Optimizing Payment Cycles for Trade Payables and Receivables

Optimizing Payment Cycles for

Trade Payables and Receivables

2

Table of Contents



Cash Conversion Cycle

3



Supply Chain Finance

6



Receivables Finance

10



Discounting Letters of Credit

14



Questions

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The Cash Conversion Cycle

DAYS’ INVENTORY

DAYS’ PAYABLES

CASH CONVERSION CYCLE

DAYS’

RECEIVABLES

DAY 1

DAY 30

DAY 45

DAY 75

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Cycle Components

Order

placed with

supplier

30%

deposit

Goods

shipped from

China 70%

balance

Arrive in

US port and

stocked

Stock sold –

invoice raised

Funds in

Lead time

Transit time

Stocking period

Sales period

195

75

135

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Supply Chain Financing

Upon receipt of buyer approved invoices, suppliers will have access to early payment from

the Bank

Commercial

Agreement

executed

Buyer

issues PO

Supplier

accepts PO

Shipment

made by

supplier

Buyer accepts

Invoice

Bank collects

payment at

maturity

Suppliers have the option

of receiving early payment

from the Bank

Post-acceptance finance

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4. Examine

documents

Supply Chain Finance Flows

ONBOARDED SUPPLIER

CUSTOMER

1. Send purchase order

2. Ship goods

3. Send documents

5. Notify approval

of invoices

7. Pay discounted

proceeds

8. Pay at maturity

Cash Flow

Advice / Notice

Documents

Goods Flow

9. Pay remaining

non-discounted proceeds

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Considerations for Supply Chain Finance



For the Importer (Buyer)

–

Do you have available credit?

–

Are you able to influence suppliers to adjust payment terms/join program?

–

Is there an impact to overall cost of goods?

–

Are there any country restrictions for location of supplier?

–

Do you want on or off balance sheet financing (bank debt or trade debt)?



For the Exporter (Supplier)

:

–

If buyer wants extended terms, is there an impact on your working capital?

–

Is the receivable encumbered under your current bank arrangements?

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Receivables Finance

Receivables Finance, also known as Invoice Finance, encompasses 3 different

propositions:

1) Factoring

– complete package that combines working capital financing, credit risk

protection, accounts receivable bookkeeping and collection services

2) Invoice Discounting

– A factoring product where the factor provides credit

protection and financing, but the client retains receivable management and collection

responsibilities

3) Reverse Factoring

– A factoring process started by the buyer, in order to help their

suppliers finance their receivables more easily

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Considerations for Receivables Finance



Does my current loan facility allow me to sell receivables?



Are foreign receivables covered in my borrowing base?



Are my buyers insurable?



Is my best option recourse or non-recourse?



How fast will I receive notice from the buyer that the invoice has been approved?



Do I want to disclose (or not disclose) to the seller than I am using an RF

program?



Should I retain control over the collection of the receivable?

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Recourse/non-recourse Receivables Finance

Recourse RF

Invoice pre-

_paid

_defaults

Buyer

Client must

repurchase

invoice

Or client

must replace

invoice

(some

countries)

Limited

recourse

Invoice

pre-paid

Buyer

defaults

Await

payment

from insurer

If insurer

does not pay

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EXPORTER

1. LC

arrives at

Bank

2. LC

confirmed

4. Docs

checked

**.

Discrepant

_{5. discounted;}

funds

remitted

ISSUING

BANK

3. Docs

presented

Export LC process flow: Acceptance Discounting

CONFIRMING

BANK

**

In order

EXPORTER

ISSUING

BANK

6. Maturity

CLIENT

RISK

Bank

RISK

DISCOUNT

Notes:

1. LC issued with usance terms (such as payable 90 days from BL date)

2.

Bank confirms on non-recourse basis: Client takes on Confirming Bank risk, rather than that of applicant

or issuing bank

3.

Docs presented: to Confirming Bank (example: draft, invoice, copy bill of lading)

4.

Docs checked: generally checking and payment within 24-72 hours of presentation

5.

Discount:

AIM FOR 24-72 HOURS

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Situations which impact prompt payment to the exporter under LCs



Exporter’s ability to present compliant documents

–

Especially control over non-correctable discrepancies



Quick presentation after goods shipped

–

Payment cycle cannot begin until documents are received by bank



Reimbursement instructions in LC

–

Location of reimbursing bank

–

Any built-in delays (i.e., 4 days after receipt of SWIFT reimbursement claim)



Confirmation

–

Automatically moves point of payment trigger to confirming bank

–

Some banks offer ‘silent’ confirmation (document purchase)



Policies of negotiating bank

–

Bank is not required to expedite payment – solely at bank discretion to discount

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Cost of discounting an LC acceptance



Who pays for the costs of confirmation/acceptance/discounting should be outlined

in your sales (purchase) contract



In a usance LC, where all fees are for the buyer, there is no negative impact to the

seller – they can fundamentally be paid at sight



If the seller accepts fees, then they should contact the bank to get an estimate

before committing to the sale price of goods



Fees:

–

Confirmation

–

Acceptance

–

Discount interest

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Financing Timeline

Order

placed with

supplier

30%

deposit

Goods

shipped from

China 70%

balance

Arrive in

US port and

stocked

Stock sold –

invoice raised

Funds in

Lead time

Transit time

Stocking period

Sales period

195

75

135

45

0

Payables:

Supply Chain Finance Program

Use usance LC; offer to pay fees

Receivables:

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Disclaimer

This information was prepared exclusively for the benefit and internal use of Houston Treasury Management Association and contains information proprietary and confidential to HSBC Bank USA, N.A. (“HSBC”). Neither this proposal nor any part thereof may be used for any other purpose or disclosed to a third party without the prior written consent of

HSBC.

The information herein reflects our services, processes and/or controls as of the date indicated on page 1 and such are subject to change without notice for any reason or no reason whatsoever. HSBC is not responsible for updating the contents of this document and/or distributing such updates to any recipient. The information herein is not intended

as an offer or solicitation for the purchase or sale of any financial instrument nor to amend or supplement any existing agreement between Houston Treasury Management Association and HSBC. Any statements with respect to timing or as to specific processes are estimates based upon our experiences with service delivery to our typical clients.

Final agreed service offerings may differ materially from such estimates depending on a client's specific circumstances and servicing needs.

Any information herein obtained from independent sources is believed to be reliable, but HSBC does not warrant its accuracy or completeness. The products and services described herein are subject to the previous authorization of the corresponding local entity of HSBC Group and to the terms and conditions of their corresponding agreements. The execution of every agreement is made on a case by case basis according to the market practice and the applicable local legislation. Therefore, neither this document nor any

part hereof is intended as an obligation or creation of a contract. Exhibits or annexes attached hereto are only for information purposes.

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