Structuring

Short term finance

 Financial requirements..
 One of the companies planning for capital expansion has
following requirements:
 Import of capital equipment – EUR 80 mn
 Working capital requirements - depending on operating cycle
 For domestic requirements
 For import of non capital goods requirements
 Receivables financing – company offers 180 days credit to their
overseas clients/buyers when they export their products
 How to structure the import
transaction

 Pricing to be finalized
 Factors which will influence the pricing?
 Terms of delivery
 Who will bear the transport and delivery expenses
 Where it will be delivered
 Terms of payment from the sellers point of view
 Can it be advance payment
 Or on credit
 Against any security
 Funding options….

 Rupee loan with domestic banks…

 Rate of interest will be based on Banks Base rate and
the rating of the borrower …
 ranging between 9.5% -11.5 % %
 Foreign currency loans from overseas market
 Interest rates will be on the basis of LIBOR
 Plus currency exposure
 International finance from overseas market

 Short term finance

 Trade related
 Import Finance for meeting import commitments
 Suppliers credit
 Buyers credit
 How it operates
 export finance for working capital expenses at pre-
shipment stage and receivable financing on post
shipment stage
 Working capital loan – Pre-shipment credit / purchase
invoice funding / vendor funding
 Receivable financing – Post shipment credit
 Issues….

 Value EUR 81 mn
 Buyer wants 36 months credit
 Risk factors for both buyer and seller
 Default risk – for the seller on the buyer
 For the buyer –
 timely delivery – time overrun cost overrun – penalty
 Quality…… same equipment or specification
 Currency exposure.. -
 Funding option…..
 Risk factors

 For seller -
 Managing the default risk
 Either through bank guarantee or letter of credit or Standby
letter of credit from the buyers bank
 For buyer
 To receive the same goods which he ordered
 On time – delayed arrival may result in time over run / cost
over run
 Finance – options
 Avail Rupee term loan and pay to overseas seller
 Interest will be around 10.5%
 Other options
 Avail credit from the seller or overseas bank – and pay interest
according to global market….. LIBOR related…..
Managing risks through instruments

 Letter of credit / Documentary Credit

 Bank guarantees /Stand by letters of credit
 Bank Payment Obligation (BPO)
 Short term finance for imports

 With or without any supportive instruments from the local

banking system
 With supportive instruments from overseas lending
institution or supplier of the materials
 Letter of credit
 Guarantees
 Standby credits
 Should comply regulatory issues of the host and home
country
 Regulations will be country specific - on the basis of country’s
forex reserve position
 Short term finance
 Option 1 – from domestic market in local currency
 Option No.2.
 From the overseas supplier –
 negotiate credit period
 Interest to be paid for the credit period on LIBOR based
 Option No.3
 In case overseas supplier could not extend credit, negotiate foreign
currency loan with any foreign financial institution at LIBOR related
interest rate
 Option No.4
 Look for line of credit from bilateral or multilateral financial
institutions.
 Short term finance suppliers credit

 How it works
 Overseas seller giving credit to the buyer
 May recover interest charges for the number of days credit
allowed
 Interest could have been loaded in the basic price
 or
 Recovered separately
 Advantage to buyer
 Getting credit for procurement
 Production cost may be comparatively lower
 stage II Payment on due date
with interest
seller
Overseas

importer Stage I
Supplying goods on
credit
Suppliers Credit
 How buyers credit operates

 Lending institution from the sellers country or any

foreign country
 Offering credit facility to overseas buyer
 Projects abroad
 For supply of heavy equipments / capital goods exports
 Securing themselves with suitable instrument from
the buyers bank
 Buyer’s Credit

Seller

Overseas financial
institution
Supply of goods
Stage II

buyer
 Import loan USD 60 mn
 Loan required for 90 days
 Rupee loan Interest at 8.25%
 Suppliers credit L + 40 BP – LC charges 1.50%
 Buyers Credit L + 30 BP – BG charges 1.25%
 Libor for 90 days 2.55%
 Spot USD/INR 69.35/40
 3 months FWD 60/62
 Comparative cost advantage

 FC loans from abroad

 Domestic loans  Interest L + 0.30 = 2.60%+
 Interest rate: 8.75 0.35 = 2.90%
 LC / guarantee charges =
2.15%
 FWD cover = 4.32%
 Total = 9.37
%
 Types of exports / exporters

 Cash exports – commodity exports

 Project exports -
 Deemed exports (Chapter 7 of FTP 2015-20)
 Resulting in savings of forex for govt – import
substitution
 Resulting in earning of forex – but goods will not leave
Indian shores
 Software exports
 on – site or off-shore projects
 Export related financial
arrangements

 Export finance
 Domestic currency – in INR
 Foreign currency
 At different stages – Pre and Post shipment
finance
 Till manufacturing stage – working capital finance
 Packing credit in INR/FC
 PC Running account
 Receivable financing
 Export bills purchased / discounted
 Export finance – different stages

Pre shipment stage

Post shipment stage
Packing credit
Fgn Bills discounting
In INR /FC

Date of receipt Date of payment

of export order Date of shipment 1st Jan 2020
1st April 2019 1st Oct 2019
 Options for exporters

 Default risk on the buyer / funding requirements

 To manage default risk and funding exporter has three
options:
 Get an Letter of Credit confirmed by a local bank and pay
confirmation charges + Interest to be paid to the bank which
gives loan
 Get the export exposure covered with Export Credit
Guarantee Corporation ECGC India Ltd and pay premium for
the risk coverage
 Factoring – International factoring / domestic factoring
 Receivable financing..

 Advantages
 Undisturbed cash flow
 Can take up new projects
 Disadvantages
 Only funding arrangements are taken care
 Funding agencies - banks - always fund the client with
recourse only.
 Banks protect exporter against the default of the buyer
 Other alternate to manage the
default

 Approaching credit risk agencies

 Exporter
 To cover the financial risk from date of receipt of an export
order till the payment is received
 Lending institutions
 To cover their exposures on their clients from the time they
extend credit facilities
 Premium paid for covering the credit risk and the
interest payable on borrowing should be factored /
included for arriving at the cost of financing
 Credit Insurance

 Large trading houses can focus on their core

activity – receivables risk free
 Default risk on the buyer can be covered under
Credit Insurance
 In India – ECGC Ltd
 Global players
 AIG
 COFACE
 EULER HERBES
 QBE
Options to Corporate in managing
receivables
 Funding from bank against confirmed Letter of credit
(Interest for loan plus confirmation charges for Letter
of credit)
 Funding from bank against risk protection from Export
Credit Guarantee corporation India .(ECGC India Ltd) –
interest to bank and premium to ECGC for risk coverage
 Funding and risk protection from any agency like
Factoring services
 NEW TECHNIQUES…

 FACTORING
 FORFAITING
 Types of Factoring

 Domestic Factoring
 For Inland Sales on a “With Recourse” or “without
recourse’

 Export Factoring
 For Overseas Sales, With Credit Protection
 Maturity factoring
 Definition of Factoring
is a contract between ‘the Supplier’ and ‘the Factor’
wherein:the the Factor performs atleast two of the
following services:
 Credit Protection against Bad Debts; continuous feed back
about the credit status of the buyer
 Financing by way of prepayments against invoices;
 90%advance - on shipment to approved debtors
 Sales Ledger Maintenance;
 Collection of Receivables;
 follow up of payments not received
 collection capabilities to understand local laws in the buyers country, local
language, customs, collection practices in these countries
 Maturity factoring -

 100% credit guarantee protection

 Sales register maintenance
 Regular monitoring of outstanding credits
 Facilitating bank finance
 Origins of Factoring

 Factoring initiated in Ancient Rome

 It expanded only in the 19th century in US - demand for
European merchandise, especially textiles
 Europeans did not know of the worthiness of US buyers
 They contacted agents who did the following:
 kept physical possession of goods
 warehoused them
 found buyers and sold the goods
 collected payments
 Agents also gave loans against the goods
 The loans were set off against payment by buyers
 Characteristics of factoring
 Cover for the buyers country ?
 Exporter’s performance obligation must
have been completed at the time of
submission of documents
 either open account or a credit period of 120
- 180 days suitable
 Notice of Assignment of receivables is given
in writing to the debtors.
 Export Factoring - Process

Exporter Importer

1.Ships Goods
3. Prepayment
2. Documents

4. Payment
6. Balance

3. Invoice details
5. Remittance
Export Factor Import factor
 Benefits for

 Exporters
 Improve cash flows
 expand business
 reduce the risk and bad debts
 monitoring receivables
 existing bank limits will be protected
 Importers
 access to open account system of payment
 payment collected by local factor who will be acquainted
with local practices...
Useful websites to know more

 http://www.fci.nl/mediacentre/videos-for-
exporters/english
Forfaiting...
 Forfaiting - What the agency need
to know ?
 Importing Country
 Amount and Currency of Invoice / trade settlement
 Tenor and Repayment Profile –
 Details about the guarantor
 Buyer
 Shipment Date (anticipated)
 Latest Date Documents available for Discounting
 Underlying Goods
 Type of Documentation (if known)
 Factoring  Forfaiting
 Short term receivables  Medium and long term
 80 to 90% financing receivables
 Expenses are for the  100% financing
seller  Expenses are for the
 With recourse or without buyer
recourse  Without recourse
 A Typical Forfaiting Transaction

Exporter Importer
3. Commercial Contract Finalised
8. Shipment
1. Request for Indicative Quote

5. LC Application
16.Payment by the
2. Indicative Offer

4. Firm Offer

LC Negotiating

buyer
Bank

15. Payment on Due Date

FORFAITER LC Opening Bank
 Advantages...

 Enhance competitive advantages -exclusively on risky

countries
 simple documentation
 non - recourse
 improving cash flow
 other bank limits will continue without disturbance
 Line of credit by Export Credit
Agencies like Exim Bank
 Line of credit
 IFC Washington / Exim Bank Japan / Exim Bank US / Exim
Bank China / Exim Bank India sanctioning credit facilities to
respective government or to leading bank in a country –
 with or without sovereign guarantee
 With specific condition that the funds must be used for lending
to only those parties who propose to import from the country
of the lending agency
 Advantage for the lending agency:
 Export promotion from its country which allows exporters to to
have exposure on risky countries.
Managing receivables – summing up with
options

 Cover the risk through Confirmed letter of credit &

get bank finance against receivables
 Cover the risk through credit risk agencies and get
bank finance against receivables
 Get into Factoring or Forfaiting –
 Looking for line of credit arrangements
End of session
 karthikeyap@gmail.com
 kparam@spjimr.org
 9820601546