The Trade and Receivables Finance Companion: A Collection of Case Studies and Solutions

By Stephen A. Jones

The Trade and Receivables Finance Companion: A Collection of Case Studies and Solutions is based on the author’s personal experience gained through more than 40 years in the field of trade finance. This Companion applies the techniques described in his first volume, Trade and Receivables Finance: A Practical Guide to Risk Evaluation and Structuring to an extensive range of international trade scenarios. Practical solutions are discussed and presented through a specially selected collection of more than 20 case studies. 
These books provide an unrivalled and highly practical set of manuals for the trade and receivables financier.
The reader is taken on a journey from the structuring of trade products including collections, import and export letters of credit, back to back credits, guarantees and standby credits to fully and partially structured financing solutions for the importer, manufacturer, distributor, middle-party and exporter. Each funding technique provides a compelling alternative to an overdraft.
The case studies include the risk assessment and financing of open account payables, stock and receivables transactions and the evaluation and use of credit insurance as a supporting tool. The structuring of commodity finance across the trade cycle, to include warehousing, and call-off is also described. 
Many of the chapters contain a summary ‘keynote’ overview and comprehensive ‘deal sheet’ extracts of the chosen solution detailing facility and operational requirements.  

• Language: English
• Publisher: Palgrave Macmillan
• Release date: Feb 14, 2020
• ISBN: 9783030251390

Book preview

© The Author(s) 2019

S. A. JonesThe Trade and Receivables Finance Companionhttps://doi.org/10.1007/978-3-030-25139-0_1

1. Conflicting Needs

The Need for Risk Mitigation and Finance

Stephen A. Jones¹  

(1)

AXS Trade Finance Ltd., Solihull, West Midlands, UK

Stephen A. Jones

Email: [e-mail]

Keywords

Advance payment guaranteeCredit riskLetter of creditLiquidity riskTrade creditTrade cycle

Trade and receivables finance provides an essential role when the conflicting needs of a seller and buyer cannot be bridged by a negotiated compromise on the commercial terms or due to a lack of financial resources.

Having expended money on the procurement or manufacture of the goods, the seller will be exposed to liquidity risk ahead of the receipt of sales proceeds. The longer the wait, the greater the risk that the seller will run out of cash; they may not be able to take on new orders or pay their workforce and creditors. Ultimately, a lack of cash will cause a business to fail.

A seller will usually require payment for goods sold either before shipment or immediately upon delivery. This will reduce their period of liquidity risk and also minimise their exposure to credit risk; the longer they allow the buyer to pay, the greater the possibility that the buyer’s financial position will deteriorate, and they will not be able to pay.

The buyer will be concerned that having paid for the goods, these will not subsequently be delivered, be received too late or find that they are not of the required specification, quantity or quality. Ideally, the buyer will wish to pay as late as possible. This will enable the buyer to receive and inspect the goods and use them, either as an input into their manufacturing process or sell the finished goods and receive the proceeds of onward sale before paying the supplier. Settlement of the supplier’s invoice earlier than this will deplete their cash resources. If payment is made before the goods have been shipped, the buyer is exposed to the risk of never receiving them and thus facing a financial loss.

A lengthy period of trade credit will be required to enable the buyer to receive, use or sell the goods and collect payment from their own customers prior to making settlement of the supplier’s invoice, particularly if the seller and buyer are in different parts of the world. The seller may require a trade product or receivable solution which protects them from the insolvency of the buyer or inability of the buyer’s country to transfer monies, and which accelerates the receipt of proceeds before the sales invoice is due for payment. These solutions will be covered in subsequent chapters.

If the buyer cannot negotiate a long enough period of trade credit from the supplier, they may need to seek a payables finance solution from their bank. Financing the importer is covered in Chap. 18.

Whilst a bank overdraft is often used by a seller and buyer to fund the gap between making payment for goods purchased and the receipt of trade receivable sales proceeds, the availability of this type of conventional finance will be determined by the borrower’s ability to repay the bank, and security cover.

International trade often requires a much longer transactional trade cycle . This is due to the distance that goods have to travel, the need to carry higher levels of stock because of the extended order and delivery times, the desirability of purchasing larger quantities to fill a container and thus reduce the freight costs, and a cultural expectation of an overseas buyer for longer credit terms.

The resultant credit facility amount can therefore outstrip the financier’s appetite to provide support on a conventional ‘balance sheet’ lending basis. The provision of a full or partially structured trade and receivables finance solution can bridge the ‘credit gap’ between what a financier is prepared to lend based upon analysis of the borrower’s financial statements (‘balance sheet lending’) and the required level of financial support.

We shall see in this collection of case studies how trade products can be structured to provide optimum risk mitigation for the seller or buyer, and how financing solutions can be formulated on documentary and open account trade which provide an identifiable and reliable source of repayment for the financier.

When the solution is structured on a self-liquidating basis, this enables the financier to ring fence the transactional sales proceeds away from the client and to apply these in repayment of the credit facility. This can release increased levels of financial support which is no longer staked to the ability of the borrower to repay; the primary source of repayment is now the transactional sales proceeds.

The key risks that need to be assessed are the credit quality of the end-buyer and their country, and the ability of the client and their supply chain to perform by delivering the required goods, in the correct quantity and of satisfactory quality on time, or the presentation of complying documents under a trade product, such as a letter of credit or payment guarantee.

1.1 Case Study: Conflicting Needs

Trade and receivables finance solutions are designed to meet the needs of the client in mitigating risk; facilitating payment to a supplier for the purchase of raw materials, components or finished goods; financing the gap which arises between payment for goods and receipt of the related sales proceeds; and the acceleration of trade receivable monies prior to the invoiced due date for payment.

To enable the formulation of an appropriate solution, it is necessary to understand the needs of the client, appreciate the requirements of their commercial counterparty, whether this be a supplier or end-buyer, identify the transactional and credit risks associated with the transaction, and plot the trade cycle timeline. This depicts the various stages of the transaction and duration of the funding gap or required period of financial credit support.

The needs of the seller and buyer are different, both in terms of the risks which need to be mitigated and the required timing of payment. Trade and receivables finance provides a bridge between these conflicting requirements.

To illustrate the conflicting needs which give rise to the demand for risk-mitigating payment mechanisms, and the requirement for finance (which is often above and beyond what a financier is prepared to provide on a conventional ‘balance sheet’ lending basis), we shall look at a transaction from the perspectives of the seller and the buyer.

A transaction is being negotiated between commercial parties based in different countries. They have not traded with each other before. Financial and non-financial information is limited upon which to make a risk assessment.

Summary of Transaction

The sale of 3,000 plastic toy remote control helicopters at a unit price each of USD 17.85

Delivery: within 2 months of order

Transit time for the goods is 20 days

Upon receipt, the buyer will immediately on-sell the toys and will receive payment from their customers 70 days later

1.2 Seller’s Perspective

The seller’s primary concern is whether they will receive payment for the toys, and if paid, how much of the invoiced value will be settled and when. This is dependent upon the buyer’s ability to pay (do they have enough cash?) and willingness to pay (are they happy with the goods?).

Where the parties have not traded before, there is a higher risk of dispute because the goods may not meet the expectation of the buyer. This could result in complete rejection of the goods, or only partial payment.

The point or place of delivery and required date need to be clear. Any misunderstanding could result in a dispute of whether goods were delivered to the correct place and on time. This is particularly important in the retail trade where goods must be received on a timely basis to fill the shelves or be available for delivery to satisfy on-line orders.

The goods may be lost or damaged during transit. If responsibility for cargo insurance is not defined, there is a risk that the goods will not be insured. Even where responsibility for insurance is allocated to the buyer, there is no certainty that the buyer will insure the goods or settle the invoice. In the event of loss or damage, they may just simply walk away refusing to pay. This will leave the seller with a potentially lengthy and costly legal battle over the unpaid invoice, pursued through a court of law in the buyer’s country.

The seller will wish to retain control of the goods during their transit and ideally only release the goods to the buyer once they know that payment has been made.

If the currency of sale is different to the cost of goods’ manufacture or procurement, or the home currency of the seller, they will be exposed to foreign exchange rate movements which may result in less than expected currency-converted proceeds. When the profit margin on the transaction is low, this could result in a financial loss for the seller where the value of converted sales proceeds is less than the cost of goods purchased or manufactured.

Whilst the seller is well-positioned to establish and satisfy the procedures and required documentation for export, it will be more difficult to arrange import customs clearance in the buyer’s country. Documentary requirements may differ, and local import taxes or duties payable. In some cases, the import arrangements and payment of taxes must be made by a company registered within the country of import.

1.2.1 Seller’s Preferred Solution

The seller will require receipt of payment prior to procurement or manufacture of the goods. Receipt of payment in advance mitigates the risk of non-payment, and the monies can be used to fund the purchase or manufacture of the goods. The buyer or their appointed agent will be required to visit the seller’s premises to load the goods and take them away. This removes the cost and responsibility of arranging carriage and insurance of the goods in transit.

1.3 Buyer’s Perspective

The buyer’s primary concern is whether they will receive the goods, delivered by the stipulated date, fully compliant with the required specification, quantity and quality.

Where goods are to be transported by sea, the full set of original negotiable bills of lading will need to be received prior to arrival of the vessel at the discharge port. Non-receipt of the bills of lading will prevent the buyer obtaining release of the cargo (when one original is required for presentation to the carrier). Receipt of the bills of lading after arrival of the vessel may result in demurrage costs due to the need for the goods to be stored at the port while awaiting release.

The buyer will not wish to pay for the goods until they have been received, inspected and found to be acceptable (as a minimum). Their preference will be to delay making payment to the supplier until they have used the goods or sold them and collected payment from their customers, making the transaction cash neutral. If they were required to pay earlier than this, payment would deplete their cash resources, assuming that they had enough cash to pay at this point.

If the currency of purchase is different to the buyer’s home currency or currency of onward sale, the buyer will be exposed to increased costs of purchase or lower converted receipt of proceeds from the onward sale if there are adverse foreign exchange rate movements during the transaction. This could result in a loss.

Whilst the buyer is well-positioned to establish and satisfy the procedures and required documentation for import into their country, it may be more difficult to arrange export customs clearance if goods are collected in the seller’s country. If the goods are sold and delivered to the buyer in the country of the seller, the invoice may bear local sales tax which cannot be recovered.

1.3.1 Buyer’s Preferred Solution

The buyer will require the seller to deliver the goods to their own premises in the country of import. The supplier will thereby bear the risk of loss or damage to the goods and the costs of transit, import taxes and duties.

Because the buyer will be on-selling the goods to their customers and collecting payment 70 days later, they will require trade credit terms from the supplier of at least 70 days from the date of delivery of the goods at their premises, or 90 days from the date of shipment (being the transit time of 20 days plus the sales proceeds collection period of 70 days).

1.4 Solution

It can be seen that the preferred solution of the seller and that of the buyer are very different! The relative bargaining strengths will determine who is able to negotiate the commercial terms which most closely meet their preferred requirements.

We shall assume that the commercial parties are equally placed in terms of their bargaining position. A compromise will therefore be required by each.

The credit period, value, currency, method of payment, responsibility for the contract of carriage insurance and customs clearance, the place or point of delivery, who bears the risk of loss or damage to the cargo, transfer of title to the goods, and other terms will be covered by the commercial agreement entered into between the seller and the buyer. Commercial terms are discussed in Chap. 14.

Where the parties have not established a track record with each other or there is a lack of trust (in terms of payment and supply of acceptable goods), a trade product should be used. This will either be a letter of credit or documentary collection where the shipping documents are exchanged by the banking system in return for either payment or an undertaking to pay on the future due date, or the provision of a demand guarantee or standby credit which provides financial recompense up to a stated maximum value in case of non-payment or contractual default.

In this case study, the best mutual trade product will be a documentary letter of credit. This provides security of payment to the seller for the full invoiced value subject to the status of the issuing bank and country, or confirming bank where applicable, and the seller’s ability to present a fully complying set of documents to the bank. This is because the obligation of the buyer to pay is substituted by an independent conditional payment undertaking of a bank. This removes the risk of the buyer’s inability and unwillingness to pay when the seller is able to submit documents which are in full accordance with the terms of the credit and the applicable Uniform Customs and Practice for Documentary Credits (UCP) rules. Letters of credit are described in Chaps. 5 and 6.

Whilst letters of credit usually carry the conditional undertaking to pay of a bank, occasionally a letter of credit will bear only the undertaking of a non-bank issuer. This type of credit is covered in Chap. 7.

By instructing its bank to issue a letter of credit, the buyer is stipulating that documents must be presented by the seller as evidence that they have performed their contractual obligations for the timely shipment of goods.

Any subsequent dispute in the nature, quantity or quality of the goods must be handled outside the payment obligation of the letter of credit through legal process between the buyer and the seller.

A compromise will need to be reached on the place of delivery given the disparate needs of the seller and the buyer who each require delivery at their own premises! A sensible compromise for goods shipped by sea is delivery on board the shipping vessel at the port of loading, cleared for export. Payment or an undertaking to pay on the due date will be provided to the seller by the buyer’s bank against receipt of the original bills of lading which evidence the timely shipment of goods. The original bills of lading provide the documentary means to obtain release of the goods from the carrier at the port of discharge.

To retain control over the goods until the conditions for release have been fulfilled, the seller should contract for carriage. This ensures they receive the full set of original bills of lading from the shipping company, known as the carrier. (An original bill of lading is ordinarily required by the buyer to arrange release of the goods from the carrier.)

When the buyer insists on contracting carriage, perhaps when they have negotiated favourable terms with a preferred carrier, the seller is at risk of losing control over the goods unless the full set of original bills of lading are provided to them. The seller should therefore sight evidence of an irrevocable instruction given by the buyer to the carrier that the full set of original bills of lading must be sent to the seller upon their issuance.

The bills of lading and other stipulated documents will be presented under the letter of credit by the seller and not released to the buyer unless or until the buyer’s bank (letter of credit issuing bank) interprets the documents as complying or approves the buyer’s acceptance (waiver) of any errors in the documentary presentation, known as discrepancies.

The letter of credit should be payable 90 days from the date of shipment. This will cover the goods in transit time of 20 days plus the buyer’s sale of the goods and collection of proceeds in 70 days. This means that the buyer will receive the original bills of lading and be able to obtain the goods once their bank has undertaken to pay the seller 90 days from the date of shipment.

When appropriately structured, a letter of credit provides a mechanism for finance, known as discount or negotiation . This means that the seller can receive proceeds of the letter of credit drawing, less discount interest, costs and fees, shortly after presentation of complying documents. This enables the seller to provide trade credit terms to the buyer without adverse impact to their cash flow. The buyer will be debited by their bank at the set fixed or determinable future due date, that is, in this case study, 90 days after the date of shipment.

Because the letter of credit is payable against the presentation of documents which appear ‘on their face’ to comply with its terms and applicable rules, it is important that the buyer carefully considers and stipulates documentation which provide satisfactory evidence of the timely shipment of conforming goods. The letter of credit should therefore require a full set of original bills of lading bearing a shipped on board date which is consistent with the subsequent timely availability of the goods to the buyer in the country of import, an insurance policy or certificate covering the risk of loss or damage to the goods and a pre-shipment inspection report issued by a specified independent competent inspectorate, or by the buyer themselves if they are to oversee the filling and sealing of the shipping container(s). The letter of credit should specify the required certified outcome of the inspection.

The letter of credit ought also to state the maximum number of days after shipment allowed for the presentation of documents. The allowed period needs to accommodate the processing of the documents by the banks and their timely release to coincide with the arrival of the vessel at the discharge port.

The buyer will have the responsibility of arranging import customs clearance of the goods in their country.

The methods of financing letters of credit are covered in Chaps. 6 and 20. The use of a commercial standby credit (or payment guarantee) to support open account invoice finance is provided in the companion to this book, Trade and Receivables Finance: A Practical Guide to Risk Evaluation and Structuring.

If the seller requires assistance with the funding of the purchase of finished goods or the components for manufacture, they can seek a pre-shipment finance loan, subject to satisfactory risk assessment. This is described in Chap. 12.

1.5 Alternative Notes

Where a letter of credit is not used, an alternative maybe a documentary collection. Bills of lading will ordinarily be released against the acceptance of a bill of exchange , also known as a draft, providing the buyer’s acknowledgement of the debt and undertaking to make payment on the due date. When the seller requires this payment obligation to be underwritten by the buyer’s bank, they will instruct that documents may only be released against bank aval .

Once the bill of exchange has been avalised, this provides the undertaking of the buyer’s bank to pay at maturity. The avalised bill of exchange is a financeable debt instrument which can be sold by the seller for its face value, less discount interest and charges, to accelerate receipt of monies before the due date for payment. This is usually sold on a ‘without recourse’ basis which means that the purchaser takes the credit risk on the avalising bank and country’s ability to pay and transfer proceeds at maturity. Collections and bank aval are described in Chaps. 4 and 20.

When the seller will only accept an advance payment prior to the procurement, manufacture or shipment of the goods, the buyer can seek protection by an advance payment guarantee from the seller’s bank. This is described in Chap. 9.

On a trade transaction where the parties are in different countries or currency union, or where the ultimate source of the goods is from an overseas supplier, one of the parties will become exposed to foreign exchange risk, unless it is mutually agreed that a neutral currency will be used, whereupon both parties will bear currency risk exposure. Where a foreign currency is used for either the sale or purchase of the goods and this cannot be naturally hedged by the contra flow of like currency monies on other transactions, a foreign exchange hedging product should be considered, particularly when the profit margin of the transaction is slim.

© The Author(s) 2019

S. A. JonesThe Trade and Receivables Finance Companionhttps://doi.org/10.1007/978-3-030-25139-0_2

2. The Trade Cycle

Construction and Facility Calculation

Stephen A. Jones¹  

(1)

AXS Trade Finance Ltd., Solihull, West Midlands, UK

Stephen A. Jones

Email: [e-mail]

Keywords

Calculating the credit facilityCredit facility amountExport letter of creditPrimary source of repaymentTrade cycleTrade cycle timeline

The trade cycle represents the flow of a transaction from beginning to end. It depicts the time-based flow of goods, documents and money. When the trade cycle is plotted in a timeline, it provides the trade and receivables financier with a visual image of the proposed trade transaction. Its construction enables the financier to plot the key stages of the transaction, when goods need to be shipped to meet the delivery timescales of the end-buyer, the point at which either a liability-based product such as a letter of credit is to be issued, and/or payment is to be made, and when receipt of sales proceeds is expected. This enables the identification of the risks, funding gap and calculation of the credit facility requirement. A summary of the key aspects is provided in Fig. 2.1.

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Fig. 2.1

Trade cycle timeline: keynotes

2.1 Case Study: Cutting Crew

Cutting Crew are a garment manufacturing company. They receive export letters of credit from their main customer, the end-buyer. On receipt of the letter of credit, Cutting Crew place an order on a supplier for the purchase of fabric. They pay their suppliers by documentary collection.

Fabric is manufactured into finished garments at their own factory in Europe. Once completed, the finished garments are shipped to the end-buyer and documents presented under the export letter of credit.

Figure 2.2 shows a transactional summary of Cutting Crew’s principal line of business and their forecast for the next 12 months. The inward (import ) documentary collection is paid 10 days after shipment of fabric from the supplier. Once the garments are manufactured, they are shipped to the end-buyer. Trade documents are presented to the advising bank under the export letter of credit 8 days after shipment of the finished garments and received by the issuing bank 6 days later.

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Fig. 2.2

Transactional summary

2.2 Risk Evaluation

If the transaction described in Sect. 2.1 is to be funded by a financier, they will need to ensure that at the time of payment to the supplier, or the provision of an undertaking to pay, the conditions have been fulfilled that should result in the future delivery of goods to the end-buyer which comply with their purchase order.

The process of assessment commences with the plotting of the trade cycle timeline shown in Fig. 2.3 and evaluation of the source of repayment.

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Fig. 2.3

Trade cycle timeline

2.2.1 Primary Source of Repayment

The primary source of repayment for the financier on a structured trade facility is the transactional proceeds. In this case study, Cutting Crew will receive an export letter of credit from the bank of the end-buyer.

Export Letter of Credit

This provides an undertaking by the end-buyer’s bank to pay on the due date subject to the receipt of documents which comply with the terms of the export letter of credit and applicable rules.

If discrepant documents are presented under the letter of credit, these will be rejected by the bank and payment refused, unless the end-buyer (letter of credit applicant) provides their acceptance (waiver ) of discrepancies and this is approved by their bank.

Where finance is required to settle the inward collection, the terms of the export letter of credit must be acceptable to the financier and capable of being performed by Cutting Crew. This is explored more fully in Chap. 6. Cutting Crew should have a demonstrable track record of making complying presentations under letters of credit. Where there is a risk of a discrepant presentation, it would be prudent for the financier to insist on a pre-check of draft documents prior to presentation of the actual documents under the export letter of credit.

The proceeds of the export letter of credit should be assigned to the financier. Assignment provides acknowledgement by the party responsible for payment, such as the letter of credit issuing or confirming bank, of an instruction from the beneficiary that proceeds are to be paid to a nominated third party. The acknowledgement and agreement to carry out this irrevocable instruction by the letter of credit paying bank should be sighted by the financier (when they are not the LC paying bank).

The financier should obtain the written undertaking of Cutting Crew to present documents to the financier only. Where the export letter of credit is available with any bank, the financier must hold the original of the letter of credit to prevent the presentation of documents by Cutting Crew to another bank.

2.2.2 Late Shipment

By plotting the trade cycle timeline, the financier can establish the latest acceptable date for the shipment of fabric from the supplier to allow time for its receipt, manufacture and shipment of finished garments to the end-buyer by the latest date specified within the letter of credit. It can be seen from the timeline in Fig. 2.3 that the required lead time period between supply of the fabric and shipment of the manufactured garments is 45 days (timeline Day 0 to Day 45).

If, for example, the letter of credit specified a latest date of shipment of 7 October, the financier will know that if the inward collection presented by the fabric supplier’s bank contains a bill of lading showing a shipped on board date of say 24 August (being less than 45 days prior to the required date of shipment of manufactured garments), this will not allow sufficient time to receive the fabric, manufacture and ship the finished garments by the date specified in the export letter of credit.

The structured financier should therefore set a facility condition that the bill of lading presented under the inward collection must bear a shipped on board date 45 days or more prior to the latest date for shipment stipulated within the related export letter of credit.

If the fabric is shipped too late according to the trade cycle timeline calculation, finance should be declined unless or until a suitable amendment has been received under the export letter of credit extending the latest date of shipment.

2.3 Trade Cycle

Based upon the information provided in Sect. 2.1, we can plot the trade cycle timeline for one transaction. The trade cycle timeline is shown in Fig. 2.3.

The trade cycle timeline in Fig. 2.3 shows us that the documents against payment (DP) collection is paid on Day 10 and proceeds from the sale of the manufactured garments is not received under the export letter of credit until Day 179. This results in a funding gap of 169 days (Day 10 to Day 179).

2.4 Credit Facility Amount

Assuming the transaction in Fig. 2.3 is financed by the bank and repeated at the same time each month, there will be a maximum of 6 collections outstanding at any time as shown in Fig. 2.4.

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Fig. 2.4

Facility calculation

The amount of each monthly purchase of fabric by documentary collection is USD 48,250. This means that the required value of the credit facility to fund the purchase of fabric is USD 289,500 (being USD 48,250 × 6).

2.5 Calculating the Credit Facility: ‘Purchases by Day’ Basis

In Sect. 2.4, the credit facility calculation is based upon the maximum number of collections financed and outstanding at any one point in time. This is based upon one collection per month for the same value. We can therefore accurately plot how many collections will be paid and financed and their aggregate outstanding value before the proceeds of an export letter of credit are received to repay the related (and oldest) financed collection. This denotes the maximum funding requirement.

When the purchases to be financed are made on an ongoing basis without precise knowledge of when and how much each transaction will be, the credit facility can be calculated on a ‘purchases by day’ basis. The total forecast purchase value is divided by the period that purchases will take place (expressed in days) and multiplied by the average length of funding for one transaction (or the credit exposure period of say an import letter of credit plus the payment period). The formula for the ‘purchases by day’ facility calculation is shown in Fig. 2.5.

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Fig. 2.5

Facility calculation: ‘purchases by day’

We shall now apply the ‘purchases by day’ formula to the business line shown in Fig. 2.2 on the new assumption that several collections will be received each month at variable times and values, totalling USD 48,250 per month.

Using the formula shown in Fig. 2.5, we take the annual amount of forecast purchases of USD 579,000 (being USD 48,250 x 12) and divide this by 365 to arrive at a daily notional purchase figure of USD 1,586.30.

We now calculate the financier’s period of credit exposure to Cutting Crew on a funded transaction. This is 169 days as shown in Fig. 2.3. This is calculated from the date of financed payment of the inward collection on Day 10 to the expected receipt of export letter of credit proceeds on Day 179.

We multiply the notional daily purchase figure of USD 1,586.30 by the period of credit exposure of 169 days. This results in a credit facility requirement of USD 268,085.

Alternatively, the monthly figure of USD 48,250 could be used rather than the annual figure of USD 579,000. In this case, the monthly purchase figure would be divided by 30 days rather than 365 days to arrive at a notional daily purchase figure of USD 1,608.33. This is multiplied by the funding gap/period of risk exposure of 169 days. The resultant credit facility requirement of USD 271,808 is slightly different due to the use of a monthly average of 30 days which represents an annual equivalent of 360 days (rather than 365 days).

The figures of USD 268,085 and USD 271,808 calculated using the ‘purchases by day’ basis are markedly different to the credit facility requirement of USD 289,500 calculated in Sect. 2.4. This can be explained by the use of the ‘purchases by day’ basis of calculation which spreads or smooths the purchases over the period of calculation because there is no available data on exactly when and how much each purchase transaction will be. This type of calculation is therefore only used when (a) the date and value of each transaction is not known and (b) the forecast transactions are not subject to variable/seasonal monthly value variation. Where specific data is known, such as that contained within the case study, a more precise calculation of the credit facility can be made.

2.6 Conclusion

When evaluating a trade proposition, the formulation of the trade cycle timeline is a vitally important tool. As the trade cycle is plotted, this will prompt questions and serve to identify risks and the time flow of goods, documents and money. Critically, it will show the required length of credit exposure, either represented by drawn finance and/or the issuance of a liability-based product such as an import letter of credit.

The appropriate trade products can be selected for use and the structure wrapped around the trade cycle. The nature of the structure, risk profile, duration of exposure and/or financing can be determined and timely triggers for enquiry incorporated into the credit facility mechanism.

In the case study shown in Sect. 2.1, the financier’s period and amount of credit risk exposure to Cutting Crew could be significantly reduced by discount purchase of the draft accepted by the letter of credit issuing bank, or by restructuring the terms of the letter of credit so that the financier is authorised to add their confirmation and to negotiate the letter of credit documents. Once the draft is discounted by the financier, or complying documents negotiated under the confirmed letter of credit, the risk exposure on Cutting Crew is replaced by credit risk exposure on the letter of credit issuing bank and their country. Discounting is described more fully in Chap. 20.

Trade cycle timelines will be used extensively throughout this book.

© The Author(s) 2019

S. A. JonesThe Trade and Receivables Finance Companionhttps://doi.org/10.1007/978-3-030-25139-0_3

3. Bills of Lading

Exercising Control

Stephen A. Jones¹  

(1)

AXS Trade Finance Ltd., Solihull, West Midlands, UK

Stephen A. Jones

Email: [e-mail]

Keywords

Cargo releaseCarriageCharter partyConsigneeConstructive possessionControl over the goodsDocument of titleFreight forwarderHouse bills of ladingLienMaster bill of ladingShipper

When financing goods in transit, the structured financier will ordinarily require control over the goods and right of possession. The disposal of the goods can provide a secondary means of repayment for the financier should the supported transaction fail to successfully conclude and the client defaults on repayment of the facility.

This is particularly important when the goods are travelling by sea, given the length of the journey and often large consignment value.

The bill of lading is the sea transport document. When issued in a set of originals (usually three) and which state that one original must be surrendered to the carrier or its agent for release of the cargo, these provide an opportunity for the financier to exercise control over the goods while in transit, commonly referred to as ‘constructive possession’.

Given their importance, it is appropriate that we consider the key aspects of the bill of lading which are necessary for the financier to achieve control over the goods. These are summarised in Fig. 3.1.

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Fig. 3.1

Bill of lading: keynotes

3.1 Case Study: Office Exports

Office Exports have requested a trade financing facility from their bank. The financier will require control over the goods in transit and the ability to take possession at the port of discharge.

An example ‘house’ bill of lading has been provided by Office Exports to assist in the financier’s evaluation of the trade proposition. The house bill of lading is shown in Fig. 3.2.

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Fig. 3.2

House bill of lading

3.2 Risk Evaluation

Examination of the example bill of lading has raised issues which impact upon the financier’s ability to use the bills of lading to exercise control over the goods in transit. These are highlighted and discussed within this section.

3.2.1 Issuer [1]

The bill of lading shown in Fig. 3.2 has been issued by a freight forwarder, Agencia Forwarding (a non-vessel owning common carrier [NVOCC]), and not the actual carrier (ship operator). This is known as a ‘house’ bill of lading as further indicated in [1.1]. Whilst this is not unusual, the financier needs to evaluate the risks of accepting and using a ‘house’ or ‘freight forwarder’s’ bill of lading. (When in doubt about the nature of the document issuer, an internet search should provide an indication of whether the issuer of the bill of lading owns or operates a fleet of vessels. This can be validated by enquiry to organisations such as the ICC’s International Maritime Bureau.)

A freight forwarder organises the logistics and shipment of the goods from the supplier to the place of destination on behalf of the contracting party (‘shipper’). This may involve the consolidation of cargoes from different suppliers into one shipment, or to fill a container with goods from multiple shippers to reduce costs, or to arrange temporary storage of goods prior to or during the journey. For example, if there are insufficient goods from the shipper to fill the container, the shipper may buy part container space via a freight forwarder. The forwarder will stuff the container with goods from other shippers to reduce shipping costs; the consignment of each shipper is referred to as an ‘LCL’ or less than container load.

Because the freight forwarder will not be the actual carrier of the goods (ship owner or operator), they will enter into a contract with the carrier and receive a transport document issued by the carrier, known as a ‘master’ bill of lading for the container(s). The freight forwarder will be shown as the shipper and either themselves or their agent at the port of discharge shown as the consignee. The freight forwarder will then issue their own ‘house’ bills of lading to each of the shippers.

Carrier

A house bill of lading might not show the name of the carrier of the goods. It is important that the financier knows who the actual carrier is and should make enquiry of