/Cs

X.    Structured Trade Finance

    A.    Exim- and SBA-guaranteed working capital loans (pre-export)

    B.    Purchase order financing (including back-to-back L/Cs)

    C.    Securitization of receivables

    D.    ECA-guaranteed/insured post-export loans

    E.    Privately insured, medium-term installment notes

XI.  Another Way to Slice It

    A.    Post-shipment, short-term financing

    1.    negotiation of L/C documents

    2.    export bills financing

    3.    sale of selected receivables

    4.    sale of insured receivables

    5.    asset-based borrowing

    6.    asset-backed securitizations

    B.    Post-shipment, medium- to long-term financing

    1.    forfaiting

    2.    ECA guarantees

    3.    medium-term insurance

    C.    Pre-shipment financing

    1.    purchase order financing

    2.    ECA working capital guarantees

    3.    insured pre-export financing

XII.Sources of Receivables Financing

    A.    Commercial banks

    1.    Asset-Based Lending Dept.

    2.    Trade Finance Dept.

    3.    Asset-Backed Securitization Dept.

    B.    Factors & finance companies

    C.    Hedge funds

    D.    Forfaiters

    E.    ECAs

XIII.Rules and Regulations to Be Aware Of

    A.    The Uniform Commercial Code, Article 9

    B.    The Uniform Commercial Code, Article 3

    C.    The Bills of Exchange Act (United Kingdom)

    D.    The Geneva Convention on Bills of Exchange

    E.    The Uniform Rules for Collections

    F.    The Uniform Commercial Code, Article 5

    G.    The Uniform Customs & Practice for Documentary Credits (“UCP”)

    H.    The International Standby Practices (“ISP98”)