Trade Finance I nnovative solutions for SMEs

1. Trade Finance Innovative solutions for SMEs Transaction Banking 26Sep2012

2. What is Trade Finance Facilitates cross border and domestic trade flows between buyers and sellers Objectives Mitigate Risk Financing Settlement Balance Sheet Mgmt

3. International Trade • Buyers and sellers exchange goods for payment across national borders • Includes services • Also forms of counter trade where trade is reciprocal and payment is not made across borders

4. Problems SMEs face in International Trade • Buyer and seller unknown to each other • Language, laws, customs, regulations • Transportation systems • Buyers want time to pay while sellers want immediate payment • Transfer of funds • Foreign exchange • Tariff barriers • Politics • Country stability

5. Importance of Contract in Trade • All trade transactions are subject to contractual agreement (sales contract) between the buyer and the seller • Sales contract should include • Method of dispatch • Documents required • Specification of party bearing the related costs • Methods of payment

6. Risks in International Trade Buyer credit risk Supplier performance risk Sovereign & Country risk Foreign exchange risk Market risk

7. Inventory Holding Period Operating Cycle Collection Raw Materials Stock Period WIP Progress Period Finished Goods Inventory Period Debtor Conversion Period Credit Granted By Suppliers Working Capital Requirement Working Capital Cycle Buy Sell Collect • What ties up cash? • Increasing assets (inventory holding periods & debtors) • Decreasing liabilities. • The longer the stock & cash conversion periods the more cash is used. • A reduction in credit can lead to crisis and pressure on bank facilities. Page 7

8. Raw Material Receivables Working Capital Cycle for SMEs Cash / Capital Working Capital Cycle Work in Progress Finished Goods

9. Working Capital Cycle for SMEs Order L/Cs (Sight/Usance) Preshipment Finance Invoice Financing Financial Gtees./ SBLCs Advance payment against Proforma Invoice Sales Bills under Export LC Outward Collection Bill/ Invoice Discounting Cheque Purchase/ BOE Discount Factoring Raw Material Cash/ Capital Work in Progress Finished Goods Receivables Stock Holding Import Loans/ Loans Against Trust Receipts Preshipment Finance Usance L/Cs Purchase Invoice Financing Loan Against Imports Warehouse Financing Finance against Commodity Receipts Production Import Loans/ Loans Against Trust Receipts (LATR) Preshipment Finance Usance L/Cs Purchase Invoice Financing Loan Against Imports Structured Trade Products for the whole cycle end-to-end

10. (3) Pay on due date (2a) Submitsinvoice (1) Delivers /Ships goods (2b) Finances (4) Repays Financing Receivables Buyer Seller Discounting Bank Border

11. How is Financing Receivables different? Value Added Propositions • Compared with other traditional lending facilities such as overdraft or short term loans which offer limited funding against receivables, Financing Receivables can advance funds up to 90% of the invoice value • Large number of buyers covered under the facility • Higher limits are assigned on the basis of : • Quality of receivables • Underlying goods and services • Management of the company • Our new credit methodology is a move away from sole balance sheet assessment to focus on your quality of receivables as well as strength of your relationship with buyers 11

12. Right Product Are you selling to many buyers on open account credit terms? Is tied up capital in accounts receivables limiting your growth? Do you deal with credit worthy buyers ? Are you facing a working capital shortage? If the answer to any of these questions is a YES… Financing Receivables could be your solution

13. Case Study 1 • Platinum Traders import Mobile Phones from Korea and re-export to GCC countries. The following is the information on their working capital • Total annual imports are AED 100 M. Goods are purchased four times a year, on the first day of each quarter commencing 1st January. Order for each quarter is AED 25M • Suppliers are paid on 30 days D/A basis from the date of AWB/bill of lading Normally it takes 5 days for the documents to reach • Monthly sales are AED 10M • Half the sales are on Cash basis and the balance on one-month credit to various buyers • Assuming the company wants to finance the working capital • What facilities will the Bank propose to the company? • How will the Bank structure them?

14. Case Study 2 Lucky Star Ltd. manufactures ceramic tiles for exports and domestic sales. The annual sale of Lucky Star is AED 60m. About 70% of sales are exported. On an average it takes 90 days for the company to receive export sales receipt, from the date that shipping documents are available The company requires to finance their export sales What facilities can the Bank provide to finance their export receivables?

15. Q & A

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