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Corporate Factoring Trade Finance

Factoring

WHAT IS FACTORING?

A form of receivables purchase, in which sellers of goods and services sell their receivables (represented by outstanding invoices) at a discount to a finance provider (commonly known as the ‘factor’). 
A key differentiator of factoring is that typically the finance provider becomes responsible for managing the debtor portfolio and collecting the payment of the underlying receivables. 
The origins of factoring can be traced back to business dealings in England as early as the 1400’s. Around 1620, it was introduced to the Americas by the Pilgrims and grew as an effective means for companies to increase their cash flow.

what are the main drivers for factoring as a means of settlement?

  • Sellers require payment as soon as possible …
  • Buyers wish to delay payment as long as possible … 
  • The provision of flexible financing solutions can help alleviate any concerns on both sides.
  • Normally, finance is provided for transactions payable on 30 or 60-day terms, but this can be extended to 90, or even 180 days.
  • Funding can be provided as early as 24 hours after reaching an agreement with a finance provider (a “factor”).
  • The amount of the advance can range from 70% to 90%, depending on the industry, credit history of the buyer and other criteria.
  • Is to cover an underlying trade or services transaction.
  • Often used to bridge the gap between invoicing and receipt of payment.
  • Favourable financing and pricing terms can make a product or service more competitive.
  • The factor will manage the process for the collection of funds from each buyer.

What type of industries we can assist with factoring services?

Factoring can be considered by a seller operating in any industry where goods or services are sold or provided on, mainly, 30 or 60-day terms; but other periods may be considered. The following are some of the more common industries for which companies will utilise factoring as a means of obtaining finance:

  • Logistics
  • Manufacturing 
  • Wholesale
  • Technology
  • Food services
  • Staffing agencies
  • Courier services
  • Consulting
  • Oilfield services
  • Distributors
  • Advertising
  • Office supplies

What kind of services are offered by us?

Typically, one or more of the following:

  • investigation of the creditworthiness of one or more buyers;
  • removal of credit risk;
  • collection and management of receivables;
  • 100% protection against write-offs;
  • invoice verification (i.e., to avoid fraud); and/or
  • finance by way of immediate advances against outstanding receivables.

The services offered by a factor may allow a seller to offer preferential terms to buyers.
Although a factor will like to see a consistent and continuous flow of invoices, there is no general requirement that a seller must finance all its invoices.
Agreements between a factor and a seller will usually last for 6 months to a year. More competitive rates will often be offered for the longer the agreement lasts.
Recourse and non-recourse financing. The majority of receivables are handled on a recourse basis with the seller agreeing to buy back the receivable if the buyer does not pay on the due date. In this event, the seller must cover the cost of the invoice that is not paid. Non-recourse funding could be charged at anything from 1% above the fee set for recourse financing.

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LC / SBLC Process & Procedures Trade Finance

Letter of Credit Application – Payment Method at Sight, deferred payment, acceptance or negotiation

What should appear in the settlement type field?

An indication of the settlement terms applicable to the beneficiary. This should conform to the requirements expressed in the sale contract, proforma invoice or purchase order.

If the beneficiary requires settlement “at sight”, the options are payment or negotiation. 

From an applicant perspective, and where the beneficiary has not given an indication of preference, a documentary credit available by negotiation at sight would be the preferred option. 

If a documentary credit is available by sight payment, the nominated bank is provided with access to immediate funds of the issuing bank. The applicant will be responsible for the interest costs arising between the date of the issuing bank’s account being debited by the nominated bank and the date the applicant’s account is debited.

If a documentary credit is available by sight negotiation, the beneficiary has a choice of receiving immediate funds (in which case it is responsible for the payment of interest), or to await the remittance of proceeds by the issuing bank. The applicant’s account will only be debited on the date that the issuing bank provides reimbursement to the nominated bank.

Main UCP considerations

Sub-article 6 (b) requires that each documentary credit indicate whether it is available by payment, deferred payment, acceptance or negotiation.

What should appear in the settlement type field?

If the beneficiary requires settlement in the future, the options are deferred payment, acceptance or negotiation. From an applicant perspective, and where the beneficiary has not given an indication of a preference when a documentary credit is to be payable XXX days after sight, an availability of negotiation at XXX days sight would be the preferred option. 

If the documentary credit is available by negotiation, the due date will be XXX days after the date the documents are received by the issuing bank. Whereas, when it is available with a nominated bank or any bank by deferred payment or acceptance, the due date will be XXX days after the nominated bank receives the documents.

When a documentary credit is to be available at XXX days after the date of shipment, date of a document or date of an event, it generally matters not which form of availability is indicated. When given the choice, a beneficiary will often prefer deferred payment or acceptance.

Main UCP considerations

Sub-article 6 (b) requires that each documentary credit indicate whether it is available by payment, deferred payment, acceptance or negotiation.

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LC / SBLC Process & Procedures Trade Finance

Letter of Credit Application – Available with Which Bank

What should appear in the bank field?

The bank to whom the beneficiary may present its documents for payment, deferred payment, acceptance or negotiation (when other than the issuing bank, this bank is referred to as the nominated bank). When the nominated bank is the advising bank or any bank, the beneficiary also has the choice of presenting its documents directly to the issuing bank.

When this field indicates that the documentary credit is available with any bank, the beneficiary may present its documents to any bank. The scope of the term ‘any bank’ will be narrowed by the inclusion of the name of a city or country as part of the expiry date details referred to earlier in this module, in which case it is any bank in the named city or country that may pay, accept a draft, incur a deferred payment undertaking or negotiate.  

Wherever possible, situations should be avoided where the place of the bank with which the documentary credit is to be available is different from the place of expiry. 

Main UCP considerations

Sub-article 6 (a) indicates that a documentary credit must state the bank with which it is available or whether it is available with any bank.

Sub-article 6 (b) requires that each documentary credit indicate whether it is available by payment, deferred payment, acceptance or negotiation.

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LC / SBLC Process & Procedures SBLC Trade Finance

STANDBY LETTER OF CREDIT ISSUANCE PROCESS

How Standby Letters of Credit Work

The numbering is commensurate with that shown in the extract below.

1. As with any other trade transaction, an underlying sale contract is agreed between the exporter (seller) and importer (buyer). For the purpose of our example, the contract provides for settlement to be made in an agreed manner and for the issuance of standby to act as security for the exporter in the event of non-payment by the importer, despite the exporter complying with the conditions of the contract.

2. The importer applies to its bank for the issuance of standby in favour of the exporter.

3. Assuming the bank is willing to proceed, e.g., a credit facility exists for such issuance, the standby is issued and advised through a bank in the country of the exporter. At this point, the exporter is referred to as the beneficiary of the standby, and the importer is referred to as the applicant.

4. The standby is advised to the beneficiary. If confirmation has been requested, and added, this will form part of the advice that is sent to the beneficiary.

At this point, the beneficiary should ensure that the conditions of the standby reflect suitable security for it to proceed to perform under the contract. The standby is held by them as security, in the event it becomes necessary to make a claim thereunder.

For example, the standby should (a) be for the amount that may become due under the sale contract; (b) have an expiry date that extends beyond the completion of the contractual terms, including any period in which the applicant would be required to pay by the agreed means; and (c) clearly indicate the document(s) that is/are to be presented in order to demand payment thereunder.

Different Types of Standby

We can assist you with a wide variety of types of Standby Letter of Credit. This are more commonly seen in trade finance transactions. Common Ones are listed below. Most of these will be familiar to those acquainted with demand guarantees.

Performance – agreeing to undertake, deliver and/or complete contractual obligations. 

Advance Payment – undertakes repayment of all or part of a percentage of the value of a contract that has been paid by the beneficiary to the applicant as a down payment, advance payment, or deposit, upon the signing of the contract. 

Bid or tender bond – ensures a bidder (applicant) cannot alter its tender proposal, or withdraw from the tender process before the tender is awarded.

Counter – a standby issued by one bank, in favour of another bank, to support the issuance of a standby, guarantee, documentary credit or other forms of the undertaking, by that other bank.

Financial – supports a financial obligation to pay or repay.

Insurance – reinforces applicant obligations with respect to insurance or reinsurance activity.

Direct-pay – not necessarily related to default and is likely to be the primary means of payment rather than secondary which is normally the case. 

Commercial – acts as a security for payment of goods or services not settled by a buyer under other arrangements i.e., via open account trading or documentary collection.

Benefits and attributes of a Standby

  • A standby is often used to cover, and to mitigate, the many risks that can occur in finalising a contract between a buyer and seller. The benefits and attributes of a standby include: 
  • Independence from any underlying contract.
  • Provision of security.
  • Protection against non-performance of obligations, as opposed to a performance which results in non-payment (as is covered by instruments such as documentary credits i.e., with the shipment of goods and presentation of complying documents).
  • Can cover financial or non-financial obligations.
  • Can be used for cross-border or domestic transactions.
  • Contains many of the characteristics of a documentary credit e.g., independent from the underlying contract, payment made only if certain conditions are fulfilled, issued by banks, subject to a set of international rules.
Categories
LC / SBLC Process & Procedures SBLC Trade Finance

Incoterm categories

There are 11 Incoterms, which are for use in domestic and international transactions.

Each one sets out the obligations of the seller and buyer under the sales contract and indicates the point at which responsibility is transferred from seller to buyer. The seller’s obligations escalate from EXW (‘ex-works’ – the minimum) to DDP (‘delivered duty paid’ – the maximum).

Any obligation that does not appear in a particular Incoterm is the responsibility of the buyer unless the sales contract states otherwise.

The 11 Incoterms are divided into two groups: seven that are suitable for any mode or modes of transport; the remaining four applying to sea or inland waterway transport only.

When incorporating an Incoterm into a sales contract, the seller and buyer should take care to ensure that the term selected is appropriate to the agreed point of delivery and the mode of transportation to be used.

SBLC Trade

The 11 Incoterms are grouped as follows:

◆◆ Group 1: Rules for any mode or modes of transport

–– EXW (‘ex-works’)

–– FCA (‘free carrier’)

–– CPT (‘carriage paid to’)

–– CIP (‘carriage and insurance paid to’)

–– DAT (‘delivered at terminal’)

–– DAP (‘delivered at place’)

–– DDP (‘delivered duty paid’)

◆◆ Group 2: Rules for sea or inland waterway transport only

–– FAS (‘free alongside ship’)

–– FOB (‘free on board’)

–– CFR (‘cost and freight’)

–– CIF (‘cost, insurance and freight’)

Applying the appropriate Incoterm, and the applicable transport and insurance document requirements. The Incoterms are set out in a logical order under each grouping, starting with the term that imposes the least obligation on a seller and ending with that which imposes the most.

Sellers and buyers are advised to review the full content of ICC Publication No. 715 once an Incoterm has been identified so that they understand its full implication and the obligations that it imposes. Irrespective of the chosen Incoterm, the buyer pays for the goods according to the terms of settlement agreed in the sales contract, proforma invoice or purchase order.

Courtesy – ifs University College 2015

Categories
SBLC Trade Finance

STANDBY LETTER OF CREDIT

What is a Standby Letter of Credit (SBLC / SLOC)?

A Standby Letter of Credit (SBLC / SLOC) is a guarantee that is made by a bank on behalf of a client, which ensures payment will be made even if their client cannot fulfil the payment. It is a payment of last resort from the bank, and ideally, is never meant to be used.

How can a contractual SBLC be used?

An SBLC is frequently used as a safety mechanism for the beneficiary, in an attempt to hedge out risks associated with the trade. Simplistically, it is a guarantee of payment which will be issued by a bank on the behalf of a client. It is also perceived as a “payment of last resort” due to the circumstances under which it is called upon. The SBLC prevents contracts from going unfulfilled if a business declares bankruptcy or cannot otherwise meet financial obligations.

Furthermore, the presence of an SBLC is usually seen as a sign of good faith as it provides proof of the buyer’s credit quality and the ability to make payment. In order to set this up, a short underwriting duty is performed to ensure the credit quality of the party that is looking for a letter of credit. Once this has been performed, a notification is then sent to the bank of the party who requested the Letter of Credit  (typically the seller).

In the case of a default, the counter-party may have part of the finance paid back by the issuing bank under an SBLC. Standby Letter of Credit’s are used to promote confidence in companies because of this.

SBLC Trade

How can you apply for a Standby Letter of Credit?

There are many aspects that a bank will take into consideration when applying for a Standby Letter of Credit, however, the main part will be whether the amount that is being guaranteed can be repaid. Essentially, it is an insurance mechanism to the company that is being contracted with.

As it is insurance, there may be collateral that is needed in order to protect the bank in a default scenario – this may be with cash or assets such as property. The level of collateral required by the bank and by the size of the SBLC will largely depend on the risk involved, and the strength of the business.

Other Application steps

There are other standard due diligence questions asked, as well as information requests regarding assets of the business and even possibly the owners. Upon receipt and review of the documentation, the bank will typically provide a letter to the business owner. Once the letter has been provided, a fee is then payable by the business owner for each yeah that the Standby Letter of Credit remains outstanding.

What are the fees for Standby Letters of Credit?

It is standard for a fee to be between 1-10% of the SBLC value. In the event that the business meets the contractual obligations prior to the due date, it is possible for an SBLC to be ended with no further charges.

What is the difference between SBLCs and LCs?

A Standby Letter of Credit is different from a Letter of Credit. An SBLC is paid when called on after conditions have not been fulfilled. However, a Letter of Credit is the guarantee of payment when certain specifications are met and documents received from the selling party.

Letters of credit promote trust in a transaction, due to the nature of international dealings, distance, knowledge of another party and legal differences.

How do SBLCs work in Cross-Border trade?

Where goods are sold to a counter-party in another country, they may have used an SBLC to ensure their seller will be paid. In the event that there is non-payment, the seller will present the SBLC to the buyer’s bank so that payment is received.

A performance SBLC makes sure that the criteria surrounding the trade such as suitability and quality of goods are met.

We sometimes see SBLCs in construction contracts as the build must fulfill many quality and time specifications. In the event that the contractor does not fulfill these specifications then there is no need to prove loss or have long protracted negotiations; the SBLC is provided to the bank and payment is then received.

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Trade Finance

Letter of Credit

Bank Letter of Credit

A letter of credit is basically a bank guarantee which promises that the exporter is fully covered for the goods he delivers to the importer. The buyer’s bank usually issues it and is either presented to the seller or the seller’s chosen financial institution. Once the seller has completed certain specific terms mentioned in the LC, they can be assured of receiving the payment.

An LC is particularly useful for newer businesses, as it is a form of financial credibility to attract foreign parties. Indian, UAE companies can also benefit from incorporating letters of credit in their international deals. Most western businesses are not comfortable about trading with businesses based with new companies in India, Middle East. However, with an international letter of credit, Indian, UAE companies can guarantee payment to their western partners in the event of a disaster. Letters of credit are of several types, namely, commercial, business, documentary, and irrevocable letter of credit. At London Trade Capital, we specialize in securing each of these LCs and other key financial banking instruments. As one of the top LC providers in Dubai, we have worked with countless Indian and UAE establishments to facilitate deals with international parties. To know more about Letter of Credits and how it can help your business, contact our team today!

How Does LC’s Work?

Whether it is a commercial, business, or international letter of credit, the process of acquiring one begins at a bank. A good credit score and appropriate income are two of the basic essentials to avail any form of LC. Most business owners find the LC bank process to be intimidating. Under such circumstance, you should consider availing the service of a proven team such as London Trade Capital. Our team of financial experts will work with you to ensure that your application is approved without any troubles. Listed are some of the primary ways in which letter of credits can benefit importers and exporters.

  • A letter of credit ensures payment is sent to the exporter once they have fulfilled the document’s terms. It helps to build trust between a buyer and seller who have not worked together in the past.
  • When a reputable bank and LC agency are involved, a letter of credit can be obtained and put into place quickly.
  • Letters of credits are markedly more customizable than alternative methods of financing. It allows importers and exporters to craft terms and conditions that are specific to their situation.
  • For those hoping to take their business international, a letter of credit acts as a risk-free foundation for expansion.

Types of Letter of Credits, we assist with,

Commercial Letter of Credit

A commercial letter of credit is the most basic LC. It has applications in a variety of international trade deals. At London Trade Capital, we offer ourselves as a hassle-free route to obtain a commercial letter of credit.

Import/Export Letter of Credit

The name of this form of LC depends on the party utilizing it. If being used by an importer, it is dubbed an “import letter of credit.” It becomes an “export letter of credit” when its obtained by an exporter.

Revocable & Irrevocable Letter of Credit

A revocable letter of credit allows the buyer or their bank to alter the terms of an LC if required. The changes can be done without the seller’s approval. However, a revocable LC is a rarity as most businesses opt for irrevocable LCs.

Revolving Letter of Credit

A revolving letter of credit grants a buyer the necessary financing for multiple purchases from the same seller. In most cases, a revolving letter of credit is considered active for a period of one year.

Back to Back Letter of Credit

A back to back letter of credit consists of two LCs. The first LC is between the buyer and the seller. The seller presents the second LC to their supplier. It is suitable only for three-party deals.

Documentary Letter of Credit

A documentary letter of credit ensures payment to the seller as long as they can provide the required documentation. These documents generally come in the form of proof of shipment or certificate of authenticity.

Standby Letter of Credit

A standby letter of credit serves as something of a “last resort.” No party involved in a standby LC expects to have reason to invoke it. However, should events transpire which inhibit the buyer’s ability to pay, the seller can fall back on the standby LC.