Facility formats and facility maps

We summarise below the many ways that a trade finance transaction can be implemented, all dependent on the circumstances of the case.

How do we define Trade Finance?

Shipping GoodsOur Clients are UK SMEs delivering Goods or Services to their Customers. Many such SMEs have to buy these Goods or Services, or components of them, to enable them to make their delivery. They might be buying them in Chichester or China, Manchester or Malaysia, Uttoxeter or USA, but they have to buy them. To buy such Goods or Services they need spare funds, or to offer their supplier an acceptable covenant to get credit. If they cannot offer the supplier those funds or covenant we can often help. Thus Trade Finance merely means the circumstances where we buy Goods or Services to enable the SME, our Client, to deliver his product.

What types of transactions do we cover?

We fund transactions; we do not make loans to the Client to fund their own transactions, or for any other purpose. That is what banks might do with an overdraft or loan, if the Client can obtain such finance. For us, the transaction is our security so we are "hands-on", and we have to be confident that the transaction will be successful and we will get our money back. We do not have firm rules about what constitutes a fundable transaction. With many years of experience we can quickly consider each proposal, hopefully to suggest a format to achieve the Client's aims. Our Clients may have any of the following characteristics:

  • They may be selling Goods or Services. (Fundable Services include ship chartering and phone calls.)
  • They may be start-ups, restarts, going into a CVA, coming out of a CVA, nearly insolvent (but stable) or well established and profitable. The key common feature is always that they have opportunities, and do not have the funds or covenant to buy the items to deliver the Goods or Services for which they have orders.
  • If the Client's current company might not be financially stable we can sometimes introduce other ways that the transactions can be funded such as our standard "Two-Company Structure". This can be applicable to both trade finance and contractual debt finance.
  • Transactions will normally have a gross margin between 20% and 70%, but we do fund transactions in which the gross margin is only about 5%.
  • Clients may be trading, assembling, or manufacturing. We do buy components for manufacturers with a track record.
  • They may be selling in UK or overseas.
  • They may be buying in UK or elsewhere.
  • It is not essential that the Goods ever touch UK shores.
  • They may be selling for payment on delivery, or offering secure credit.
  • They may use us to buy some or all of their purchases. We trace our Goods through to the related sales invoices.
  • It is not always essential that all Goods are presold before we commit to buy. Our concern will to be confident we shall get our money back from sale proceeds.

The Client's sales contract and Customer payment

The Client must have acceptable and secure conditions of sale to a Customer who we know can pay. It is normal in such contracts that:

  • Goods are not delivered on "Sale or Return"
  • Payment will be on delivery, or by incoming letter of credit assigned to us, or...
  • The Customers get credit because they are insurable, or there is a spread of acceptable Customers.

There will normally one of the following methods under which we recover our funds:

  1. The Customer pays us to get access to the Goods, usually when in transit to them, or
  2. The debt from the Customer is assigned to us under a factoring agreement (Facility Map 1) (the Customer might be a leasing company for the company using the Goods), or
  3. The sales contract with the Customer is novated to us (Facility Map 2). Our Client delivers the Goods as our agent and invoices us, and we sell the Goods (or Services) to the Customer who then pays us. This method is often used when there are other funders to the company to avoid conflicts in agreements, or
  4. Debts from the Customer are assigned to an acceptable factoring company who pays us direct (Facility Map 3).

The Client's purchases and payment to the supplier

Before we can buy any Goods or Services we need to be confident about the process to our repayment, and the risks in the Client's circumstance. That will be a matter for continuous review.

There are normally the following methods of buying from suppliers:

  1. For suppliers in the UK we invariably buy on normal credit. We issue a Supplier Undertaking to confirm the terms under which we will pay the Client's order to the supplier. The supplier invoices us and can credit insure debts from us. Fundamentally, we pay if the supplier meets their contractual commitments. Payment is anything from 7-90 days from supply, as is separately agreed.
  2. For suppliers in the EU we would expect to use the same process. Occasionally we use LCs at the supplier's insistence, but LCs are rarely the best way to secure the EU supplier.
  3. For suppliers outside the EU there are four purchasing options:
    1. Supplier Undertakings (SU) are the normal method from Western economies
    2. Letters of Credit (LCs) are used where the local regulations require it, eg Bangladesh and Sri Lanka, and sometimes in purchases from China and other FE countries, especially for the first purchase from a supplier. They are mostly used where the supplier needs an LC to get local funding to enable their supply.
    3. "DP" (Documentary Presentation, also known as Cash Against Documents - CAD) is the most common method for purchasing from the FE. This is also common when buying from South America, Russia, and many other countries where Goods come by sea. A modified DP process can also be used for Goods supplied by air. In exchange for payment we buy title and the relevant documents, eg Bills of Lading. DP is much cheaper than LCs.
    4. "DA" (Documentary Acceptance, also known as Documentary Drafts) is cheaper than DP. In this process we take the Bills of Lading (or other documents required for customs clearance) in exchange for accepting a Bill of Exchange payable, say, 60 or 90 days after date of shipment. Although this sounds as if the supplier gets paid later, they might get paid much earlier if we send them the Bill of Exchange soon after shipment and they discount the insurable Bill at their bankers.

We also normally pay:

  • Import VAT and duty. When the Goods are imported into the UK we normally use our duty deferment bond to pay the duty and input VAT. To do this we need to have an input invoice from the supplier, or from the Client if the supplier has invoiced them.
  • Freight and Insurance. When appropriate we normally also pay for these.

Simplified typical facility maps

Example 1: Presold Goods bought outside EU; sales ledger debt assigned to us

  1. Example Facility Map 1Customer places Purchase order (PO) on Client and agrees contract acceptable to all parties
  2. Client issues PO to his supplier
  3. We issue the security to the supplier being SU, LC, or commit to DP or DA.
  4. Supplier delivers and invoices Client, or us (if an SU), as appropriate
  5. If the supplier has invoiced the Client, they reinvoice us at the same cost
  6. We pay VAT, duty and any freight and invoice the Client at these combined costs
  7. Client invoices Customer(s) with the debt assigned to us
  8. Customer pays us
  9. We recover our exposure and pay profit to Client
  10. We pay supplier on time

Example 2: Presold Goods bought outside EU. Client has debenture from his bank and only needs us for part of his trade so does not want to change the bank arrangement or security.

  1. Example Facility Map 2 Purchase order (PO) on Client and agreed acceptable contract with their Customer. This contract will state that the Customer will be invoiced by us with the Client delivering as our agent and always responsible for the quality of Goods and warranties
  2. Client issues PO to his supplier
  3. We issue the security to the supplier being SU, LC, or commit to DP or DA
  4. Supplier delivers and invoices Client, or us (if an SU), as appropriate
  5. If the supplier has invoiced the Client, they reinvoice us at the same cost
  6. We pay VAT, duty and any freight and invoice the Client at these combined costs
  7. Client invoices us and we invoice the Customer(s)
  8. Customer pays us
  9. We recover our exposure and pay profit to Client
  10. We pay supplier on time

Example 3:. Manufacturer buying components in UK, EU, or elsewhere; selling to Customers with debts factored by an independent factor

  1. Example Facility Map 3 Agreed acceptable contracts with factorable Customers, UK and export
  2. Agreement with factor that they pay "all availability" (as defined in their factoring agreement) direct to us, plus various other agreements
  3. Purchase order (PO) on Client and/or clear pattern of sale
  4. Client issues POs on his suppliers. We typically have 4-10 suppliers
  5. We issue the security to the supplier being SU, LC, or commit to DP or DA
  6. Supplier delivers and invoices Client, or us (if an SU), as appropriate
  7. If the non-EU supplier invoices the Client, they reinvoice us at the same cost
  8. We pay any VAT, duty and freight and invoice the Client at these combined costs
  9. After manufacture and delivery Client invoices Customers with debts assigned to the factor
  10. Factor pays us all availability from advances and collections
  11. We split availability between us and Client on pre-agreed formula appropriate to their circumstances.
  12. Customers pay factor
  13. We pay suppliers on time