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Case Reference: Expanding import-export business using trade financing in CHINA

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A. EXPORT BUSINESS
Case A1 – The Scenario
A leather goods factory in China sells fashionable handbags to a large French retail franchise, and the French buyer requires the settlement method of “Open Account O/A 30 days after shipment.”
Although the factory can self-finance the upfront production funding itself, accepting such trade term means that the factory will not be able to receive the payment nearly 100 days after the shipment, which will not only result in tie-up of funds but lead to collection and exchange risk as well.
How should the problem be solved ?

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Solving the problem for both the buying and the selling parties with the “discount and buyout of usance L/C”
Case A1 - The Solution
The Buyer
The Supplier
1）Establish a usance L/C of days
2）Document presentation
after shipment
3）D/A and pickup
4）Full advancement of payment
5）Payment after days
FSP

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Case A1 - The Benefits
Benefits for the Supplier
Advanced payment term
Reduced exchange risk
Tax rebate in time
Lowered capital costs
Enhanced competitiveness
for more orders
Benefits for the Buyer
Prolonged payment term
Reduced exchange risk
Lowered capital costs
Enhanced competitiveness with fund on hand

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Case A2 – The Scenario
A furniture factory have not entertained credit transactions for years and it would accept sight L/Cs or full payment before shipment.
Amid fierce market competition, they realized that they have lost many orders due to disagreement on settlement with the customers. They also found out that settlement with sight L/C is not really risk-free as they have been refused payment by issuers many times on the ground of discrepancies after shipment and eventually had to settle for discounted payment.
With credit transactions, however, there were also situations when customers canceled their orders or the L/Cs due to market changes., which caused big losses to the factory. An even greater problem was the funding pressure to raise adequate funds for production by receiving too many L/Cs.
So how should the problem be solved ?

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Case A2 - The Solution
1. Using multiple trade financing methods.
2. Establishing a flexible settlement scheme by integrating various
financing methods and hedging measures.
Settlement scheme
Financing scheme
30% deposit + usance L/C
30% deposit + documentation
collection
Partial L/C + partial collection
Document against Acceptance (D/A)
Open Account (O/A)
Packaging + cargo pledge loans
Negotiation loans
B/L pledge loans
Discount and buyout of usance L/Cs
Export credit insurance loans
Factoring

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Case A2 – The Results
Results to the Factory
Enhanced competitiveness for more orders
Reduced collection risk
Lowered capital costs
Advanced production funding

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Case A3 – The Scenario
A motorcycle factory receives an order from a large US franchise for an annual export sales of USD30,000,000 that features steady exportation in monthly average and profitability. The customer, however, requires “O/A 90 days after shipment.”
So how should the problem be solved ?

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Case A3 - The Solution
3）80% advance payment
US Customer
The Factory
1）Document presentation
after shipment
2）D/A and pickup
4）Payment after 90 days
FSP
5）Payment of remaining balance

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Case A4 – The Scenario
A large garment procurement company purchases products from a number of local factories in China that are scattered geographically and diversified in strength. The procurement company requires “O/A 45 days after shipment.”
Most of the factories can raise funds for purchasing materials, but considering the production cycle plus the 45 days after shipment, they will not be able to collect the payments until over 100 days later, so the production flow will be affected.
So how should the problem be solved ?

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Case A4 - The Solution
The Buyer
The Suppliers
FSP
1）Goods delivery to warehouse
2）Partial payment for the goods
3）Shipment to destination
4）Payment after 45 days
5）Payment of remaining balance
CFS/Warehouse

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Case A4 - The Benefits
Benefits for the Suppliers
Advanced capital payback
Reduced exchange risk
Lowered capital costs
Enhanced competitiveness
for more orders
Benefits for the Buyer
Prolonged payment term
Reduced exchange risk
Lowered capital costs
Less risk for suppliers
due to advance payment

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B. IMPORT BUSINESS
Case B1 – The Scenario
A large international food material trading company imports industrial dairy products and sells them to the domestic food factories in China. Based on common market practice in the trade, they demand settlement of “net days with a grace period of 30 days” thus it will take the trading company over 180 days from product procurement to payment collection leading to capital tie-up as well as collection risk over time.
So how should the problem be solved ?

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Case B1 – The Solution
3）70% advance payment
Food product factories
Trading Company
1）Document presentation
after shipment
4）Payment after 90 days
FSP
2) Document presentation
5）Payment of remaining balance

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Case B2 – The Scenario
A building materials manufacturer in Europe sells products to China through the local regional distributors that require payment terms of “net days with a grace period of 30 days.” As the distributors have different credit positions and weak in financial strength, the risk of open account is great. But if handled otherwise, the distributors will not be able to operate as plan with their own funding thus affecting sales.
So how should the problem be solved ?

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Case B2 : The Solution
For regional distributors
FSP’s specified financing institute
Providing
financing credit
Regional distributors
The Overseas Manufacturer
1）Collection and document
presentation after shipment
FSP
2）Collection and document

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Glossary
Usance letter of credit or Deferred payment letter of credit
That is paid a fixed number of days after shipment or presentation of prescribed documents. It is used where a buyer and a seller have close working relationship because, in effect, the seller (beneficiary of the L/C) is financing the purchase by allowing the buyer a grace period for payment. It differs from a sight draft or time draft in that no drafts are involved but the payment is guaranteed on the stated date. However, there being no draft, the beneficiary party's ability to discount or sell his or her right to payment is restricted.
Standby Letter of Credit
Primarily a substitute for a performance bond or payment guaranty, this L/C is used where banks are legally barred from issuing certain types of guaranties. It serves as a parallel (collateral) payment source in case the primary source fails to meet its obligations in part or in full.

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Global Supply Chain Logistics
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