507© The Author(s) 2018S. A. Jones, Trade and Receivables Finance, https://doi.org/10.1007/978-3-319-95735-7

Appendix A: Trade Proposition Evaluation Checklist

Client

FinancialsPast financial performance(profit and loss [P&L], balance sheet [BS], cash flow statement)3 years (audited) and latest management accounts

• Reconciliation of historic financial performance with non-financial understanding and appraisal of the client

• If financial issues have occurred in the past, how has the client demonstrated that these issues will not reoccur; what are the risk mitigating factors?

Going concernBalance sheet (net assets) • Assessment of ‘going concern’ during the life

of the transaction• Are there sufficient net assets to enable the

client to absorb shocks?Creditor position (ageing and key creditors)

• Any evidence of liquidity pressure, and threat to the client’s ‘going concern’ status during the life of the transaction?

• Assessment of risk of lien by interested parties (forwarder, warehouse owner, etc.)

Cash/facilities • What is the current cash balance of the client?• If the client already has lending facilities (i.e.

overdraft or factoring) what is the current drawn balance against the available limit or prepayment available for drawdown? Any signs of pressure?

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508 Appendix A: Trade Proposition Evaluation Checklist

Client

Working capital assetsStock • If there is stock in the balance sheet, is the

value and its presence consistent with the understanding of the client’s trading model?

• Where is it stored—customer premises or independent warehouse?

• What does the stock comprise, and how long has it been there—ageing?

• Does the presence of stock indicate a problem with a previous transaction?

• Is the stock easily marketable (and at what price/discount), how much is obsolete, branded, or licensed?

Debtors • Consider ageing (indication of disputes, poor debtor credit quality, inefficient debt chasing and collection, bad debts), concentration, and payment record, if any, with end-buyers in relation to the proposed transaction

Other facilities/other lendersOther borrowing facilities • Lender, nature, facility limit, current utilisation,

security held, and covenants• Is the asset to be financed (goods/receivable)

unencumbered or is a waiver or deed of priority required?

• Loans: what is the repayment profile; consider the need for postponement

Shareholder/director background and supportShareholder support • Evidence of shareholder support (profit

retention, loans, investment, deferral of loans)Associate businesses of the shareholders and directors

• High-level financial assessment: any issues which could impact on the client?

• Assessment of conflict of interest and risk of manipulation between associated businesses (trade and receivables)

Previous failed businesses of the shareholders/directors

• When and why did these occur and what, if any, financial losses were incurred by the financiers?

Track recordThe client’s experience/track record of dealing with the supply chain and end- buyer(s) and handling the goods

• Supply chain: conformity, quality and timeliness of supply

• End-buyer: disputes, dilutions, timeliness of payment

• Goods: are these within the core competency of the client/their supply chain? Any modifications required?

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509 Appendix A: Trade Proposition Evaluation Checklist

Trade operating model

Contractual terms of saleTerms and conditions (T&Cs) of sale(or commercial contract)

• Review of key conditions; for example, conditionality of sale, sale or return, call-off, indicative purchase, quantity, price, Incoterms® rule, trade credit, method of payment, inspection, mode of transport, delivery date and place, documentation, insurances, acceptance of goods, provision of contract or financial guarantees, retention of title, instalment deliveries (divisible or entire contract?), set-off or counterclaim, taxes, damages, ban on assignment, force majeure, cancellation or variation in terms, governing law, jurisdiction, responsibility for costs and charges, dispute adjudication

• How are T&Cs communicated to the end-buyer?• Does the client’s documentation (order acknowledgement,

invoice, and delivery note) contain reference to the client’s T&Cs of sale?

Incoterms® rule • Who is responsible for freight and insurance? At what point does risk pass from the supplier to the client and then to the end-buyer. At what point are goods deemed to have been delivered—by the supplier to the client and to the end-buyer?

GoodsNature • Are they unique, widely available from other suppliers,

fragile, perishable? Is there an established market?Branded • Nature of branding—client or end-buyer?

• If end-buyer branded, is this the goods themselves, packaging or tag only?

Licensed (bearing the logo or character subject to third-party ownership)

• Evidence of licence approval and T&Cs of the licence holder• The licence agreement is required to understand royalty

payments (how much/when due, any upfront payment required?)

• Does the licence allow the financier the right to dispose/sell licensed goods elsewhere in case of need? Specific approval of the licensor may be required

Gross margin • Is there adequate margin to cover fees, freight costs, duty, currency conversion, unforeseen costs?

• Where invoice finance is the source of repayment, does the net prepayment rate generate sufficient funds to fully repay the financier?

Quality • What are the end-buyer’s requirements, if any, for quality assurance/control and certification?

• Are goods inspected prior to shipment; by whom, and against what criteria (quantity, quality and conformity to specification, sampling, acceptable quality level)?

• Are the inspection criteria in conformity with the end-buyer’s requirements?

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510 Appendix A: Trade Proposition Evaluation Checklist

Trade operating model

Perishable or fragile

• Is there a higher risk of deterioration or damage and thus rejection of goods or dispute by the end-buyer?

• Is there special transport, storage conditions, or handling requirements?

• Is insurance cover restricted or subject to special conditions?• Is funding tenor/timeline consistent with product life?

Product life cycle • Are goods at the beginning, middle, or end of their product cycle? Consider impact on marketability and disposal price

Market • Size of market. Extent of demand for the product (vs. supply) and external forces/requirements on fashion, trends, regulation, technological advancement (quickly rendering market or product obsolete)

• Has the client sufficient experience or knowledge in this market and with this product?

• Alternate market/buyers in case of order cancellation• How quickly can goods be disposed of at a price sufficient to

repay the facility, fees, and costs?Price dynamics/volatility

• How vulnerable is the end-buyer’s order to market price volatility?

• Does the contract set a fixed price or provide for a pricing mechanism to account for increased costs or currency exchange rate movements?

Certification, licence, approvals

• Are there any regulatory or end-buyer requirements, certification, approvals, or licences required?

• Does the end-buyer need to approve/audit the manufacturer—has this been done?

• When will such approvals or certification be obtained within the timeline (pre or post finance)?

• What are the implications of delay or likelihood of order cancellation should licences/certification not be available, or on a timely basis—what are the dependencies for approval/certification?

Goods in transitMode of transport (sea, air, road, or rail)

• Consider implications for control, documentation, security or title

Carrier or freight forwarder

• Reputation, status, and experience

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511 Appendix A: Trade Proposition Evaluation Checklist

Trade operating model

Insurance (transit)

• Who is responsible for insurance (seller or end-buyer)?• The financier should obtain evidence of insurance• What risks are covered, that is, Institute Cargo Clause A, B, or C,

for what value and from which place and to what destination? When does cover commence and expire?

• Is the period and value of insurance sufficient to cover the envisaged transactions?

• Who is the insurer and underwriter?• Is the policy in negotiable form or can this be assigned to the

financier (or nominated as loss payee)?• Seek evidence that the premium has been paid and note the

date of expiry/renewalGoods in storageWhere are the goods stored?

• Is the warehouse operated/owned by a company independent of the client or is this the client’s own warehouse?

• What is the status/integrity of the warehouse owner?• Confirmation ought to be obtained that goods physically

exist and there is no sign of damage• What are the conditions of storage (do the goods require

any special storage conditions and will this be fulfilled by the warehouse)?

• Will the goods be segregated (or can they be if so required)?Documentation (control, security, or title to goods)

• What form of document will be issued by the warehouse keeper (warehouse receipt, deed of attornment) and can this be relied upon to give control, security or title of the goods to the financier?

Performance risk• Supply chain• Manufacture• Sub-contracting• Assembly• Packaging• Delivery

• Assessment of track record, time, cost, and risk factor of conversion into a finished, packaged, labelled product ready for sale (track record of supply chain, manufacture, and third parties [sub-contractors, packers, and carrier])

• What contingency for alternative supply (lead time and cost) is available in case of a supplier’s failure to perform?

• Is there dependency on any suppliers (are they providing a unique product/component)? What is their financial status, reputation, and reliability?

• Can the client deliver by the required date?SupplierStatus • What is their track record in supplying timely, quality-

conforming goods or components or in providing sub- contracted manufacture/assembly?

• Can their existence be independently verified; do they appear on company registers or blacklists, have cautions been issued by the International Maritime Bureau, or is there any adverse publicity?

• What process does the client have of identification and evaluation of new suppliers?

• What is the lead time of supply?

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512 Appendix A: Trade Proposition Evaluation Checklist

Trade operating model

Incoterms® rule of supply

• At what point are goods deemed delivered?• Who is responsible to contract freight and arrange

insurance?Retention of title (T&Cs of supply)

• At what point does title pass from the supplier to the client?• Are the goods purchased unencumbered?

Payment • What is the payment method (is this consistent with the assessment of supplier risk)?

• What is the payment term? Is the due date for payment clear—how is this calculated—from date of invoice or a defined event?

End-buyer/source of repaymentReason for end- buyer’s purchase

• Is this a commoditised purchase based on price, discretionary spend, or essential?

• What is the client’s unique selling point ‘USP’? What leverage does the client have over order enforcement?

Nature of end- buyer’s commitment at the point of finance entry

• Will a purchase order be held by the client in a form acceptable to the financier at the point of finance/letter of credit issuance?

Contract  (refer to contractual terms of sale)

• What is the conditionality of purchase and what are the performance obligations required of the seller?

• If the client fails to perform on one delivery, what impact does this have for continued delivery, or payment on other deliveries? What penalties apply?

Purchase order (and related terms)

• Is this an official committed order (formal signed order, unsigned order, or email)?

• Does this show quantities, Incoterms® rule and required delivery date and place? Is the delivery date achievable?

• What rights of cancellation does the end-buyer have? Is the end-buyer responsible for the client’s costs (and loss of profit) incurred on order cancellation?

• Do the T&Cs of purchase provide right of ‘sale or return’, and period for rejection? Is there a ban on assignment clause? Do the T&Cs state that the end-buyer takes title on delivery or payment?

Call-off • Does this feature? If so is there a commitment from the end-buyer to purchase the goods, defined in time and quantity?

• If goods are not called off by a stipulated date, can the client invoice the end-buyer for remaining goods held?

Status of end-buyer • Financial statusPayment experience

• What trading track record does the client have with the end-buyer (ageing of past and current debts?) and dilution experience (deductions from gross invoice amount) on prior transactions?

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513 Appendix A: Trade Proposition Evaluation Checklist

Trade operating model

Payment method and terms

• Is this consistent with payment risk assessment?• Is the end-buyer’s obligation to pay guaranteed by a letter of

credit or other independent payment instrument?• Is credit insurance available and for appropriate limit?• Do the payment terms conform to the credit insurance limit

and conditions (if applicable)?Frustration risk • What events could frustrate the sale, delivery of goods or

collection of payment, such as political or transfer risk? (Are these events insured?)

Dilution risk (deductions to sales invoices)

• What is the client history of credit notes (frequency, reason, value)? What has been the level of credit notes raised by the client (a) in total over the past 24 months, (b) in total for this end-buyer over the past 24 months?

• Is settlement discount or retro rebates offered and how much (need to accrue for retro rebates)?

• Does contra trade exist and to what extent?Dispute risk • What is the risk/likelihood of dispute?

• Credit note history will indicate the likelihood of disputeRejection risk • What is the risk of late delivery or non-conformance of

goods? Refer to the (contracted) quality inspection process and importance of timeliness of delivery

Incoterms® rule • At what point are goods deemed delivered; when can an enforceable invoice be financed?

• What form of proof of delivery/receipt is obtained and when?

Invoice • This must be addressed to the same legal entity as the issuer of the purchase order (and the credit insured party, if applicable). Invoice must be clear and specific on the due date for payment (or date from which the credit period is calculated)

• Incoterms® rule must be stated for international sales• Where a disclosed facility is provided the invoice must bear

the appropriate assignment clauseForeign currencyCurrency of sale and purchase

• What is the currency of goods purchase, sale, and borrowing?

• Where currencies differ, what exchange rate (actual or notional) has been used to set the sales price and the cost of goods?

• If the profit margin is low, exchange rate protection should be a mandatory condition of finance

Funding

Amount • How much is required in total (to cover peak trade and/or seasonality) and what will be the value of each shipment/transaction and trade cycle duration (transactional risk exposure)?

• The amount required should be validated by the financier according to the trade cycle timeline calculation

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514 Appendix A: Trade Proposition Evaluation Checklist

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Funding

Other lenders • What other lenders are involved and how dependent is the client on the continued support and finance availability of these to the success of the transaction?

Purpose and application

• Does the financier need to control the use of funds? These must be used for the pre-agreed purpose to generate the transactional self-liquidating source of repayment

Self-liquidating? • Will the facility be repaid solely by the proceeds of sale which are controlled/captured by the financier?

• Is there sufficient margin to ensure full repayment after all costs and fees?

• If repayment is via invoice finance, is the net prepayment advance sufficient to cover trade loan repayment?

Entry point of finance

• At what point is the financier to enter the transaction and what are the associated risks of this entry point of the trade cycle timeline?

Funding period • Calculated from the trade cycle timeline. Is this within scope and reasonable?

Import tax and duty

• How much is payable? Is the financier required to fund this—is there sufficient margin in the deal?

Freight costs • How much and when payable? Is the financier required to fund this—is there sufficient margin in the deal to cover self- liquidated repayment?

Other costs? • How much, what for, and when payable? Is the financier confident that all transaction costs are known? Do these need to be funded by the financier and is there sufficient margin in the deal to accommodate repayment of these?

Trade cycle

Order lead time

• How long before goods are manufactured or shipped?• Is funding or credit support required during this period?

Shipment duration

• How long will it take to ship or deliver goods to the end-buyer or to the nominated place?

Customs clearance

• Requirements for clearance and likely timescale

Timeline • Is this realistic, consistent with the order lead time, transit time, any manufacturing or added value process, financial statements of the client (DPO, DIO, DSO) and nature of the goods, and is the delivery date achievable?

Security

Personal guarantees • If to be taken, from whom and for what value; assets and liabilities statement will be required—what is the net worth of the individual?

Unencumbered assets

• What assets does the client own; what is their value (and basis of valuation)? Are any of these assets charged elsewhere as security—which assets are unencumbered?

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515 Appendix A: Trade Proposition Evaluation Checklist

Security

Security over the goods

• Is security required over the assets (goods and receivable) throughout the trade cycle, what property rights are required, can this be achieved (and how)?

Invoice debt assignment

• Does the end-buyer have a ban on assignment clause within their T&Cs of purchase? If so, specific consent of the end- buyer will be required

InsurancesCredit insurance • Request a copy of the proposal form, schedule of cover, and

policy• Are premiums paid up to date?• What is the insurance indemnity and what are the

deductibles?• Insured events covered, or required (pre-delivery,

commercial, political risks)• Maximum liability of the policy• Obtain a list of credit insured debtors• Have any claims in the past three years been rejected?• Is the policy unencumbered or is there already a loss payee

or joint insured?• Consider becoming joint insured or loss payee

Insurances specified by the end-buyer (if any)

• Does the end-buyer require the client to hold certain insurances? Is the necessary insurance and indemnity limit in place?

Other insurances:Public and product liabilityProduct recallStockPremisesCargo

• Establish the nature of other insurances held (note insurance limit, insured risks, policy expiry, material exclusions to cover, name of insurer and underwriter, and evidence that premium payments are up to date)

• Are these insurances appropriate and adequate for the client’s business?

• Consider being noted as loss payee

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517© The Author(s) 2018S. A. Jones, Trade and Receivables Finance, https://doi.org/10.1007/978-3-319-95735-7

Financial ratios are used to establish the relationship between sets of data and to identify trends in these when compared against different trading periods. They should not be used in isolation but in conjunction with sources of non- financial data to build a complete understanding of the client’s business and their perfor-mance. Ratio analysis and their interpretation must be set against the environ-ment in which the company operates to include their market and competitors. Financial ratios are used most importantly to identify trends across a period and to raise questions. Not every ratio needs to be used; they should be selected to help understand the company’s performance in specific areas. For example, these can cover liquidity (solvency), profitability, working capital, debt (gearing), and so on. The ratios provided in this appendix are not exhaustive but include those that may be useful for the structured or partially structured financier.

When the proposition is to be fully structured on a ‘self-liquidated’ short- term basis, those ratios most important to the structured financier are provided in the ‘primary ratio analysis’ section. If the proposition is to be partially structured or provided on a revolving basis over, say, one year, the financial assessment may need to be wider incorporating some of those ratios summarised in ‘secondary analysis’ which assess more deeply the ‘going concern’ status of the client.

The conventional ‘balance sheet’ lender relies upon a large suite of ratios given their reliance on general cash flows and the client’s effective management of the business for its repayment. The lender will use many of the ratios con-tained within this appendix and more. Ratios which analyse gearing or debt will be added because the conventional lender needs to assess whether the client can repay their debt. This will be determined by the level of their sales, profitability

Appendix B: Financial Ratio Analysis

518 Appendix B: Financial Ratio Analysis

and efficiency in collecting their trade receivables against the amount of interest payable and their loan repayment schedule. These are not of primary impor-tance on a self-liquidating facility because the structured financier will ring-fence targeted cash flows away from the client and use these to repay themselves ahead of other creditors. On longer-term credit support or funding arrange-ments, such as a revolving facility, or a transaction spanning several months, the dependency of the client on other sources of finance will need to be evaluated.

The ratios selected within this Appendix measure either profitability, liquid-ity, or gearing as shown within each ratio. The source of information required for calculation of each ratio is indicated by profit and loss [P&L], and balance sheet [BS].

Primary Ratio Analysis

Table B.1 Gross profit margin

Gross profit margin % Gross profit × 100 [P&L]

Profitability Sales [P&L]

This measures the difference between the cost of goods purchased or manu-factured and the sales value. It is an important ratio for the structured finan-cier when the full cost of goods purchased is financed because it establishes the extent and sufficiency of the margin to absorb deductions made by the debtor and foreign exchange rate conversion to ensure sufficient net receivable proceeds to cover the value of credit support, or loan, interest, and fees.

Table B.2 Net profit margin

Net profit margin % Net profit × 100 [P&L]

Profitability Sales [P&L]

This ratio measures the profit as a percentage of sales which remains after all expenses have been deducted. A loss-making business is of concern to the structured financier, as this will erode its cash resources, which may impair its ability to remain a ‘going concern’.

Table B.3 Debtor collection

Debtor collection (days) Trade debtors × 365 [BS]

Liquidity Sales turnover (annual) [P&L]

519 Appendix B: Financial Ratio Analysis

Also known as ‘DSO’ or ‘debtor days’, this ratio measures how long it takes to collect monies from end-buyers (debtors). This is very important to the structured financier because it provides an indication of the quality of the debtor book and thus the structured financier’s source of repayment. This should be used by the structured financier to formulate and validate the trade cycle timeline and required trade loan duration to cover any trade receivable period. A declining trend (lengthening) could be an indication of poor credit quality of debtors, disputes, inefficient debt collection, bad debts, an exten-sion of longer credit terms, or a combination of these. An ageing of 8 days or more beyond official trade credit terms should be investigated. An ageing of 30 days or more is of major concern.

Table B.4 Creditor payment

Creditor payment (days) Trade creditors × 365 [BS]

Liquidity Trade purchases (annual)a [P&L]aIf the purchase figure is not available, cost of goods sold may be used. Exceptionally, the sales figure can be used if applied consistently to establish a trend.

Also known as ‘DPO’ or ‘creditor days’, this ratio measures how long it takes to settle supplier invoices. This can be used by the structured financier to formulate and validate the trade cycle timeline and funding gap. A declin-ing trend (lengthening) could be an indication of liquidity pressure (shortage of funds), or a dispute with a major supplier. Unless there has been an agreed lengthening of terms, an ageing of 30 days or more beyond official trade credit terms is very concerning.

Table B.5 Current ratio

Current ratio Current assets [BS] Current liabilities [BS]Liquidity

This provides an indicator of the short-term solvency and ‘going concern’ status of the business. It compares current assets against debts (liabilities) that need to be paid in the short term. There should be enough assets which can be converted into cash to meet the debts as they fall due. Unlike the ‘quick ratio’, stock is included in the current assets; this may be difficult to sell and also require heavy price discounting. Whilst the ratio should generally be greater than 1:1, the satisfactory level will vary from sector to sector; for example, cash intensive businesses such as retailers can operate at lower levels than a manu-facturer. The key factors which determine the acceptable level for the ‘current ratio’ are how long it takes the company to convert its current assets into cash

520 Appendix B: Financial Ratio Analysis

(the shorter the lower the ratio) and how frequently its products are sold (the more frequent the lower the ratio).

Table B.6 Quick ratio

Quick ratio Current assets − Stock [BS]Current liabilities [BS]Liquidity

The ‘quick ratio’ or ‘acid test’ is similar to the ‘current ratio’ but excludes stock (which may be difficult to convert into cash), from the current assets figure. This is a better indicator of short-term solvency.

Table B.7 Stock

Stock (days) Stock × 365 [BS] Trade purchases (annual)a [P&L]Liquidity

aIf the purchase figure is not available, cost of goods sold may be used. Exceptionally, the sales figure can be used, if applied consistently, to establish a trend.

This ratio measures the number of days’ stock the company is carrying. Also known as ‘DIO’, or ‘stock days’. This should be used by the structured financier to formulate and validate the trade cycle timeline and required trade loan duration to cover any stocking period. A declining trend (length-ening) could be an indication of slow-moving lines, unsaleable goods, poor stock management, or an unsuccessful trade transaction which resulted in returned goods.

Table B.8 Debt/equity ratio

Debt/equity ratio Total debt [BS] Capital and reserves (TNW) [BS]Gearing

Measures the proportion of debt to the net assets of the client. This ratio is important to the conventional lender because the higher the proportion of debt, the greater level of income required to service that debt. It thus measures the proportion of the client’s own funds invested in the business compared to debt. Whilst less relevant to the structured financier, it is an indicator of the sustainability of the business and thus its ‘going concern’ status. What is rel-evant to the structured financier is the dependency of the client on the con-tinuance and availability of other lending facilities, their covenants, and the security held by other financiers.

521 Appendix B: Financial Ratio Analysis

Secondary Ratio Analysis

When a partially structured facility is provided, where, for example, the trade receivable proceeds are collected into the bank account operated by the client, the following ratios, in addition to those summarised under ‘primary ratio analysis’, may be required. These evaluate the client’s ability to repay and ser-vice the borrowings.

Table B.9 Operating profit margin

Operating profit margin % Operating profit ×100 [P&L]

Sales [P&L]Profitability

This ratio measures profit (after administration and distribution expenses are deducted from the gross profit figure) against the level of sales. This will be affected by an increase in costs, or a fall in the gross profit margin.

Table B.10 Overhead cost ratio

Overhead cost ratio Administration and distribution costs [P&L]

Sales [P&L]Profitability

When the partially structured financier relies upon the ability of the client to repay, the financier is vulnerable to any restriction caused to cash flows, such as an increase in expenses or fall in profitability. This ratio measures the proportion of the indirect fixed costs of producing goods and operating the business against the total sales figures.

Table B.11 Interest cover ratio

Interest cover ratio Profit before interest and tax (PBIT) [P&L]

Interest payable [P&L]Gearing

This ratio assesses the affordability of the debt by measuring the number of times interest is covered by profit. When the structured financier deducts interest from the captured trade receivable, this ratio is not relevant. When the partially structured or conventional financier relies upon the borrower’s ability to pay interest, then it becomes very relevant. This often features as a covenant in lending agreements requiring interest to be covered between 2.5 and 4 times by profits.

522 Appendix B: Financial Ratio Analysis

Table B.12 EBITDA (earnings before interest, tax, depreciation, and amortisation) leverage ratio

EBITDA leverage ratio Gross interest-bearing debt − cash and bank credit balances (net debt) [P&L] and [BS]

EBITDA [P&L] and [BS]Gearing

The proportion of interest-bearing debt (after netting off available cash) against total revenue is measured by this ratio. This is not directly relevant to the structured financier. What is relevant is the dependency of the client on the continuance and availability of other lending facilities, their covenants, and the security held by other financiers.

Table B.13 Debt service coverage

Debt service coverage Net profit after tax + Interest + Depreciation + Amortisation [P&L] and [BS]

Interest + Instalments [P&L] and [BS]Gearing

This ratio assesses the affordability of the debt by measuring the number of times loan repayments and interest are covered by revenue. When the struc-tured financier deducts loan repayment and interest from the captured trade receivable and repays themselves first before releasing any surplus to the cli-ent, this ratio is not relevant. When the partially structured or conventional financier relies upon the client’s ability to repay the borrowing and interest, then it becomes very relevant.

Table B.14 Sales breakeven

Sales breakeven Total fixed costs (administration and distribution costs) [P&L]Gross profit margin [P&L]Profitability

The sales breakeven ratio calculates the level of sales required to cover over-head costs and thereafter to generate profits. This is used by the conventional lender to assess the margin of ‘safety’ between a profitable and loss-making sales performance. Whilst this will not be of primary relevance to the short- term structured financier, who captures the trade receivable proceeds and thus is not directly concerned or exposed to general cash flows and level of profit-ability, it is relevant to the partially structured and conventional financier. They are exposed to a contraction in liquidity caused by cash absorbing losses. This may impair the client’s capability to fulfil orders, restrict their ability to repay the financier, and threaten the ‘going concern’ status of the client.

523© The Author(s) 2018S. A. Jones, Trade and Receivables Finance, https://doi.org/10.1007/978-3-319-95735-7

AAccounts receivable, 293, 447Advance payment, 4

advance or deposit payment, 346–347

advance payment guarantee, 301–303

advance payment standby credit, 272

funding deposit payments, 359–361assessment, 359–361

requirement of the seller, 20risk, 27trade loan, 360

Agency agreement, 291Agency receipt, 153Air waybill, 77–80

control of goods, 79use of documentary

collection, 79delivery order, 79pledge, 79

Alternative market financiers, 89operating model, 14risk and reward, 90–91risk philosophy, 89

Anti-money launderingletters of credit; handling for non-

customer beneficiaries, 198standby credits; lack of

transparency, 279Approved trade payables finance,

363–369Assignment

back-to-back credits, 258ban on assignment, 52–53demand guarantees, 327invoice debt assignment, 397

acknowledgement, 398reservation of right to serve debt

assignment notice, 459, 477invoice debt assignment clause,

398–399letters of credit, 233

allocation of proceeds, 235commitment to negotiate,

211–213pre-shipment finance, 231

standby credit, 283financing, 291

Automatic extension, 277, 288, 316, 322

Index

524 Index

BBack-to-back letters of credit,

249–261amendments, 256assignment of proceeds, 258availability, 253–254bills of lading, 255confirmation, 254–255counter credit, 249, 258–261credit facility, 249data, 255facility documentation; rejection of

documents, 260–261insurance, 255–256latest date for shipment, 257master credit, 249, 253–258

reimbursement, 257payment term, 254power of attorney, 252 (see also

Agency agreement; Demand guarantees; Standby credits)

completion of claim documentation, 252–253

presentation, 258presentation period, 257process, 250reimbursement, 257risk appreciation, 250–252structuring a back-to-back letter of

credit arrangement, 252–253third parties, 256–257third party documents, 256

Ban on assignment, 52–53Bank aval, 5, 177–189

bon pour aval endorsement, 177credit facility, 182debt purchase, 181discount purchase, 183–185finance, 181financing by the avalising bank, 185financing by the remitting bank, 185liability for payment, 178maturity, 180performance, 182–183

process, 178–180recourse, 181–182risk and control, 180–181warranties, representations and

undertakings, 183Bank risk, 413

importance of the end-buyer’s bank, 411–413

Bill of exchange (draft), 399–401acceptance, 401

acceptor, 400letter of credit; bank

acceptance, 201trade acceptance, 401

consideration, 401endorsement

bank aval, 181bearer, 399bill discounting, 172bill of exchange, 399–401liability of drawer and

endorsers, 402without deduction, 400

financier’s perspective, 403–404format, 400–401

inchoate, 401sole, sola, first and second, 400

holder in due course, 402negotiable instrument, 402non-payment, 402–403parties, 399protest, 403–404 (see also Protest)stamp duty, 400

Bill of lading, 64–66back-to-back LC, 256charter party, 75

key aspects for financier, 72–76consignee party, 74constructive possession, 68–69contract of carriage, 224control, 223–224document of title?, 64

bill of lading, 67warehouse receipt, 372

525 Index

express, 71–72house, 69

less than container load (LCL), 70risks, 75

master, 69multimodal/combined transport,

70–71originals, 73

letters of credit, 222payment against copy bill of lading,

356–357port to port, 70received for shipment, 71risk of copy bills of lading, 31sea waybill, 71security over the goods, 76shipped on board, 74straight, 68

Borrowing base, 389–392floating charge, 392lending value, 390reporting, 383risk considerations and limitations, 392

Buyer, see End-buyer; evaluation

CCalculating finance, 33–36

seasonal trade, 34–35Call-off, 43Capital and exchange controls, 414Cargo insurance, 339–343

back-to-back LCs; master credit, 255claims, 343collections, 170contents of policy, 340contracting party, 340–341double insurance, 340goods and journey, 342Institute Cargo Clauses, 342insured party, 341letters of credit, 218loss payee, 341, 384 (see also

Assignment)

open policy, 340period of cover, 342premium payment, 432risks, 342salvage, 341seller’s interest, 340terms and conditions, 343value, 342warehouse finance, 384

Cargo receipt, 64forwarder’s cargo receipt (FCR), 82–83mates receipt, 64

Cash against documents, 162Cash margin, 96

letters of credit, 216Claim demand, 151, 321, 323

claim demand statement, 313counter guarantee, 321using a transferred guarantee

from the borrower, 151credit insurance, 430demand guarantees, 321notification; demand guarantees,

323–324power of attorney, 323 (see also

Agency agreement; Standby letters of credit)

completion of claim documentation, 151

standby credit, 276standby credit documentation, 285

Client evaluation, 99–123character, 99commercial leverage, 441–442debt capacity, 122–123

deed of postponement, 108restriction on use of prepayment

funding, 122debt service coverage, 123going concern, 100, 362loss making, 110, 117other businesses, 101

manipulation and diversion risk, 101

526 Index

Client evaluation (cont.)other lending facilities

availability, 122security, 122sufficiency, 361

payables finance, 362performance, 362previously failed businesses,

101–102retained earnings, 110risk philosophy, 89, 493shareholder support, 100–102solvency, 111, 112trade operating model, 494

Collateral manager, 382–383custodial services, 382document trustee, 383monitoring services, 382valuation services, 383

Collections, 5, 159–175advance against collections,

168–171case in need, 167clean and documentary

collections, 160dishonour, 167documents against acceptance (DA),

165–167documents against payment (DP),

162–165 (see also Cash against documents)

financing; identifiable source of repayment, 168

free of payment, 167inward bill discounting, 174–175liability for payment, 159local currency, 165maturity, 166outward bill discounting, 172–173process, 160–162protest, 167 (see also Protest)refinancing inward or import

collections, 173–174

retirement of the bill, 175risk and control, 166–167

air shipment, 164other modes of transport, 164sea shipment, 163–164

schedule of instructions, 160structured finance, 174use with payables finance, 357when used, 160

Commercial letter of credit, 191, 241, 288, 290

Commercial terms, 6–7, 37–59, 336acceptance of goods, 49agreement to supply, 40cancellation or variation, 56–58commercial leverage, 19–25,

441–442conditionality of sale, 41–42contract or financial guarantees, 46damages, 55–56delivery date and place, 48divisible contract, 51documented agreement, 39entire contract, 50, 439force majeure, 56governing law, 58incoterms® rules, 38–39jurisdiction, 58key clauses, 37–59other aspects of the contract, 59place of payment, 45–46price, 43–44sale or return, 42

promotional goods, 336set-off or counterclaim, 51–52taxes, 52transfer of title, 39

Concentration, 456–457Confirmation (letter of credit)

commitment to negotiate, 211–213confirmation instructions, 207–208confirming bank’s perspective, 229credit risk, 209

527 Index

documentary riskbeneficiary, 207confirming bank, 209–210

master credit, 254, 255may add, 206payment ‘without recourse,’ 209silent confirmation, 210–213silent undertaking to pay, 211unconfirmed credit, 208undertaking to pay, 208–209when used, 207without recourse, 204

Conflicting needsof seller and buyer, 1–15

Consigneeair waybill, 79bill of lading, 74

Consignment stock, 42–43Constructive possession

goods in transit, 68, 69goods in warehouse, 376requirement to validate pledge,

151–153Containers (shipping), 64

full container load (FCL), 70less than container load (LCL), 70sealing, 443, 444

Contra trade, 457monitoring, 51, 457

Conventional lending, 8–9, 123assessment, 9, 102credit gap, 129external debt, 123 (see also Gearing)financial ratio analysis, 111

Court injunction, 213, 282, 321Credit, 2, 5, 19–25, 27, 38, 44–45, 55,

61, 87–99, 113, 114, 125, 135, 137, 160, 171–172, 177, 182, 191–239, 241–268, 271–292, 297, 336, 348–349, 357–358, 366, 376, 395, 407, 409–411, 417–435, 437, 447, 450, 454, 460, 474, 489–504

Credit application, 489–504aged stock report, 496–497annual review and audit, 498available security, 492company background, 493credit insurer; status, 432current facilities, 492–493executive summary, 490–497facility proposition, 491forecast performance, 494foreign exchange risk exposure, 497key end-buyers (debtors), 494–495key principles, 489–490lending structure, 491–492quality management, 496risk philosophy, 493suppliers (trade creditors), 495–496trade operating model, 494trading financial performance, 493transactional control matrix,

498–500Credit facility

back-to-back credits, 249–261bank aval, 182credit insurance; without recourse

facility, 462–463demand guarantees, 298inward bill; refinancing, 174

indemnity, 174, 175letters of credit, 214

foreign currency; margin, 215tolerance in value, 215

recording, 97sub-limits; use of, 360supply chain finance, 366

Credit insurance, 417–435aggregate first loss, 425–426calculation of loss, 430claim demand, 417–435claims history, performance, 432claims waiting period, 171client evaluation; use of, 409collections, 171

528 Index

Credit insurance (cont.)commercial risk, 419–420countries covered, 428credit approval; without recourse

finance, 432reinsurance treaties, 432

debtor ageing, 418debtor list; monitoring policy

compliance, 427declaration of material

information, 423deductibles, 424discretionary limit, 428–429dispute, 420double insurance; invalidation of

insurance, 435excess, 425exclusions, 422financier’s own policy, 434–435 (see

also Factor’s endorsement)financier’s perspective, 431insolvency, 420insurable interest, 434, 435insured debtor limit, 426–427

cancellation, 426, 427non-cancellable limits, 426

insured percentage, 424joint insured, 433loss payee, 433management of the policy, 432maximum extension period,

427–428maximum liability, 429–430maximum terms of payment, 427minimum retention, 425nature of the debtor, 418payment method, 427performance, 432period of the policy, 423–424policy, 419political risk, 420–421pre-delivery risk, 421, 434premium payment, 432

proposal form; contents and importance, 418–419

protest; requirement, 403–404credit insurance requirement, 427

protracted default, 420public buyer, 418

collectability of debt, 415retention of title, 422retention reserve; use of with credit

insurance, 426salvage, 422

calculation of loss, 430double insurance, 435

status of the insurer, 432subrogation, 431terms; key aspects, 431third country risk, 428types of policy, 417

losses arising, 424risks attaching, 424

using the client’s insurance policy, 431using with receivables finance, 460

Credit notescontents, 454debit notes, 454history, 454–455notification, 477

Credit reference agencies, 409–410other sources of information, 410

Credit risk, 21, 87–98actual ‘hard’ liability, 98blended approach, 129, 490

invoice finance prepayment via client drawing, 485

contingent liability, 97–98credit insurer, 432default risk, 87–88early warning signs, 88–89end buyer, 407–408general trade product facilities, 96–97identification of transactional issues, 95loss given default (LGD), 96policy, 89

529 Index

probability of loss, 87–98reasons for default, 88receivables; credit risk, 450recording the liability, 97risk and reward, 90–91risk identification, 92risk philosophy, 89supply chain finance, 366trade and receivables finance credit

assessment, 91–92Creditor days, 115, 116Creditor listing, 114–116

ageing, 89assessment, 496

days payables outstanding (DPO), 24–25, 115 (see also Creditor days)

liquidity pressure, 114–115, 362 (see also Suppliers)

DDebenture, 141, 376Debt advance, 449–450Debtor days, 112, 126, 494Debtor listing, 112–114

ageing, 88–89, 112–114, 418–419assessment, 494–495

concentration, 456–457contra trade, 457days sales outstanding ‘DSO,’

22–23, 112–114 (see also Debtor days; Financing agreement, covenants, debt turn)

extension of longer credit terms, 113inefficient chasing of debts, 114key end-buyers (debtors), 494–495nature of the debtor, 418poor credit quality, 114

Debt purchase, 450–451bills of exchange (draft), 181purchase price, 451

repurchasepoor debtor quality, 114with recourse financing, 464

true sale, 139–140warranty, representations and

undertakingbills of exchange, 172–173

Debt reserve account, 465Deed of attornment, 152, 374, 376,

377, 385, 386Deed of priority, 138, 141, 150,

479, 493Delivery, 29–30

delivery date (payables finance), 358delivery date and place, 48‘of the essence’; consequences,

29–30, 48performance, 438–439proof of delivery, 451

Delivery order, 83Demand guarantees, 295–329, see also

Letter of guaranteeadvance payment guarantee, 301–303

(see also Standby credits)amount and currency, 299, 306applicant, 306assignment, 327automatic expiry extension, 315

(see also Demand guarantees, evergreen; Standby credits)

beneficiary, 306bid bond or tender guarantee,

300–301 (see also Standby credits)

cancellation, 327–329statement of discharge, 328–329

claim demand, 313–314 (see also Standby letters of credit)

counter guarantee, 321–322demand statement, 313–314clause structure, 305–317

commencement date, 309conclusive evidence, 314

530 Index

Demand guarantees (cont.)conditional guarantees, 296 (see also

Legal arbitration)conditions precedent, 309–311 (see

also Demand guarantees, operative clause)

consideration, 313contractual requirements, 46counter guarantee, 318–323 (see also

Standby credits)counter guarantee terms, 320counter indemnity, 299credit facility, 298direct guarantees, 299–300evergreen, 315–316 (see also

Automatic extension)expiry, 315

counter guarantee, 322extend or pay, 325–326foreign law and usage, 325form of presentation, 314fraud; exception to the rule of

payment, 324–325governing law, 316–317

counter guarantee, 322–323guarantor, 305independence, 297, 312indirect guarantees, 317intermediate banks, 319–320issuing the guarantee, 298jurisdiction, 317language, 308liability for payment, 297–298notification of a claim demand,

323–324operative clause, 309–311overseas guarantor; risk

considerations, 320parties, 317payment guarantee, 304 (see also

Standby credits, commercial standby credits)

performance guarantee, 303 (see also Standby credits)

period for examination, 324place of presentation, 315primary guarantee, 295–329private text, 304

counter guarantee, 323side letter, 304

procedure for rejection of a claim, 324

retention monies guarantee, 303–304 (see also Standby credits)

surety bonds, 295–296text, 305 (see also Demand

guarantees, private text)time of payment, 315transferable guarantees, 326type of guarantee, 308unconditional guarantees,

295–296underlying relationship, 312undertaking, 320–321undertaking of the guarantor, 312unjustified claim demand (standby

credit), 282URDG, 297variation in amount clause,

306–308warranty or maintenance

guarantee, 304when used, 296–297

Demurrageair freight, 79–80bill of lading delay, 356–357LC presentation period,

213–214De-recognition, 467–468

linked presentation, 468separate presentation, 468

Dilution risk, 455–456factoring, 474–475types, 354–355

Disclosed facilities, 460Discount

bills of exchange, 172–173

531 Index

days grace; bill discount, 168–171, 183–185

discount purchase; bills of exchange, 183–185

discount to yield, 183–185inward bill, 174–175letters of credit, 231–233outward bill, 172–173straight discount, 183–185

Disputecredit insurance, 420receivables finance, 453–455sales invoice; vulnerability, 395supply chain finance, 367

Document of title, 66consignee and endorsement, 66–67negotiable or transferable?, 67–68performance risk, 442–443warehouse receipt, 386

Documentary collection, see Collections

Documentary credit, 179, 191, 192, 208, 217, 229, 241, 242, 261, 311

Documentation, 48–49certification, license and

approvals, 339documentary risk, 437–438draw down

clean trade loan, 128–129documentary trade loan,

127–128highly structured drawing

documentation, 136due diligence; underlying

transaction, 403–404evidence of commercial

performance, 31, 442–443importance, 49proof of delivery, 451trade finance; exchange of

documents, 444–445Documents in trust facility, 167–168Draft, see Bill of exchange (draft)

EECA guarantee, 155–156

Export Credit Agency; purpose, operation and products, 155–156

See also Export Credit Agency (ECA)Encumbrance

supplier, 351–352warehouse, 376

End-buyer; evaluation, 407–415bank or institutional risk, 413collectability of debt, 415credit enhancement, 412–413credit insurance, 409credit reference agencies, 409–410credit risk, 407–408financial statement assessment, 409importance of the end-buyer’s bank,

411–413issuance of trade products,

412–413key requirements, 23other sources of information, 410payment history, 408political risk, 414–415public buyer, 415risk assessment, 408status reports, 411–412trade credit terms, 411trade product; preparedness to issue,

412–413transfer risk, 413–414See also Debtor listing

Export Credit Agency (ECA), 12, 155Export loans, 125

FFactor’s endorsement, 434Factoring, 474–476

dilutions risk, 474–475structure, 475–476when used, 474

532 Index

Financial statementsadverse trends, 110balance sheet, 103–105cash flow projections, 94cash flow statement, 111–112debt capacity, 122–123debt service coverage, 123EBITDA, 111–112end-buyer assessment, 409forecast performance, 494gross profit, 118–120indicator of future performance,

109–110, 440–441limitations (see Conventional

lending)liquidity, 111–112 (see also Client

evaluation, solvency)losses, 118–120profit and loss account, 118–120ratio analysis, 111–112, 409,

517–522relevance of the client’s financial

statements, 102–103reliability, 1–3sales forecast, 94tangible net worth, 105–109

negative net worth, 107–109positive net worth, 107

trading financial performance, 493Financing agreement, 500–501

covenants, 121–122asset stripping, 101breach, 121–122cross guarantees, 142debt turn, 121–122dilutions, 121–122disputed debt, 453–455shipment schedule, 121–122stock, 121–122, 496–497tangible net worth, 121–122

cross default, 465, 500–501legal agreements, 147

post-conditions, 501pre-conditions, 500–501receivables facility, 504

concentration limit, 456–457director’s undertaking and

indemnity, 469undertakings, 505warranties, 504

supply chain finance, 368trade debt versus bank debt,

366–367trade Facility, 501

Financing ratio, 144–145‘skin in the game,’ 145

Foreign exchange, 414convertibility risk, 414 (see also

Capital and exchange controls)

reserves (insufficiency), 1–3, 165risk exposure, 497

Forfaiting, 185–187commitment to purchase, 187due diligence, 187–189primary forfait, 185–187 (see also

Initial purchase)secondary forfait, 189secondary market, 189without recourse, 181–182

Fraud, 77bills of lading, 77court order, 238–239, 282 (see also

Court injunction; Restraining order)

demand guarantees, 324–325exception to the rule of payment,

324–325letter of credit, 238–239receivables finance, 452–453

periodic audit, 452–453standby credits, 282warehouse finance, 388–389

Funding gap, 7, 32

533 Index

GGearing, 110, 111, 123Going concern, 100

client evaluation, 361–362importance on a structured facility, 94

early warning triggers, 88–89reliance on other lending facilities,

120–122Goods, 333–343

adaptation, modification, bespoke or special requirements, 361, 439–440

work around, 351branded, 335certification, license and approvals, 339constructive possession, 68–69control, 135

collections, 170letters of credit, 216–217,

223–224in transit, 28

description, 61–62non-validation, 67–68

dual-use, 47, 334end-use, 283, 334fragility or perishability, 334–335instalment deliveries, 50–51lead time, 362–363legal title, 375licensed, 336–337

agreement, 336–337parties, 336–337royalties, 336–337

marketability, 337–338mode of transport, 47–48movement of goods (ex warehouse),

386–387negative net worth, 107–109net realisable value, 137–138,

337–338new to market, 334ownership, 138–139

liability, 138–139, 143–145, 334

versus possession, 139–140performance, 333–334possession, 139preparation for sale, 440price volatility, 338promotional, 336public & product liability, 139–140

insurance, 55–56, 139–140representations, warranties and

undertakings, 351–352reputational risk, 334storage conditions, 380

co-mingled, 149separate, 149

structured facility, 333–343title, 351–352in transit, 13, 28, 47, 48, 118, 126,

130, 137, 152, 179, 333, 347, 353, 358–360, 391

warehoused, 380control in warehouse, 376

Governing lawcommercial terms, 58demand guarantees, 316–317,

322–323jurisdiction, 58

demand guarantees, 317exclusive, 317legal agreements, 147

letters of credit, 191–192neutral, 147standby credit governance, 287

Green clause credits, 266Guarantees, see Demand guarantees

IImport loans, 125Incoterms® rules, 38–39

overview, 31–32Initial payment, 458Initial purchase, 186Insolvency, 420

534 Index

Inspection, 356, 443–445choice of inspector and inspection

criteria, 444–445health certificates, 443–445letters of credit; inspection report,

221–222phytosanitary and plant certificates,

443–445pre-shipment, 350–351quality management, 496sealing of the container, 443–445warehoused goods, 381

International tradeincreased finance requirements, 9–10risk, 407–408risk requirements, 1–15

Invoice finance, 473–485audit, 477–478

aged creditor listing, 477–478paper trails, 477–478

ban on assignment, 52–53breach letter, 452–453confidential invoice finance,

476–477current account, 447–471

credit balance; creation of availability, 465–467

credit balance; drawing availability, 458–459

trade finance drawing rights, 484debt assignment, 397debt assignment clause, 398–399eligible debts, 474–476factoring (see Factoring)invoice finance repayment solutions,

481–485claim for prepayment, 481–483drawdown by the client, 484–485drawing rights, 484payment to the trade financier, 484retention reserve, 483–484

negative net worth, 107–109ongoing communication, 485

prepayment percentage, 481security over the book debts, 478–479sell and forget transactions, 398–399trade financier; invoice finance

repayment risk, 479–481tripartite agreement, 479use for working capital only,

107–109, 122–123

LLegal arbitration, 296Lending agreements, see Financing

agreementLending assessment

conventional, 102credit gap, 129EBITDA, 123structured, 102–103structured lending compared with

‘balance sheet’ lending, 93Lending facilities

current facilities, 492–493going concern; dependence risk,

120–122other lenders, 120–122

availability, 121–122required information, 120–122security, 122

required information, 120–122monitoring, 121–122servicing, 122–123

security held by another financier, 122, 150

Letter of credit (LC), 5, 191–239advising bank, 197–198allocation of proceeds, 233–235amendments, 224–225applicant documents, 222, 223assignment of proceeds, 233–236availability, 200–206

by acceptance, 201–202by deferred payment, 202–203

535 Index

issuing bank’s perspective, 204–205by negotiation, 203–204by negotiation with any bank, 206nominated bank and beneficiary’s

perspective, 205–206by payment at sight, 201

bank liability, 192–195irrevocability, 192–195

bank to bank reimbursement, 227–230

credits available by negotiation, 203–204

reimbursement undertaking, 228–229

calculating the credit facility limit, 214–216

payment period, 215–216time exposure, 215validity period, 215value, 215

cash margin (see Cash margin)confirmation (see Confirmation)contract of carriage, 224control over the bills of lading,

223–224control over the goods, 216–217discount, 231–233discrepant presentation, 226–227

implications of bills of lading sent direct, 73

risk mitigation; rejection of documents, 95

waiver; control of goods, 223–224waiver; issuing bank refusal,

194–195documentary presentation, 225–226documentary risk mitigant; issuing

bank, 192–195, 226–227document presentation period,

213–214exceptions to the payment

obligation, 194–195

expiry date, 199financing export letters of credit,

230–236financing import letters of credit,

236–238governing law, 191–192independent undertaking, 194inspection of goods, 221–222,

357–358insurance, 218issuing bank

perspective, 228–229risk mitigation, 216–218

issuing the letter of credit, 197, 198negotiating bank’s perspective,

229–230negotiation, 233nominated bank, 197–198

perspective, 229unconfirmed credit; take up of

nomination, 200–206non-operative, 192–195oil credits, 241–245original bills of lading, 221parties, 191–239place of expiry, 199–200pledge; LC application form,

216–217pre-shipment finance, 231, 348–349refinance, 236rules

UCP and ISBP, 191–192URR, 227–230

special types, 241–268structuring export letters of credit,

222–224structuring import letters of credit,

218–222tolerance, 215track record of presentation, 440–441transmission of the letter of credit, 218usance payable at sight, 236–238

536 Index

Letter of credit (LC) (cont.)use with payables finance, 357–358validity, 215when used

buyer (applicant), 196seller (beneficiary), 195–196

See also Commercial letter of credit; Credit; Documentary credit

Letter of guarantee, 295Letters of indemnity, 242Lien, 155

creditor listing; use and importance, 155, 381–382

waiver, 381–382 (see also Client evaluation, debt capacity, deed of postponement)

warehouse finance, 381–382Liquidity risk, 21

losses, 118–120preservation of liquidity;

end buyer, 23Local currency, 165

MManufacture, 28–29Methods of payment, 3–4, 45Money laundering

standby credits, 280–281

NNegotiable instrument

bill of exchange, 402forfaiting, 185warehouse receipt; negotiable or

non-negotiable?, 372–374Net worth, 105–109Non-bank issuer credits, 267, see also

White label credits

OOpen account

introduction, 5–6risks, 37–59

Order lead time, 27–28LC validity period, 215

Overheadscosts not funded by trade finance, 100funded by working capital, 7other borrowing facilities;

sufficiency, 361–362

PPayables finance, 345–369

advance or deposit payment, 346–347amount of financing, 354–355cargo insurance, 353delivery date, 358early settlement, 25finance draw down, 355–356funding deposit payments, 359–361funding structure, 353–354funding structure (deposit

payments), 360funding the manufacturer, 361–363goods adaptation, modification,

bespoke, 361, 439–440work around, 351

goods in transit, 347inspection report, 356letters of credit; key aspects (use

with), 348–349pre-examination of documents,

348–349manufacture and warehousing,

347–348payment against copy bill of lading,

356–357payment to the supplier, 355

537 Index

performance, 361pre-shipment finance (against letter

of credit), 231pre-shipment phase, 346refinance, 360–361source of repayment, 348supplier assessment, 362–363supplier performance, 362–363supplier status, 349–350supply chain sensitivity analysis, 351trade loan, 358–359transport document, 356use of documentary collections, 357use of letters of credit, 357–358when used, 345–346

Paymentcourt order, 282 (see also Court

injunction; Restraining order)sanctions and anti-money

laundering, 281sight payment, 399–401tenor, 399–401usance, 399–401

Performance risk, 437–445bank aval, 182–183client, 361–362commercial leverage, 441–442consequences of goods rejection,

49–50credit insurance, 432documentary risk, 442–443

letters of credit, 437–438entirety of contract, 439experience of the client, 439–440financier’s perspective, 444–445frustration, 442goods adaptation, modification,

bespoke, 361, 439–440work around, 351

goods inspection, 443–445pre-shipment, 350–352

goods lead time, 362–363goods; new to market, 334

indication of performance risk, 440–441

letter of credit presentation, 440–441

manufacture, 361need to perform, 437–438payables finance, 361place or point of delivery, 438–439preparation of goods for sale, 440risk assessment, 438sell and forget transactions, 398–399suppliers, 362–363

status, 349–350track record of the client, 440–441

Pledge, 151–153air waybill, 79–80applicable law, 152–153criteria; validation, 151–153

shipping marks, 151–153warehouse financing, 376–377

LC application form, 216–217Political risk, 414–415, 420–421

credit insurance; use of, 414–415frustration, 442moratorium, 414–415third country risk, 428

Prepayment, 458–459, see also Initial payment

determining the amount, 458–459net prepayment, 458–459prepayment percentage, 481sufficiency, 354–355

Promissory note, 404–406key differences to a bill of

exchange, 406parties, 404–406

Protest, 403–404collections, 167deed, 403–404householder’s protest, 403–404noting, 403–404

Purchase order, 39–40cancellation or variation, 56–58

538 Index

RRail consignment note, 82Receivables finance, 12–13, 447–471

capture of the trade receivable proceeds, 122–123, 461–462

collection account, 461trust account, 461–462

client use of proceeds, 127–128concentration, 456–457contra trade, 457credit insurance, 460credit note history, 454–455credit risk assessment, 450debt advance, 449–450debt obligation, 447–471debt purchase, 450–451debt reserve account, 465de-recognition, 467–468

linked presentation, 468separate presentation, 468true sale, 462–463, 467–468

determining the amount of prepayment, 458–459

dilution risk, 455–456disclosed facilities, 460dispute, 453–455financier’s perspective, 470–471fraud, 452–453ineligible debts, 450–451international trade; risk, 407–408limited recourse, 463partially structured loan, 450prepayment, 447–471

determining the amount, 458–459

proof of delivery, 451purchase price, 451receivable value, 464

uncertain value, 464without recourse, 462–463with recourse, 463–464with recourse financing, 468–470repurchase, 114, 464retention reserve, 457

rights of recourse, 462risk assessment, 451–452self-liquidating loan, 449set-off or counterclaim, 51–52shortfall management; receivables

value, 464, 474–475specific debt purchase, 465–467structuring receivables finance,

468–470tax deduction, 52undisclosed facilities, 459when used, 448–449

specific debt purchase, 467Recourse

bank aval, 181–182confirmed letters of credit, 209limited recourse, 463without recourse, 462–463

confirmed letters of credit, 203–204

with recourse, 463–464, 468–470unconfirmed letters of credit,

203–204repurchase, 464rights of recourse, 462–464rights of recourse on a without

recourse facility, 462–463Red clause credits, 264–266

advance, 264–266pre-shipment drawing, 264–266

Reinstateable credits, 263–264issuing bank’s perspective, 264

Reputational risk, 47Restraining order, 239, 281, 282, 314Retention of title

credit insurance requirement, 55, 422supply contract, 351–352transfer of title, 53–55

Retention reserve, 457contra trade, 457use of remanaging receivables

shortfall, 460, 474–475aggregate first loss;

accommodation, 425–426

539 Index

Reverse factoring, 363Revolving credits, 261–263

cumulative, 262facility limit calculation, 262–263issuing bank’s perspective, 263non-cumulative, 262revolving by time, 262revolving by value, 261–262risks, 263

Risk profile, 31–32managing the type of risk exposure,

129–131

SSales invoice, 395–406

commercial invoice, 396debt assignment, 397

acknowledgement, 398dispute vulnerability, 395financier’s perspective, 398–399format, 395invoice debt assignment clause,

398–399proforma invoice, 396–397

Sanctionsdemand guarantee; due diligence, 312dual-use goods, 47, 334

end-use, 283, 334end-user, 283

frustration of contract or payment, 442

standby credits’ lack of transparency, 279–280

Security, 137–156applicable law, 146–150available security, 492bank guarantee held by the

borrower, 150–151bill of lading; goods, 76book debts, 478–479cash balances, 143

cash margin, 143trust account, 461–462

corporate guarantee, 142cross guarantee, 142different legal systems (impact),

148–149encumbrance, 138, 351–352equity of redemption, 139fixed charge, 142floating charge, 141, 376 (see also

Debenture)general security, 140–143goods, 143–145held by another financier, 150hypothecation, 154intangible assets, 147law of the place ‘lex situs,’ 147, 377legal agreements, 147letter of comfort, 142negative pledge, 143net realisable value, 144, 145, 338other financiers, 122, 150perfecting security, 149personal guarantees, 145–146

joint and several, 146personal assets and liabilities

statement, 146shareholder support, 100–102supported and unsupported, 146

pledge (see Pledge)possession and sale of goods, 13property rights, 137, 138, 376–377purpose of security, 137–138representations, warranties and

undertakings, 352skin in the game, 101trust receipt (see Trust receipt (TR))waiver, 150 (see also Deed of

priority)deed of release, 479use with invoice finance, 478

Self-liquidating facilityintroduction, 13

Sellerkey requirements, 20

Shipping guarantee, 242–245

540 Index

Source of repaymentcollectability of debt, 415identifiable means of repayment,

92, 348introduction, 13

Standby, 4, 46, 271–274, 276, 277, 279–290, 293, 297, 298

Standby credits, 271–292, 309, see also Standby

advance payment, 272 (see also Demand guarantees)

amount, 276applicant’s perspective; risk

appreciation, 281–282assignment, 283automatic expiry extension, 277 (see

also Demand guarantees)availability, 285beneficiary’s perspective; risk

appreciation, 282–283bid or tender payment, 273 (see also

Demand guarantees)claim demand, 276 (see also Demand

guarantees)demand statement, 276

claim demand documentation, 285–287

commencement, 284, 309 (see also Demand guarantee)

commercial standby credits, 274–275 (see also Demand guarantees, payment guarantee)

comparison with on demand guarantees, 289

comparison with standard letters of credit, 288–289

conditions precedent and operative clause (Demand guarantees), 309–311

counter, 273 (see also Demand guarantees)

direct pay, 274discrepant presentation; repeated

presentations to cure discrepancy, 281

documentary safeguards, 284–287duplicated payment, 281financial or facilities, 274financing against standby credits,

290–292financing structure, 291–292governance, 287ICC rules; UCP, ISP, 272insurance, 274issuer’s perspective; risk appreciation,

279–281obligation to pay, 281performance, 273 (see also Demand

guarantees)power of attorney (see also Agency

agreement; Demand guarantees)completion of claim

documentation, 291process, 277reducing value, 287relationship tension, 280retention monies, 273 (see also

Demand guarantees)structure of the standby credit,

290–291structuring standby credits

protecting the applicant and issuer, 284

protecting the beneficiary, 287–288transferable standby credits, 283

compliance risk, 283transparency, 279–280unjustified claim demand, 282validity, 287

Standby letters of credit, 4, 271–292Stock, 116–118

aged stock report, 118, 496–497call-off, 29

541 Index

days inventory outstanding ‘DIO,’ 116 (see also Stock days)

management, 117validation of stocking period, 29, 116

Stock days, 110, 111, 116, 117, 121, 126, 497, 520

Structured finance, 13–14assessment, 102–103capture of the trade receivable

proceeds, 103, 136, 461–462client use of proceeds, 127–128collection; refinancing, 173–174collections, 174commercial terms; importance, 40credit gap; determining the extent of

structure, 129, 134defined by level of control, 125draw down documentation, 127–128gross profit; relevance, 118–120, 354high additional risk, 136

drawing documentation, 136lending structure, 491–492loss making; highly structured

facility, 110managing the type of risk exposure,

129–131partially structured lending,

135–136blended assessment, 129, 490repayment, 131

reduced loss given default, 96reduced risk of default, 95–96repayment; highly structured, 131self-liquidating, 449, 490trade loan structuring, 129, 134

multiple transactions, 469transactional control matrix,

498–500use of funds, 93

refinancing the client, 93use of the credit facility, 135

Suppliersaudit, 351encumbrance, 351–352

lead time of supply, 353new suppliers, 350–351payables finance, 362payment to the supplier, 355performance risk, 352–353

supply of materials for manufacture, 362

retention of title, 138status of the supplier, 349–350suppliers (trade creditors), 495–496supply chain sensitivity, 351

Supply chain finance, 363approved debts, 364

approval criteria, 368buyer considerations, 368classification; bank or trade debt, 367credit risk, 366

assessment, 366days payables outstanding

‘DPO,’ 364dispute, 367documentation, 366–367on boarding, 364, 368payment services provider, 364platforms, 366prepayment, 364supplier considerations, 369wording of the agreement with the

supplier, 368debt assignment, 368

See also Approved trade payables finance; Reverse factoring

Synthetic or structured letters of credit, 268

TTaxes

managing a shortfall; withholding/retention tax, 52

Trade and receivables financecredit assessment, 91–92purpose, 11uncommitted, 501

542 Index

Trade credit, 19–25calculation, 44early settlement, 25financier’s perspective, 22period, 21–22terms, 411

Trade cycle, 27–36stock, 116validation, 35

Trade financeintroduction, 11–12

Trade loans, 95, 125–136back-to-back credits; bridging the

funding gap, 254clean, 128–129collections, 168deposit funding, 360determining the trade loan

structure, 134documentary, 127–128double finance, 388draw down; documentation and period

clean, 128documentary, 127–128highly structured, 136

duration, 130, 355extension, 126labelling, 130managing the type of risk exposure,

129–131funding deposits, 360

misalignment; risk, 131multiple sales, 131–132partially structured loan, 450payables finance, 358period, 126–127receivables advance, 447–471repayment, 126, 131

partially structured facility repayment, 450

repayment from receivables prepayment, 449

seasonal trade, 34–35

self-liquidating loan, 449stock, 116–118

stock call-off, 118, 133–134validation of loan period, 126

structuring trade loans, 129use in a structured and partially

structured facility, 13clean loans, 129documentary loans, 128

use in combination with overdraft, 131

warehouse, 387See also Export loans; Import loans

Trade productsend-buyer; availability of, 412general trade product facilities,

96–97issuance, 412–413liability-based products

credit risk assessment, 96credit risk exposure, 90fees, 90

overview, 97risk mitigation, 95

Trade proposition evaluation checklist, 507–515

Trade receivable, 30, see also Accounts receivable

amount, 30–31capture, 136, 461–462

eliminating diversion of funds risk, 93

collectability of debt, 415collection account, 461

offshore, 461financier’s perspective, 40–41isolation from the borrower,

134, 136reliability, 468top up, 44

collateral manager valuation, 383

price volatility, 338

543 Index

trust account, 461–462security over cash balance, 462

value, 464Trade risk, 1–3

See also Trade proposition evaluation checklist

Transactional Control Matrix, 498–500Transfer risk, 413–414Transferable credits, 245–249

compliance risk, 248parties, 245, 246

consignee; neutral name, 249issuing bank’s perspective, 248–249presentation, 246–248transfer, 246transferring bank’s perspective, 249

Transport documentcargo release, 73carrier, 61clean, 62contract of carriage, 64–66

control of bills of lading, 72letter of credit; bills of lading, 224

financier’s perspective, 82–83freight, 63freight forwarder, 69

control of goods, 83goods description, 61–62issuer, 62key aspects for the financier, 72–76payables finance, 356sanctions, 356transhipment, 71

Trigger points, 32letter of credit; identification of

slippage, 88, 95timely triggers, 88trade loan repayment, 88, 126use of labelled trade loans, 130

Truck consignment note, 81Trust receipt, 153–154

applicable law, 153–154See also Agency receipt

UUndisclosed facilities, 459

silent collection agent, 459

WWarehouse finance, 371–392

collateral manager, 382–383Collateral Management

Agreement (CMA), 382custodial services, 382document trustee, 383monitoring services, 382valuation services, 383

contractual terms, 378control, 376document of title or transfer, 386drawdown, 386encumbrance, 376financing ratio

price volatility, 338warehouse finance, 386

financing structure, 385–388financing the exit of goods

from the warehouse, 387–388

format, 372fungibility, 380goods, 380holding certificate, 374 (see also

Deed of attornment)indemnification

limitation of liability, 384warehouse; goods release, 376warehouse keeper, 378,

383, 384inspection, 381 (see also Inspection)insurance, 384leased premises, 379legal ownership, 375lien, 381–382location; implications to security

and control, 380

544 Index

Warehouse finance (cont.)movement of goods, 386–387owned or operated by the

borrower, 379property rights, 375–377refinance, 387risk assessment, 378–382security and control, 375–377, 385storage conditions, 380

co-mingled, 149separate, 149

transfer; acknowledgement, 386

transferability, 377warehouse keeper, 378warehouse receipts, 371–372

contents, 372negotiable or non-negotiable,

372–374warehouse warrant, 374–375

White label credits, 267Working capital, 7

cash conversion cycle, 111cycle, 8management, 8