Optimizing Payment Cycles for Trade Payables and Receivables

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1 Optimizing Payment Cycles for Trade Payables and Receivables Houston Treasury Management Association Space City Cash Conference September 2013 Madeline Sprague, HSBC Bank USA, N.A. Global Trade & Receivables Finance Please see the last page of this presentation for important information regarding the contents within.

2 Table of Contents Cash Conversion Cycle 3 Supply Chain Finance 6 Receivables Finance 10 Discounting Letters of Credit 14 Questions 19 2

3 Cash Conversion Cycle 3

4 The Cash Conversion Cycle PURCHASE OF MATERIALS PAYMENT FOR MATERIALS SALE OF PRODUCT COLLECT ACCOUNTS RECEIVABLE DAYS INVENTORY DAYS PAYABLES DAYS RECEIVABLES CASH CONVERSION CYCLE DAY 1 DAY 30 DAY 45 DAY 75 4

5 Cycle Components Lead time Transit time Stocking period Sales period Order placed with supplier 30% deposit Goods shipped from China 70% balance Arrive in US port and stocked Stock sold invoice raised Funds in 5

6 Supply Chain Finance 6

7 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 Pre-shipment finance Post-shipment finance Post-acceptance finance Suppliers have the option of receiving early payment from the Bank 7

8 Supply Chain Finance Flows 1. Send purchase order 4. Examine documents 2. Ship goods CUSTOMER 3. Send documents ONBOARDED SUPPLIER 8. Pay at maturity 5. Notify approval of invoices 6. View approved invoices, select those for early payment 7. Pay discounted proceeds 9. Pay remaining nondiscounted proceeds Documents Advice / Notice 8 Goods Flow Cash Flow

9 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? How will you know when invoices have been approved? Availability of automation/portal 9

10 Receivables Finance 10

11 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 Seller (Client) 3 Advances 1)Seller sends Goods/Services to the Buyer 2) Seller sends the invoices to the Factor 1 Goods /Services 2 Invoices Buyer (Customer) Bank RF (Factor) 3) Factor advances a percentage of the invoiced amount to the Seller, usually within 24hrs of receipt of invoices 4) Factor collects the invoice payments from the Buyer. Any amount not advanced to the Seller is now paid in full 4 Payment 11

12 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? How often do commercial disputes occur that impact payment timing? 12

13 Recourse/non-recourse Receivables Finance Recourse RF Invoice prepaid Buyer defaults Client must repurchase invoice Or client must replace invoice (some countries) Limited recourse Invoice prepaid Buyer defaults Await payment from insurer If insurer does not pay client repurchases Non recourse Invoice prepaid Buyer defaults Bank takes the loss Bank pursues insolvent buyer or claims on own insurance 13

14 Discounting Letters of Credit 14

15 Export LC process flow: Acceptance Discounting AIM FOR HOURS DISCOUNT PERIOD e.g DAYS ISSUING BANK 1. LC arrives at Bank CONFIRMING BANK 2. LC confirmed 3. Docs presented 4. Docs checked ISSUING BANK **. Discrepant ** In order 5. discounted; funds remitted 6. Maturity EXPORTER EXPORTER 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 hours of presentation 5. Discount: a. Pre-acceptance: client receives immediate value, discount created for remaining e.g days b. Post-acceptance: discount created when issuing bank sends SWIFT approving docs, fewer days of discount (e.g. 75 days or less) 6. Maturity: funds come into confirming bank from issuing bank ** Discrepant docs: require issuing bank approval: will cause delay in setting the discount point 15

16 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 Check to see if any special agreements/documentation required 16

17 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 So fees are a function of amount, time, and quality of issuing bank/country 17

18 Financing Timeline Lead time Transit time Stocking period Sales period Order placed with supplier 30% deposit Goods shipped from China 70% balance Arrive in US port and stocked Stock sold invoice raised Funds in Payables: Receivables: Supply Chain Finance Program Use usance LC; offer to pay fees 18 Receivables Finance options Use usance LC; discount

19 Questions/Comments? 19

20 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. Supply Chain Solutions products may be subject to credit approval and may not be offered in every market. Other restrictions, including specific country regulations may apply. Foreign currency exchange rates may apply to certain trade transactions. Supply Chain Solutions products in the US are provided by HSBC Bank USA, N.A. Please note that regulations and practices change from time to time and Houston Treasury Management Association is advised to consult with its independent legal and tax experts as to the implications of any product use. These materials are not intended to contain any legal, tax, fiduciary, investment management or regulatory advice. Houston Treasury Management Association is responsible for assessing and complying with local laws and regulatory requirements to which it may be subject. Neither HSBC nor any of its affiliates are responsible for providing its clients with legal, tax or other specialist advice. Issued by HSBC Bank USA, N.A. Copyright HSBC Bank USA, N.A ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted on any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of HSBC Bank USA, N.A. 20

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