Structured Trade Finance
Structured Trade Finance (STF) is an alternative mean of providing trade financing facility so as to overcome the difficulty of obtaining conventional financing products. STF transactions are structured around the supply chain & customer’s commercial terms – involving large bilateral strategic relationships.
Each financing requirement is tailored/customized as per the particular need of the client. Repayment of such transactions is made through the sale/export proceeds of product and this tool can be used for financing short term working capital & long term working capital expenditure (upto 5 years). With the growing economic scenario any business has to face competition within the International/Global market and for this it is dependent upon innovative cost reduction & capital management products so as to overcome the limitation of inadequate capital which often dampens the fast paced growth of some many organizations.
We take this opportunity to share a real time case study which encompasses the kind of savings we could affect for some of our clients on the ground of various structured trade finance products:
Client: Few companies (name not disclosed) having their operations crossborder had gone for some Trade Finance products. IFA Global had suggested them with structured products which are easily available with bank. This suggestion was fruitful as these companies had setup these operations recently in foreign location
Banking Profile: The Companies had a good presence in India & were dealing with the Foreign Giants in banking.
Problem: Some of these companies had setup its operation recently & some had their operation for the past 1-2 years but were less conversant with various Trade Finance products. So an effective cost management tool was what these companies wanted. Since they did not have strong 3 years of Financial Performance so the banks were skeptical to sanction them various funded & non-funded limits.
Engagement Parameters: These companies had sought IFA Global help to make them conversant with the various Structured Trade Finance products and advise them upon the best alternative or a mix of structures so as to reduce interest cost and satisfy their working capital requirement.
Process: IFA Global firstly analyzed the business structure of the group company. It was important to understand the relationship between the various operations in a company (whether parent- subsidiary setup, related parties etc). Then post analyzing the business cycle, risk appetite, working & long-term capital requirement etc, IFA Global was in a position to suggest these companies few structures on Structured Trade Finance.
- One of the companies whose subsidiary was in a foreign location (outside India) had started that unit very recently. That subsidiary operation did not have any performance history for a sound banking limit sanctioning. So the company had to rely upon external funding sources for working capital needs. This source was proving to be quite expensive for them. IFA Global suggested the parent company to open a SBLC in favor of the subsidiary company through its Indian banking partner. This arrangement helped the subsidiary company to get a sanctioned limit for meeting its working capital needs. The overall cost had also come down for the subsidiary company along with no burden on its balance sheet (as it is an off balance sheet item)
- Again a similar structure company was in lookout for a cheap funding source to meet its working capital needs. However this subsidiary was an exporter whose buyer was a very well established & high credit rated company. On this basis IFA Global was able to advice for Factoring/Forfaiting method of financing. The cost could be reduced considerably because of the underlying facts of this case.
- Another structuring suggested by IFA Global to its client was supply chain financing. In this case the buyer had a better credit rating than the supplier. So the financial institution of the buyer firm had gone for arrangement of the funds for the supplier on the confirmation of the former. This led to the access to cheaper source of funding for the supplier whereas the buyer managed a better credit term & discount from the supplier.
- Other forms of financing suggested to few other clients were LC backed bill discounting, Warehouse financing, borrowing base financing etc. In all these financing models the core benefit was in the form of greater flexibility and the underlying covenants were more favorable for the borrower/receiver of fund. Through these structures the cost of funding could also be managed more optimally.
Outcome: Through this advisory the company was in a position to make available to companies access to cheaper source of funding along with the knowledge and information of various structured trade finance products. The overall objective was to reduce the cost of funding along with steady flow of capital for these growing companies