Cash & Liquidity Management

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Discovery and Rediscovery: Familiar Solutions for New Challenges Michael Gilham and Colin Hemsley of Lloyds Banking Group look at how the financial crisis has meant that treasurers have had to seek alternative sources of financing as opposed to relying on bank facilities for short-term funding.

Discovery and Rediscovery: Familiar Solutions for New Challenges

The global financial crisis has had many implications for treasurers and finance managers, but one of the most frequent things we have observed amongst our clients is the return of a ‘back to basics’ approach. In particular, treasurers have been focused on capital preservation, managing their core financial risks, and ensuring sufficient access to liquidity. In this environment, one of the issues that Lloyds Banking Group has been focused on with our clients is how we can help treasurers and finance managers, who may not have been frequent users of trade instruments, to make the best use of them to support and develop their business. A crucial enabler of this is a long-standing relationship-based approach to trade business focusing on the specific needs of the customer.

One of the most frequent things we have observed amongst our clients is the return of a 'back to basics' approach.

In the past, borrowing was cheap and plentiful, so working capital and capital protection were relatively minor issues. Since credit became more constrained and costly, treasurers have been seeking alternative sources of financing as opposed to relying on bank facilities for short-term working capital funding. Furthermore, with counterparty risk now taking its place at the top of treasurers’ risk management agenda, financing solutions need to satisfy both working capital and counterparty risk objectives.

Growth of trade finance

Many treasurers are discovering that the most appropriate solutions to achieve these objectives have existed for many years. In particular, trade finance is emerging once again as the choice means of unlocking working capital, monetising the financial supply chain and simultaneously alleviating counterparty and country risk. This includes financial supply chain solutions such as supply chain finance, bills of exchange and the use of documentary credits for international imports and exports. 

One of the challenges that the partnership approach employed by Lloyds Banking Group overcomes is the lack of familiarity and understanding of trade instruments in some companies that have moved towards open account trading. These companies have benefited from the early involvement of the bank, taking advantage of our open, customer-centric approach to assist from structuring the deal through to its execution.

The crisis has been a catalyst for returning to documentary credits, and we have seen an increase in the use of LCs and guarantees of around 10% over the past year. When used appropriately, these instruments offer considerable advantages in addressing companies’ working capital and counterparty risk management requirements. Furthermore, so long as documentation is accurate and can be processed smoothly, there should be predictability of funds transfer.

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