Published: June 01, 2010
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.
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.[[[PAGE]]]
One of the criticisms of trade finance in the past has been the bureaucracy and length of time required to transfer documentation between parties in the trade process. However, we are seeing more companies rediscovering how a standard trade instrument, a simple combination of trade instruments or a fully automated supply chain finance solution can enable them to regain control of working capital and mitigate risk. In this way, suppliers can protect and accelerate their cash flow, whilst providing their buyers with greater security and continuity of delivery. There are also industry initiatives to automate the transmission of documentation between parties, such as Bolero. While it has taken some time for these automated platforms to gain critical mass, there is now growing momentum. Lloyds is very supportive of tools that make business processes more integrated, efficient and straightforward for our customers and expect to be live on Bolero early in Q3, 2010.
As treasurers seek new opportunities for supporting working capital needs, trade instruments can be valuable finance collateral. Again, monetising the financial supply chain is not a new concept and techniques such as supply chain finance have existed for some time, particularly in an automated form in continental Europe, although they are only now gaining prominence in the UK. Banks have been promoting working capital programmes for a number of years; for example, Lloyds implemented a supplier financing programme with BT plc in 2007. However, despite intellectual interest from treasurers, there was a perception that the effort required to implement such a scheme would counteract the benefits, particularly in an environment of plentiful credit. The change of credit conditions, however, has led treasurers to recognise the tangible value for their business. In the past, companies with cash surpluses made use of early payment discounts that helped their suppliers and delivered financial benefits. As credit constraints have tightened, even cash-rich companies are keeping hold of their cash as a precaution should their ability to finance the business in the future be limited. However, while they want to delay supplier payments for as long as possible, they recognise the need to secure their supply chain, which may be compromised if smaller suppliers struggle to finance their working capital needs.
Supplier financing delivers benefits to both suppliers and buyers, as summarised in figure 1. Suppliers can receive early payment when required. Even if they choose not to receive early payment, they are assured of prompt payment, providing greater surety of payment, and counterparty risk is transferred from the buyer to the buyer’s bank. Where finance is taken, there may also be opportunities to benefit from more competitive pricing, by arbitraging against the stronger rating of a large buyer. Buyers may benefit from extended payment terms and reduced payment administration, as supplier payments are undertaken by their bank. Furthermore, there may be the potential for them to arbitrage the financing rate of their own buyers with a stronger credit rating than their own. [[[PAGE]]]
Every stage of the financial supply chain, whether purchase order, invoice, letter of credit or receivable can present a financing opportunity, but with every company maintaining its own unique supply chain, financing programmes need to be created according to each company’s needs, depending on their supplier and buyer profile, length and complexity of the supply chain, financing requirement. Consequently, supply chain initiatives can be bespoke solutions using a combination of simple trade instruments for individual suppliers or transactions, or more structured.
Lloyds is very supportive of tools that make business process more integrated, efficient and straightforward for our customers.
With the opportunities of trade and supply chain finance being discovered or rediscovered, many treasurers and finance managers may lack the experience of these areas within their teams, or an awareness of how solutions can be constructed to meet their individual needs. This is an important way in which Lloyds’ business experts can deliver considerable value. While some banks are only now recognising the benefits of a relationship approach to client engagements, this has been a pivotal aspect of our approach since the mid 1980s. We bring the systems that UK and international clients require to automate business processes and ensure efficient communication, but equally importantly, we bring the skills and expertise to understand our clients’ objectives and constraints, and to design appropriate solutions. As a result of our relationship and skills-based approach, we have been successful in creating financing solutions for many of the world’s most respected and innovative companies, such as supporting Glencore’s import and export requirements in their oil and mining businesses. We work very closely with clients and form partnerships with them based on trust and mutual respect, resulting in very long-standing relationships. We aim to break through much of the mystique and complexity associated with trade and supply chain finance, and ensure that solutions are simple, efficient, and take into account the needs and opportunities across the entire financial supply chain, as opposed to being focused on delivering a particular product.
We have seen treasurers’ and finance managers’ approach to risk and liquidity management change unrecognisably over recent years, motivated by the global financial crisis. Treasurers have become more open-minded about the types of solutions that they will consider, with transparency, efficiency and risk mitigation as key elements in every decision. Trade and supply chain finance has the potential to deliver even greater value for companies seeking to manage their risk and liquidity more effectively, but proposed changes to the regulatory landscape could disadvantage trade. Unless trade is accurately priced in banks’ capital requirements, we could see the cost of trade finance increase materially or availability decline. As a major provider of trade and supply chain services to our clients, Lloyds is active in engaging with regulators to ensure that the solutions on which corporate treasurers increasingly rely recognise the dynamics of the business and consequently remain available and cost-effective in the future.
How Thought Leadership Can Reduce the Cost of Sales by Patrik Havander, Havander & Partners A focused attention on the costs incurred by the global sales and marketing processes is becoming increasingly important for corporate banks and their transaction banking departments. While the client/bank relationship remains vital, research has shown that in fact relationship selling […]
