The phrase ‘trade finance’ describes and embraces all types of unusual lending facilities not already mentioned. It is normally associated with one-off transactional deals or revolving lines of credit, which may involve over-lapping individual type transactions requiring a larger credit line to cater for continuous business.It can include various types of Letter of Credit facilities, forex transactions (ie, foreign exchange/currency requirements as part of a deal) and lines of credit set-up to provide working capital secured against a contract to supply goods in the future.Also deals can involve Bonds of various types, which underpin the performance of a party within a deal or protect a deposit paid in advance as a condition within a contract.The common theme in all trade finance transactions is the provision of additional working capital, not available from traditional sources, between two points in time from the start to finish of a project, with the certainty of repayment to the lender at the end of a specified time.
A UK based company bought a printing machine in the USA for 250,000 US dollars and at the same time had an agreement with a European company to supply a refurbished machine for 350,000 dollars. The printing press needed to be stripped down, reconditioned and refurbished with new parts and delivered within three months.
The problem was the UK company could not afford to pay the purchase price from existing overdraft facilities, and the bank declined any additional temporary overdraft to cover the deal.
The solution was a lender was found to purchase the machine with a letter of credit, the company refurbished it at a cost of 35,000 dollars, it was delivered to Belgium and commissioned within the three months. The buyer opened a letter of credit prior to delivery payable on completion, in favour of the UK company’s trust account set up for this deal and the lender was paid in full including the fees and interest, which left the UK company with a good profit on the transaction.
A business involved in the charter, hire, servicing and repair of helicopters had the opportunity of buying a number of second-hand helicopters, from the Romanian army via an authorised agent, for approx’ 25,000 us dollars each.
They needed completely overhauling, re-building and re-spraying before sale with a full CCA certification. Firm buyers would pay a non-refunderable deposit, but the work would take 3/4 months to complete; involving the purchase of new parts, specialist mechanics and paint costs.
The selling price was circa’ £100-150k each, offering the buyers a saving of over £100k against a new machine.
The problem was the company’s bankers would not entertain any additional working capital facility for this project and they ran the risk of loosing the buyers to another foreign company.
There was no more security available other than the purchase agreements and deposit monies paid up front even though a good profit could be made prior to funding costs.
The solution was resolved when we found a lender who agreed to make available a separate working capital facility to its normal business based on cash flow forecasts to cover the programme by taking the helicopters and purchase agreements as security. If anything happened to prevent the completion of the work, the lender made arrangements for the work to be done by another servicing company.