Trade and Receivables Finance: A Practical Guide to Risk Evaluation and Structuring

546 Pages·2018·23.53 MB·English

by  Stephen A. Jones

TRADE AND
RECEIVABLES
FINANCE
A PRACTICAL GUIDE TO RISK
EVALUATION AND STRUCTURING
STEPHEN A. JONES
Trade and Receivables Finance
Stephen A. Jones
Trade and Receivables
Finance
A Practical Guide to Risk Evaluation
and Structuring
Stephen A. Jones
AXS Trade Finance Ltd.
Solihull, West Midlands, UK
ISBN 978-3-319-95734-0 ISBN 978-3-319-95735-7 (eBook)
https://doi.org/10.1007/978-3-319-95735-7
Library of Congress Control Number: 2018953562
© The Editor(s) (if applicable) and The Author(s) 2018
This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole
or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations,
recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information
storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now
known or hereafter developed.
The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does
not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective
laws and regulations and therefore free for general use.
The publisher, the authors and the editors are safe to assume that the advice and information in this book are
believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors
give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions
that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps
and institutional affiliations.
Cover credit: © Geo Images / Alamy Stock Vector
Cover design by Oscar Spigolon
This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG
The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland
Preface
About This Book
Trade and Receivables Finance provides hands-on practical guidance on how to
evaluate trade-related propositions, mitigate risk, and structure finance.
Whilst books have been written on trade finance, none in my opinion deal
adequately with the evaluation of risk, the structuring of trade products and
financing facilities, and the integration of a receivables finance solution as the
source of facility repayment.
Why the Book Has Been Written
During my 43 years in trade finance, I would have welcomed a ‘go-to’ manual
which provided an easy reference for the appraisal and formulation of trade
and receivables finance propositions.
When a trade-related proposition is properly evaluated so that the transac-
tional risks are fully understood and mitigated to an acceptable level, and the
source of repayment is identifiable and considered reliable, a well-structured
trade and receivables finance facility reduces the risk of default when com-
pared to conventional lending products.
When the transactional source of repayment is of better credit quality than
the client themselves and the credit support or financing is provided on a fully
or partially structured basis, trade and receivables finance can generate addi-
tional credit appetite and thus enable the financier to lend more in a c ontrolled
manner. It is not limited to the credit status, debt capacity, and available secu-
rity of the client but leveraged by the status of whom they are selling to.
v
vi Preface
Trade and Receivables Finance will provide the reader with the tools for
gathering information, evaluating risk, advising on the use of trade products,
and how to optimally structure the financing of the purchase, warehousing,
and sale of goods on a controlled basis.
Whilst the opportunities for the financier arising from global trade are vast,
a limiting factor for many is that knowledge is concentrated into a relatively
small number of seasoned practitioners. The significant potential for trade-
based revenue generation is not fully realised due to the relatively low levels of
knowledge and understanding by a bank’s front-line personnel and credit risk
managers.
The increasing trend for integrating the trade and invoice finance client-
facing specialists gives rise to the need for a deeper mutual understanding and
improved competency around the identification and structuring of trade and
receivables financing solutions.
Who the Book Is For
This book is written as a reference manual for risk managers and financiers to
aid their understanding of international trade, risk assessment, and formula-
tion of funding solutions. The information and guidance will provide practi-
cal help to relationship managers, trade sales and advisory specialists, middle
office and operations personnel, invoice financiers, credit departments,
alternative market providers, export development agencies, credit insurers,
and lawyers.
Trade and Receivables Finance aims to become the definitive and constant
companion for anyone involved in the provision of credit support and lend-
ing to companies who trade internationally.
This book will also be of value to those who import or export and have
responsibility for the financial or commercial areas of trade such as finance,
credit risk management, sales, and purchasing. The business reader will ben-
efit from an improved understanding of the key aspects of commercial and
financial risk, methods of risk mitigation, the types of trade-related finance,
and thus be better equipped to negotiate commercial trade terms and to seek
the best form of financial support. These aspects are often critically important
to enable a company to offer competitive trade terms to their customers and
to fund the gap between making payment for goods, or incurring the costs of
manufacture, and the eventual receipt of sales proceeds.
Preface vii
How the Book Is Organised
The content of this book is structured to take the reader on a journey from the
commercial aspects of international trade to credit assessment and transac-
tional risk analysis, the use operation and structuring of trade and receivable
products, the formulation of financing solutions aligned to the client’s trade
cycle, and the key aspects of formulating a compelling credit application.
Given the increasing practice of banks to bring the trade and invoice finance
teams together under a common divisional reporting structure, and the
importance to trade financiers of having an identifiable and reliable source of
transactional repayment, this book delivers analysis and detailed advice on
both trade and receivables finance to provide a complete trade-related risk
evaluation and financing guide.
The contents are divided into easily digestible sections with the aim of
enabling the reader to use this book as a practical ‘go-to’ reference manual.
Notes and Disclaimer
This book does not provide legal advice; this must be sought by the financier
when considered appropriate. Applicable law should be consulted to identify
governing rights and liabilities.
The author accepts no responsibility or liability for the example wordings
appearing in the figures contained within this book. The examples shown are
purely for illustration purposes only and do not represent legally approved
wordings. Legal advice should be taken on the interpretation and construc-
tion of documentation, commercial agreements, credit facility documenta-
tion, terms and conditions, and their incorporated wordings. Examples shown
in this book are the subject of copyright and must not be copied or used.
The figures and example documentation contained within this book are
simulated and the named parties and transactions appearing therein are
entirely fictitious. The figures and examples do not purport to represent
any actual party or transaction, and any similarity to the names of actual
persons, entities, transactions or activities, past, present, or future, is purely
coincidental.
The ‘financier checklists’ appearing in this book are indicative only and not
intended to be either exhaustive or prescriptive. Financiers must adopt proce-
dures in accordance with their own internal policies and external regulatory
requirements.
viii Preface
This book covers the due diligence required for credit risk appraisal and not
the compliance risks of money laundering or sanctions violation. Anti-money
laundering, countering the financing of terrorism, and trade and financial
sanctions violation prevention are vitally important to the trade and receiv-
ables financier. Given their importance these are best covered in a dedicated
form as a companion to this book.
Solihull, West Midlands, UK Stephen A. Jones
Acknowledgements
This book is dedicated to my wife, Kath, and my children, Orla and Joseph,
who have been supportive, patient, and understanding throughout this
project.
My most sincere thanks to Michael Kenny, Gavin McLaren, Chris Jones,
Martin Hodges, and Adrian Holmes for their valued review of chapters, feed-
back, and input and to Ian Fletcher and Graham Laurence for helping to
make this project happen.
ix
Terms and Definitions
Applicable Law
This book is intended for global readership and cannot therefore be specific
on the application or provisions of a country’s law and how this will impact
the transaction, security, or financing.
Where it is recommended that the reader examines and considers the appli-
cation, interpretation, and impact of governing law, this book will comment
‘subject to applicable law’. However, this should not be taken as an exhaustive
indication. Because of the potentially significant impact that different laws
can have as the goods, documentation, and money flow from one country to
another, specialist legal advice should be taken.
Client
For the purposes of consistency, the term ‘client’ is used to describe the party
who requires trade and receivables credit support or financing.
Credit Support
The party referred to as the ‘client’ may require a bank to issue an undertaking
to pay in the form of a trade product such as a letter of credit, bank aval,
standby credit, or bank guarantee. This is referred to as a ‘credit facility’ or
‘credit support’.
Goods
Reference is made throughout this book to the sale and purchase of ‘goods’ for
the sake of consistency and simplicity. The goods referred to may be in the
form of raw materials, components, or finished goods, or the provision of
services. Whilst many of the techniques provided within this manual can also
xi