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Financing your international trade – documentary collections
| 04-04-2018 | Lionel Pavey |
Acquiring the right goods at the right price can eventually lead a company to overseas markets. International trade has certain barriers – buyers and sellers have never met and are reluctant to completely trust each other; drawing up documentation can be difficult and time consuming due to difference in law between 2 countries; agreement has to be made on the settlement currency; documentation that implies ownership needs to be sent, but the seller is hesitant to have these released to the buyer before payment has been made. This article looks at 1 of the 3 main financial instruments used in international trade – the documentary collection (DC).
What is the process?
1 – Buyer and seller agree terms and conditions for a trade to take place – the means of payment, the collecting bank (this is usually the house bank of the buyer), a detailed description of the set of documents that have to supplied.
2 – The seller (exporter) arranges for shipment of the goods to the buyer (importer) via a shipping agent and receives a transport document (usually a bill of lading) that is negotiable.
3 – The seller prepares the agreed documents into 1 package and presents these to his bank (the remitting bank). This will include the bill of lading, certificates of origin, inspection notices, a collection order stating the terms and conditions under which the bank can release the documents etc. and a draft.
4 – The remitting bank will send these documents to the collecting bank instructing the collecting bank to present the documents to the buyer and to collect the payment.
5 – The collecting bank will inspect the documents and the contract, ensuring that they are in compliance with the collection order.
6 – The collecting bank will contact the buyer stating that the documents are in order, or what discrepancies have been established; and inform the buyer about the terms and conditions of the collection order.
7 – The buyer will be shown the documents and asked to accept them. Acceptance is recognised by signing the draft. When the documents are accepted, and payment is made then the documents are handed over to the buyer.
8 – Release of the documents occurs in 2 ways – documents against payment is when payment is made at sight of the documents; and documents against acceptance is when payment is made at an agreed date in the future.
9 – The buyer takes possession of the documents allowing them to receive the goods from the warehouse or port where they are being stored.
10 – The collecting bank arranges to pay the remitting bank either immediately in the event of a sight bill, or at the agreed future date in the event of an acceptance bill.
11 – The remitting bank arranges to credit the account of the seller.
So it is a letter of credit?
No, a documentary collection is an alternative to a letter of credit. In a DC, the banks undertake no guarantee role – they merely advise, release documents and effect payments. If a buyer does not agree to the documents, they do not receive the goods, the banks do not effect payment and the seller is out of pocket. Therefore a DC is normally far cheaper than a LC.
Why use a DC?
Both buyer and seller know each other and are happy with their existing relationship.
The collections are for a one-off transaction – there is no open account between the parties.
The seller has faith in the economic and political characteristics of the importing country.
A LC is not acceptable to both parties.
Documentary collections are governed by the Uniform Rules for Collections as issued by the International Chamber of Commerce.
Lionel Pavey
Cash Management and Treasury Specialist
TIS – the single source of truth
| 29-03-2018 | treasuryXL | TIS Treasury Intelligence Solutions |
Why?
In today’s world, companies can find themselves with a physical presence in a multitude of countries and locations. In the current environment, a corporate treasury would need to log on to the website of every unique bank where they hold accounts and extract the bank statements for the previous day. Using separate bank tokens and log in protocols, this process can quite easily take up to 1 hour. Furthermore, all the separate data needs to be collated and then uploaded into 1 system, Various subsets of the information need to be given to different internal departments so that they can perform their daily tasks – reconciliation, data input and verification.
The reality
In the modern age, you could find yourself as a Treasurer, within a large complex organisation, consisting of a head office, subsidiaries, legal entities and shared service centres. The underlying platforms can consist of book keeping systems, ERP, HR and different databases. Additional data flows come from e-banking systems, TMS and stand alone projects. The output from all these systems are then used to connect to the banks. Furthermore, all these layers of connectivity can be subject to fraud or attack from outside sources.
TIS provides a single point of contact via a SaaS (Software as a Service) platform that connects to all these systems, thereby offering a simple and effective control over the data flows in real time.
Advantages
After this we were informed about how the system works in the real world. Bas Coolen is the global head of treasury at Archroma – a colour and speciality chemicals company based in Switzerland. They have a physical presence in over 35 countries and 3,000 employees. Formed 5 years ago, they wanted a minimal IT solution to their legacy banking operations. These operations stretch from Asia, via Europe to the Americas and involved many different banks. They concluded that no single bank could provide the service they required within every country and that they needed a solution. By adopting the platform offered by TIS, they have been able to implement a global system that encompasses all their bank accounts – this provides them with a single source of truth. Importantly, the security aspects can now be maintained from one source – all the relevant authorisation matrices are now contained in one platform, along with the capability to perform all global e-banking operations from one location.
TIS were joined at this seminar by Cashforce, who presented their Smart Cash Forecasting and Treasury system – that will be the topic of our next blog.
treasuryXL would like to thank TIS for allowing us to participate in this seminar. If you have any questions, please feel free to contact us.
Rainy day funds and moral hazards
| 28-03-2018 | treasuryXL |
Closer Integration
To achieve this target, it would require at least the following steps:
Her speech closely echoes that of her fellow countryman – President Macron. However, whilst receiving support from Mrs. Merkel when making his remarks, he also met with objections from other member states. Countries such as the Netherlands and Sweden voiced their objection to what they perceived as “far reaching” policies, whilst ignoring the fundamental problems and issues within the Eurozone. Their concerns are centred around the public perception of the Eurozone – there has been a growing tide of populist sentiment expressed at recent general elections, together with the continued fallout from the financial and sovereign debt crises that has impacted on the economic well being of the citizens.
Implementation of this policy – according to the IMF – would entail an annual contribution of about 0.30-0.35% of GDP per member state into a common fund. This fund would then pay out in the event of an economic downturn. Given the aforementioned level of disenchantment among citizens, it would not be easy to implement this policy within every member state. Furthermore, whilst pay outs would be conditional on member states meeting certain criteria, the Eurozone has shown in the past that their criteria has been ignored and no sanctions were enforced.
This common fund, whilst being ring fenced, could have an impact on the functioning of financial markets. Just knowing that there is a fund that needs to earn a return could led to distortions in money markets. Also, who decides when a member state can draw down from the fund – the EU, the ECB, majority decision of member states?
And then there is the potential problem of moral hazard. A country could pursue policies that are imprudent, safe in the knowledge that there was a communal fund to save them. Given the record of certain member states since even before the inception of the Euro to deceive, this is not a matter to be taken lightly. Even when countries have be found to have cheated they have always received the help that they need, regardless of all the stated criteria that are in place. Countries that are performing well will have to pay proportionally more into the fund than countries whose economies are not doing so well.
10 years since the start of the crisis and almost 20 years since the introduction of the Euro, we are no closer to a collective harmony than before.
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