Brief Discussion on Corporate Banking Services (1) – Trade Finance

When considering banking services, companies often look for suitable products from the perspective of the company’s business development needs. For example, a trading company needs working capital support when taking a new order or a long-term financing for new factory opening. However, it is getting more difficult for smaller business to have close banking partners nowadays. One of the reasons is the transition of banking industry for the pursuit of continuously high revenue and balance sheet growth year after year. The business model of corporate banking has changed from the traditional comprehensive business relationship for long-term development to a short-term event-driven selling approach with immediate business return. The corporate banking managers look for the target product sales to fulfill their Key Performance Indicator (KPI) and they are highly focused and specialized in few products only. While large corporates have better understanding of their financial situation and the banking products business, smaller business may not have the same level of resources. In this connection, the author hopes to, with his past experience in corporate banking, share the product characteristics of different types of corporate banks, thereby helping enterprises to improve operational efficiency and realize corporate dreams.

In general, corporate banking services can be divided into two broad categories, Borrowing and Non-Borrowing. Let’s talk about Borrowing first. The bank managers usually decide the loan type according to the use of loan proceed, which are in general the following.

  1. Trade Finance
  2. Working Capital Finance
  3. Capital Expenditure Finance
  4. Real Estate Finance
  5. Refinancing
  6. Acquisition Finance
  7. Project Finance

Type 1 to 4 are simple categories of which general SMEs have different levels of demand. Type 5 to 7 are more suitable for large enterprises. We will introduce you one by one.

Trade Finance

From a company perspective, trade is mainly divided into imports or exports. Take a manufacturing company as an example. The import trade service is the bank to assist the payment to supplier when purchasing raw materials. The means of transaction can generally be Letter of Credit (LC), Document Collection or direct invoice payment (Open Account), depending on the partnership and bargaining power between the customer and the supplier. There are additional procedures and cost for letters of credit, but the two parties are more protected by the terms of LC. Bank can provide services such as Import LC Issuance as a payment to supplier and Trust Receipt Loan when the supplied goods arrive at the port. If the company also receives LC from buyer when exporting the finished product, they can consider applying the packing loan (Packing Loan) before the shipment to pay for the purchase of raw materials, production costs or repayment of the import bills. When the goods are shipped to overseas buyers, company may advance the LC proceeds by Negotiation and achieve the best working capital management.

If the company is engaged in trading instead of manufacturing and both the buyer and the seller use LC as means of transaction, the bank can open a Back-to-Back or Front-to-Back Letter of Credit to facilitate the transaction. For Back-to-Back LC (BBLC), the company has received from the buyer the LC (a.k.a. master LC) at the time of opening the BBLC. For Front-to-Back LC, the company opens the LC to supplier before receiving LC from its buyer and will be received within a specific time. This type of transaction is generally used for bulk commodity trading. In addition, some trading companies may also choose to transfer the buyer’s LC (Transfer LC) with the amount in whole or in part to the supplier as the second beneficiary and the order is shipped within the time specified in the LC terms.

If the transaction does not involve a letter of credit but a simple invoice payment, company can use the bank’s Import Invoice Finance, Order Packing Loan and Export Invoice Finance to purchase goods, manufacturing and exporting at three different points of time for financing.

The Document Collection is a compromise between letters of credit and invoice payments. When the customer exports, it instructs its bank (remitting bank) to send the bills of lading and other transaction documents (e.g. bills of exchange) to the overseas buyer’s bank (collecting bank) to collect sales proceeds. Overseas buyers can only pick up the goods after they have accepted or paid the bill, and therefore the risk is less than open account transaction. Banks can also make advances to customers (DA/ DP Financing) on the basis that the buyer is expected to pay.

In some cases, in order to control the company’s export credit risk, company can purchase from insurance company the export trade credit insurance to protect against the non-payment of receivables due to commercial or political risk. The bank will also provide relevant Export Loan under Trade Credit Insurance, allowing the company to receive sales proceeds earlier. If the company wants to improve the cash flow by selling the accounts receivable of specific buyers, it can negotiate with the bank for Factoring business.

In addition, trade services also include Bank Guarantee/Performance Bond to provides performance guarantees to buyers or projects; or issue a Standby Letter of Credit to company’s overseas subsidiaries or affiliates for local banking facilities.

Trade loans are generally regarded as low-risk products from the perspective of banks, mainly because the repayment period is short (mainly 3 to 6 months). The use of loan proceeds and the source of repayment are clear. Therefore, interest and fees are generally lower than other commercial loans. SMEs are encouraged to use trade loans as the main financing method.

Professional bank managers not only provide individual trade product but also design the total financing solutions based on the customer’s trading pattern and arrange a series of trade products from import to export. This can meet the actual capital needs of customers while achieving better risk control such that facility amount, interest and fees are acceptable to customers.

FinMonster offers wide range of banking products collaborating with different financial institutions. After registering as our corporate users, we can shortlist the right bankers with the offering of various trade finance products to match your business needs.

Extended reading: Brief Discussion on Corporate Banking Services (2) – Working Capital Finance

Extended reading: Brief Discussion on Corporate Banking Services (3) — Long Term Financing