Electronics Industry – Foreign subsidiary financing through SBLC

• A company having a foreign subsidiary that recently commenced operations was forced to rely on external funding sources for working capital needs.
• The company had a strong presence in India & was dealing with foreign banks.

Challenge and Observation

• Insufficient Credit History: The subsidiary did not have a performance track record on the basis of which banks could sanction limits. The banks were sceptical in extending fund and non-fund based facilities.
• The company was not conversantwith various trade finance products.

Observation:

• External funding was proving to be quite expensive for the company.

Process

• IFA Global suggested that the parent company open a SBLC (Stand By Letter of Credit) in favour of the subsidiary company through its Indian banking partner.
• This arrangement helped the subsidiary company get limits sanctioned for meeting its working capital requirements.
• Other methods recommended to clients to reduce the cash cycle and lower borrowing costs include: discounting bills under LC, warehouse financing, borrowing base financing, etc.

Outcome

• This lowered the overall cost for the subsidiary without any strain on its balance sheet (as it is an off balance sheet item)
• Through these structures, the cost of funding was managed more optimally.