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
 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
 Stag Buyer’s Credit
e III
beha – s et
lf of tl
buye ement on
Seller r

Overseas financial
institution
Supply of goods

g
it n
t ia I
go F
ne th F
Stage II

t
en
– i

m
e I w

ay
ag loa n

re p
t
S C
F V
eI
ag
buyer
St
 Comparative cost advantage

 FC loans from abroad

 Domestic loans  Interest L + 0.30 = 2.00%+
 Interest rate: 9.5% 0.30 = 2.30%
 LC / guarantee charges = 2%
 FWD cover = 4%
 Total = 8.30%
 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

1.Ships Goods
3. Prepayment
2. Documents

4. Payment
ts
6. Balance

en
u m
o c
D
3.

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/e
nglish
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

9. 7.
P
Do res
LC
Ad
1. Request for Indicative Quote

cu en vis
m e ta
t
nt ion ing
s of

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

14p
aym
4. Firm Offer

e nt
ma
de

u rse 6.
LC
co 1 Iss
Re LC Negotiating 0.

buyer
Fo ue
/O Bank 1 1. r A d
t W e c
e n ic Ac ce
m d v c ep pt
ay A ta an
. P ce nc ce
3 ta n e
1
c ep Ad
vic
Ac
. e
12

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