Trade Finance Fundamentals

“Great content with detail made easy. Great learnings for someone with no experience”
Gauteng Province, South Africa

This 3-day on-line virtual classroom fundamentals training course comprising 9 modules provides a practical introduction to trade finance, the importance of Incoterms® 2020 rules and trade documentation, the risks faced by exporters, importers, and banks, and how to maintain control over the goods. Coverage is provided of documentary collections, bank aval, letters of credit, forfaiting, and letters of guarantee, to include the parties, mechanics, and risk mitigating features of each

The virtual classroom provides the engagement and participation of a physical class without leaving the home or office. Each day is structured into four separate 75 minute sessions. Case studies are discussed, and solutions formulated via delegate participation through virtual breakout syndicate rooms

Training objectives

By attending this on-line virtual classroom training course, the delegates will:

  • Have an appreciation of the working capital needs of the client

  • Appreciate the importance of Incoterms® rules and trade documentation

  • Identify trade risk and how this can be mitigated

  • Be aware of the methods of payment and their risk profile from the perspectives of seller and buyer

  • Know how each of the trade finance products operate and when they should be used

MODULE 1

Introduction to trade finance (75mins)

International trade: conflicting needs of buyer and seller

  • Mechanics of international trade:
    • Four stages of a trade transaction
    • Process of moving goods internationally
  • Conflicting requirements of seller and buyer
  • Importance and implications of trade credit for the seller:
    • Credit risk exposure
    • Liquidity risk

Introduction to trade and working capital finance: identifying key client drivers

  • Understanding working capital
  • Working capital finance:
    • Cash conversion cycle
    • Identifying the funding gap
  • Key client drivers:
    • Importance and relevance of DSO and DPO ratios:
      • Calculation and assessment
      • How trade finance can improve these ratios

DSO & DPO: CALCULATION AND ASSESSMENT

Calculation of DSO & DPO ratios
Identification of risk and client needs
Exercise       

Description of trade finance

  • Different types of trade finance and when each is used:
    • Trade services
    • Trade finance
    • Structured trade finance
  • Why trade finance is required – the need for:
    • Risk mitigation and finance
    • Increased facility requirement in international trade
  • Essential role of trade finance in facilitating global trade flows:
    • Benefits to corporate and bank

MODULE 2

Incoterms® rules 2020: their relevance to trade finance (150mins)

Incoterms® rules 2020

  • Their relevance and importance to trade finance
  • Key differences to Incoterms® 2010
  • Examination of the most commonly used Incoterms® in respect of:
    • Place or point of delivery
    • Risk transfer
    • Contract of carriage
    • Contract of insurance
    • Customs clearance

INCOTERMS®: GOODS CONTROL & RISK MITIGATION

Rose Royce
Evaluation of the needs of the seller, buyer and financier
Prioritisation of the Incoterms® rules in order of preference from a control and risk mitigation perspective
Case study: virtual breakout syndicate       

MODULE 3

Trade documentation: its importance to the trade financier (75mins)

Taking control and protecting the goods

  • Important role of trade documentation in trade finance
  • Bill of lading: key requirements for goods control and possession:
    • Function and key features
    • Negotiable documents: characteristics and importance
    • Requirement for a full set of original clean shipped on board bills of lading
    • Importance of consignee and negotiable status
    • Taking control of the goods: constructive possession
    • Use of the shipping guarantee (example)
    • Other types of bill of lading
  • Air waybill
    • Taking control of the goods:
      • Practical issues
    • Other modes of transport and implications for control
    • Cargo insurance: key aspects and considerations for the financier
    • Inspection certification: its importance to risk mitigation

BILL OF LADING: EVALUATION

Evaluation of a bill of lading to establish whether it provides satisfactory control over the goods to the bank
Case study: virtual breakout syndicate 

MODULE 4

Identifying and managing risk in trade finance (150mins)

Types of trade-related risk

  • Financial risk: buyer credit risk, country, and transfer risk
  • Commercial risk: debt instrument, method of payment, trade credit terms, currency, Incoterms®, contractual terms, sales leverage
  • Performance risk: supply chain, nature of goods, quality management, delivery, dispute, dilutions, non-compliance with trade product and insurance terms
  • Political risk: contract and/or payment frustration
  • Liquidity risk: ‘going concern’ status of the client re fulfilment of the end-buyer’s purchase order
  • Documentary risk: discrepant presentation to the bank, non-compliance with customs (export and/or import clearance)
  • Legal risk: governance of trade product operation, dispute, security over goods, debt recovery

Types of trade finance-related risk exposures

  • Client and/or counterparty credit risk
  • Operational risk: non-compliance with client instructions and ICC rules
  • Compliance risk: trade-based money laundering and sanctions violation
  • Fraud
  • Reputational risk

The payment “risk ladder”

  • Introduction to the methods of payment:
    • Advance payment
    • Collections
    • Bank aval
    • Letters of credit
    • Open account
  • Key risk considerations for the importer and exporter

KEY COMMERCIAL TERMS: MITIGATION OF RISK

Determining & negotiating the key commercial terms of a trade transaction to mitigate risk:
Incoterms® rule, credit period, method of payment, responsibility for contract of carriage & insurance
Case study: virtual breakout syndicate 

MODULE 5

Introduction to documentary collections (75mins)

Documentary collections

  • What a collection is and when it should be used:
    • Description and parties
  • Bank risk and responsibility:
    • Compliance with instructions
    • No undertaking to honour or pay (unless bank aval)
    • Document examination? – URC rules versus compliance risk
  • Types:
    • Documents against payment (DP/CAD)
    • Documents against acceptance (DA)
  • Operation
  • Collection schedule of instructions (example)
  • Risk, benefit, and control features
  • Dishonour: protest
  • Document in trust facilities:
    • Bank risk exposure and liability
  • Financing: advance against collections
  • ICC URC 522 rules: appreciation
  • Advantages and disadvantages

COLLECTION SCHEDULE: COMPLETION

Completion of a collection schedule of instructions from the information provided
Case study: virtual breakout syndicate                                                      

MODULE 6

Introduction to bank aval (75mins)

Bank aval

  • What bank aval is and when it should be used
  • Operation
  • Comparison with trade acceptance
  • Conditions for release of documents
  • Form of bank aval:
    • Pour aval endorsement
    • Bank undertaking to pay at maturity
  • Avalising bank liability
  • Avalising bank considerations:
    • Need for an approved credit facility
    • Documentation:
      • Client authority to pay
      • Counter indemnity
  • Risk appreciation:
    • Seller: timing of bank aval, avalising bank and country risk
    • Buyer: timing of bank aval, obligation to reimburse the avalising bank
    • Avalising bank: buyer credit risk, transactional due diligence
    • Financing bank: authenticity and signing capacity of the obligor, avalising bank and country risk, transactional due diligence
  • Financing avalised bills:
    • Import
    • Export

BANK AVAL: STRUCTURING A SOLUTION

Formulation of a risk mitigation and financing solution for the buyer and seller using bank aval
Case study: virtual breakout syndicate 

MODULE 7

Introduction to documentary letters of credit (150mins)

Letters of credit

  • What a letter of credit is and when it should be used:
    • Description
    • Operation
    • Parties
  • Key aspects:
    • Bank liability
    • Irrevocable
    •  Independance
    • Conditional undertaking to pay
    • Banks deal only in documents ‘on their face’
  • ICC UCP 600, ISBP & URR rules: appreciation
  • Issuing a letter of credit: credit facility requirement

LETTER OF CREDIT FACILITY: CALCULATION

Stereophonics
Calculation of the letter of credit facility requirement for an importer
Exercise
  • Importance of documentation: standard for examination
  • Complying presentation: obligation to honour/pay:
    • Importance of timely notification to the presenter
    • Exceptions to the payment principle
  • Confirmation:
    • Risk mitigation
    • Unconfirmed credits: risk implications to the beneficiary
    • Confirming bank liability: financial engagement and responsibility:
      • Issuing bank and country risk exposure
      • Documentary risk: issuing bank document rejection
      • Without recourse financing
  • Letter of credit process
  • Letter of credit example
  • Amendments: acceptance and rejection
  • Discrepant presentation: risk implications to the:
    • Beneficiary
    • Confirming bank
    • Negotiating bank
  • Advantages and disadvantages of letters of credit

EXPORT LETTER OF CREDIT: RISK ASSESSMENT

Review of an export letter of credit and identification of issues
Case study: virtual breakout syndicate 

MODULE 8

Introduction to forfaiting (75mins)

Forfaiting

  • What forfaiting is and when it is used
  • Characteristics of a forfaiting transaction
  • Debt obligation examples:
    • Sales invoice:
      • Claim for payment under the commercial contract
      • Debtor approval/undertaking to pay
      • Invoice debt assignment and acknowledgement
    • Bill of exchange:
      • Independence
      • Negotiable
      • Trade acceptance
      • Bank acceptance
      • Bank aval
    • Letter of credit deferred payment undertaking
  • Without recourse finance:
    • Events of recourse
  • Offer and commitment to forfait
  • Purchase: discount to face value:
    • Straight discount
    • Discount to yield
  • Primary purchase
  • Forfaiting process
  • Documentation:
    • Offer
    • Debt purchase (forfaiting) agreement
    • Representations, warranties, and undertakings
    • Underlying transaction: copy shipping documentation
  • Risk appreciation and due diligence:
    • Authenticity
    • Legal enforceability, and transferability of the debt obligation
    • Sight and satisfaction with supporting or underlying trade documentation
    • Authorised signatures and signing capacity of the obligor
    • Performance free (‘sell and forget’)
    • Reaffirmation of the irrevocable undertaking of the obligor to pay the full amount on the due date
  • Secondary purchase:
    • Responsibility of the prior forfaiter
    • Secondary market distribution:
      • Opportunity for portfolio risk management
  • ICC URF 800: appreciation
  • Advantages and disadvantages

AVALISED BILL DEBT PURCHASE: RISK EVALUATION

Dire Straits
Consideration of a request to purchase an avalised bill of exchange
Identification of the risks and further information required to evaluate the proposition
Case study: virtual breakout syndicate   

MODULE 9

Introduction to demand guarantees (75mins)

Demand guarantees

  • What demand bank guarantees are and when they are used
  • Issuing a guarantee: key risk considerations:
    • Irrevocable
    • Independance
    • ‘Unconditional’ undertaking to pay
  • Exceptions to the payment principle
  • Banks deal in claim demand documents only:
    • No requirement for default event validation
  • Ease of claim (beneficiary claim documentation)
  • Direct guarantees: operation and parties
  • Indirect guarantees: operation and parties:
    • Nature, role, and risk implications of the counter-guarantee (example)
  • Types: bid, advance payment, performance, and payment
  • Text wordings: APG working example:
    • Regulatory text
    • Bank’s own standard wording
    • Private text (risk and requirement for approval)
  • Claim demand:
    • Demand requirements: claim demand statement
    • Separateness of each demand
    • Period for examination
  • Risk appreciation:
    • Unjustified claim (unfair calling)
    • Fair calling (politically driven)
    • Extend or pay demand
    • Foreign laws and usages
    • Cancellation
  • URDG 758: appreciation and use

DEMAND GUARANTEE: APPLICATION COMPLETION

Completion of a guarantee application from the information provided
Key risk considerations
Case study: virtual breakout syndicate