Basic Definition in Banking and Trade Finance
Overdraft
- Credit Facility usually provided through your current account facility, made available for clients with good credit standing
- Unsecured advance/ credit made on the basis of expected business and / or on future anticipated proceeds
Storage / Warehouse Financing
- Purchased goods shall be warehoused for a period of time; whereby the WH can be utilized as a collection point / storage place until enough goods / commodities are stored for on sale or for processing purposes
- Goods will be held to the order of the Financial Institution (‘FI’)
- Liked by smaller traders because the bank finances the asset until on sell is concluded
- ‘Bigger’ trader sells inventory (i.e. commodities) to the financier with repo structure to turn inventory into cash whenever needed and the bank sells back in the future
- Often referred to as Inventory Finance (misnomer)
- Quality of WH mgmt. & jurisdiction to enforce your legal rights as a financier must be discussed
- Market price development of the underlying goods must be managed right
Storage now with or without Collateral Mgmt Agreement (CMA) or Stock Monitoring Agreement (SMA)
- Quality of Collateral Mgmt. Agent or Stock Monitoring. Agent should be assessed before decision making (i.e. track record with WH and country, liability issue, insurance coverage, etc.)
Borrowing Base
- Combination of Inventory and Receivable Finance
- Assets of our borrower are usually the base of the Borrowing Base Calculation;
- Different lending ratios (or LTV ratios) are assigned to different assets classes of the borrower; the sum of assigned values reflects the borrowing base value
- Degree of security involvements varies
- Borrowing Base Agent is crucial to be assessed
Discounting Facilities – Invoice discounting at a margin,
- Invoices issued by approved, acceptable buyers submitted to bank on a case by case basis
- With or without recourse to the client
- Sometimes insurance cover from acceptable credit insurance company is added;
- Financier has to be either named loss payee under the insurance policy or the proceeds must be assigned to the bank
- Supplier / seller can immediately cash the invoice form the offtaker;
Discounting Facilities – Bills of Exchange discounting
- Traders pay suppliers and receive a BoE from the buyer which can be discounted by the Financial Institution
- With or without recourse to the client
Discounting Facilities – LC discounting
- Proceeds paid to the beneficiary
- LC are confirmed or not confirmed by Financial Institution
- With or without recourse to the client
Receivables (Purchase) Finance Define receivables
- Bill of Exchange / avalized BoE / Promissory Note
- LC / SBLC
- Etc.
Purchase Order / Contract Finance Facility
- Financing of goods listed under third party confirmed purchase orders / contracts from pre approved, acceptable buyers
- Repaid from proceeds of purchase orders / contracts, usually
- Assigned in favor of FI which means
o Assignment,
o Notification &
o Acknowledgment of assignement
Additional terms to be used if appropriate -pre shipment / -sold / pre-sold / un-sold, post shipment
- Pre shipment refers to before goods are transported to WH or destination
- Sold / pre-sold / unsold are imprecise terms, if no commercial contract has been signed, no commercial rights have been established which influences structure and risk;
- Post-shipment refers to after goods were shipped to.WH or destination.
Products Comments
LC driven facilities
Refers to
- a) where the bank opens the documentary credit (outgoing LC) for his buyer / importer / trader to purchase supplies / raw material / etc from the exporter / seller / trader
- b) an incoming LC, where bank will act as advising and paying bank for his client, a seller / exporter / trader from the LC issuing bank which has opened the LC obo the importing client elsewhere.
Back-to-Back (LC) Finance
- On the strength of an incoming LC – issued by an acceptable bank, acceptable to the trader’s bank in terms of risk and credit standing, trader’s bank will open a mirror LC (outgoing) obo the bank’s client to purchase the supplies needed to satisfy the incoming LC.
- Back-to-back facility (B2B) is issued on the same terms and conditions of a confirmed inward letter of credit. Goods are transported directly from supplier to final destination and documents requested under the inward letter of credit (except for the commercial invoice) shall be called for under the outward letter of credit.
- Facility may include some deviations such as different trade terms, expiry places, currencies, and some documents may not be called for under the outward LC such as insurance documents or certificate of origin.
- If the customer wants a facility with more deviations than the ones identified above, then the facility may be considered on a case by case basis and the relationship with the customer.
FCR / Shipment Finance
- Financing of goods made against receipt of a forwarder certificate of receipt confirming receipt of goods at a named place to the order of bank.
- Goods to be maintained by the forwarder for a short time window (how short) pending receipt of the sale receivable, or proceeds, at which stage bank will request forwarder to release goods and if applicable
- provide bank with documentation (including where applicable shipping documents) evidencing shipment or dispatch of goods for presentation by bank for payment.
- Shipment finance is generally applied for goods in transit.
Front to Back
- Front to back facility to issue an outward letter of credit prior to the receipt of the inward LC on the premise that it is amended in order to be on the same terms and conditions of a confirmed inward letter of credit.
- Goods are transported directly from supplier to final destination and documents requested under the inward letter of credit (except for the commercial invoice) shall be called for under the outward letter of credit.
- Facility may include some deviations such as different trade terms, expiry places, currencies, and some documents may not be called for under the outward LC such as insurance documents or a certificate of origin.
Pre Export Finance
- The financing of existing and future flows of commodities;
- borrower is usually a strategically important producer & exporter of commodities
- but located in a difficult market, usually due to political or marco-economic conditions,
- where access to funds is limited or nonexistent.
- Product (commodity) is sold internationally to off-takers (traders) which have a proven track record with the producer.
- On that basis, a financing of the borrower appears possible by the Financier because of the commercial track record and the performance & delivery analysis and capability.
- Offtaker will repay the facility and acts in the partnership construction as payee, hence, the payment and transfer / conversion risk is short cut and linked to the offtaker(s) of the facility.
Pre Payment (Advance) Finance Same like above, but done due to different (interesting) reasons;
- by and large, offtaker prepays the supplier;
- legal borrower will be the offtaker of the commodity and
- economic beneficiary is the producer / trader.
- underlying commercial contract (purchase & sales contract) b/w commodity producer and buyer (offtaker) will have a pre payment clause attached.
- Such facilities are also coined limited-recourse (LR) structures, where the offtaker takes a certain percentage of the underlying production and delivery risk.
- remaining part (1-LR portion) of the risk is taken by the bank.
Tolling / Processing Finance
- Facility requested by trading houses to finance usually a) the raw material to be transported to the tolling company and b) the tolling fee paid to the producer upfront.
- Repayment will be done from the finished product which will be given to the offtaker / trader, hence, assignment of sales proceeds.
- Payment risk remains with offtaker.
- Performance risk with the producer / toller.