Alternative Finance: Using Your Available Capital Most Efficiently

Greetings!

It’s a new year.  One month gone!! But it may seem surprisingly like the old year when you deal with your banker trying to handle Letters of Credit or any form of Finance.

We begin 2015 with our continuing update on points of interest in our world, which happens to be largely your world too.

In today’s global environment, companies conduct trade all over the world.  The client companies of domestic banks and finance houses can be importers who are always on the lookout for better quality and better pricing, and who continually search throughout the world in pursuit of such products as they require to conduct their business.

There are no boundaries and there are no borders when it comes to sourcing merchandise and the same can be said when it comes to sourcing finance.

Opportunities exist in this era of global openness that can provide mainstream Banks and Clients, alike, opportunities which were available before the late 1990’s when universal banking rules and protocols evolved.

Westcap, with its global reach, is here to help you take advantage of these global opportunities and innovative finance that the financial world has to offer.

Funding a Deal

We are sometimes surprised by client expectations of finance.

As you must know, no new parent ever has an ugly baby. And likewise, no prospective client ever has an unfinanceable deal, at least in their eyes. You, dear reader, would be surprised to learn that sometimes a client who can’t put up any capital to secure the supplier will still conclude that the finance is at fault.

It works like this: the deal has to fit the available finance, not the other way around. Our contribution is, slowly but surely, to find or develop finance structures so that we can assist more clients in completing their transactions.

With that said, our process still remains much more faster than mainstream banks.

Finance Structures

It seems like the most obvious thing in the world, but structure is everything in trade finance.  It comes naturally to us, perhaps because of our time on London’s Financial District and Wall Street during which we traded sophisticated Derivative Instruments and ICTs and worked on complicated fund raising deals including a convertible arbitrage hedge fund (If you don’t already know what these are, don’t ask.  It would take too long to explain.).

In the simplest terms, here’s what we need to assist in financing a deal:  credible buyer, secure buyer payment structure, credible supplier and acceptable supplier payment requirement.

There are myriad permutations of that simple basic deal structure, but in simple terms, that’s about it. Seems easy, no doubt.  And it should be, although often, it isn’t.

So if you do look for finance based on deals you’ve put together, keep in mind that your funding partner prefers not to lose money, which will often account for their requirements while putting a deal together.

More often than not, the client also benefits from the care taken on the financier’s side.

We hear regularly from clients working to use their capital the best way they can. Some are nervous about using OPM (Other People’s Money) and use strictly their own capital without ever reaching out to other sources.  Others don’t have a lot of capital and are searching for ways to make their small amount of capital stretch a whole lot further.

The first type can miss opportunities if they don’t get a clear view of the profit opportunity versus the cost of capital.  In many cases they compare the cost of funding with the cost of bank loans, even if bank loans aren’t available. There’s really only one key question to ask:  even if finance is more expensive, does the expected profit justify the effort?  If yes, the deal is a do.  If no, then not.

The second type sometimes takes unnecessary risks because they try to push deals that aren’t set up quite right, because of the prospect of making a generous profit which at times can cause the trader to abandon caution.

Simple Answers

And then there’s the part of finance which tends to be invisible to so many players in the marketplace. We get numerous inquiries from clients looking for Standby Letters of Credit, Advance Payment Guarantees, Proof of Funds other Financial Instruments.

In many cases, clients ask for what they’ve been told they need, but here’s a little secret:  very often, the other side is asking for something because they heard it somewhere themselves.  Everyone wants to secure their side of the trade, without necessarily knowing what will actually do the job most effectively.

It’s like this: the right structure on a trade deal makes it very easy to finance.  The wrong structure makes it difficult or impossible.  If you take the time to find out the right structure for your deals and then start with deals that are easy to finance, business becomes much easier.

Too often the opposite holds true: clients set up transactions and then try and force the finance to fit the deal.  It’s the other way around. The deal should be built around the proper finance structure.  It’ll all happen faster and more smoothly that way.

Some of this revolves around Letters of Credit.  You, dear reader, hear us talk about that a lot because Letters of Credit can unlock an amazing amount of business potential on cross-border trade.  We try to apply a certain amount of commonsense to the whole process. After all, if you’ve got a choice between the hard way and the easy way, doesn’t it make sense to find out about the easy way?

Advance Payment Guarantees (APGs)

Lots of foreign orders with manufacturing or construction work in stages involve advance deposits.  And the customer often wants a corresponding APG issued back, because the customer doesn’t want to risk losing the deposit. For the supplier, the result is that the deposit and the APG offset each other, leaving NO net advantage to the supplier from the customer’s advance payment.

We were reminded of this recently, when a new client had precisely this problem.  This is also a structuring issue, and we have several ways to get the deal into better shape, based on small changes in the contract and the buyer’s LC structure.  The right counterproposal can sometimes break the stalemate that can occur. In some cases, there may be a way to put up the APG without requiring the supplier to tie up all his capital.

There’s always something interesting and new coming along around here.  We like solving problems, and we along with our partners have increasing intellectual property and extensive credit lines to be applied to solving LC-related problems. We prefer to hang out with people who know more than we do in these areas, and have realized some success in this, which flows through to our clients’ benefit.  Keep this in mind as you wrestle with trade finance issues on your own.

The Things You Know Can Obscure the Things You Don’t

We occasionally speak with clients who have experience with letters of credit.  Sometimes this is a good thing.  Sometimes, it serves as a barrier to new understanding.

One simple fact can sometimes change one’s understanding.   Take, for example, the revelation that you don’t have to have an account open at a bank to receive and negotiate a documentary credit at that same bank.  It astonished us when we first learned this.

It may seem trivial, but think about it:  you are no longer held hostage by your existing bank, or even the banking system in your country, if things are difficult there.

And if you have, as we do, a means of financing a Letter of Credit, then you have true access to the world’s banks, and have access to banks that suits in capability and cost almost anywhere in the world.

To us, that’s profound.  But sometimes when we’ve spoken to clients and informed them, they still hold to their old understanding that to use a new bank, they must open an account there, which can be a slow and laborious process depending on the bank.

There’s a lot more to it.  To get more of a step by step picture of how we can manage and finance your entire deal process  go to our  Trade Finance web page. You may find that you’ll get a whole lot more than you bargained for.

We all bump into perverse business situations, especially when it comes to financing opportunities the proper way.  On the other hand, you can find out just about anything you need to know.  But remember this:  you don’t ask, you don’t get.  We can’t answer the questions you don’t ask

There’s a freeway close to us that has an unusual feature.  It breaks up into an express road and a local road for access to a few exits.  But then, a mile and a half further, the two halves, two lanes apiece, merge into each other again.  Here’s the funny part:  before the re-merge, the express lane shrinks from two lanes into one.  So the express lane is always backed up during rush hour as two lanes become one, while the “local” road is always clear.

Why should you care?  Well, in the highway case, if you’re making your daily drive to or from work, all you have to do is look twenty yards to your right on a road you take every day to find a better route. Anyone who bothers to look will see a clear parallel road merging back into their own road.

The clogged express lane is proof that most people don’t see a better way even when it’s right in front of them.  They don’t know what they don’t know, and consequently are not motivated to ask if there’s a better way.

By Noel Danquah, Janet Maison