Main Title of Document

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Finance for Importers

• A Proactive and Creative Approach

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Finance for Importers

• David Pearson
• International Relationship Director

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Overseas Trade with East Midlands Businesses -
2006

• Exports from Region 18.9bn 5,046 companies
• Imports to Region 13.7bn 6,766 companies
• Average imports per company 2 million

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Executive Summary

• Our Credentials
• The Holy Trinity
• Cash Resources
• Risk Mitigation
• Finance
• Finance Options and Case Studies
• Trade Cycle Finance
• Capital Equipment Finance
• Other methods
• Protecting against Exchange Rate Movements
• Summary and Questions Answers

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International Credentials

• 6th largest Banking Group in the World and 2nd in
  Europe
• Recent Acquisition of ABN Amro
• Presence in 140 countries through a network of
  3000 partner and correspondent banks
• Team of 13 specialists operating across the East
  Midlands
• RBS is committed to providing UK processing of UK
  customers international services
• No 1 in UK for Corporate Service

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Companies who trade internationally.

• normally need higher levels of finance than UK
  trading companies
• need to understand the financial culture of the
  supplying / buying markets
• need to appreciate the underlying trade cycle
• need to efficiently make and receive overseas
  payments
• need to protect against the risks of dealing in
  different currencies

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Common client needs - The Holy Trinity
Finance
Cash Resources
Risk Mitigation
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Common client needs - The Holy Trinity
Finance
Cash Resources
Risk Mitigation
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Common client needs - Cash

• Maximise Cash Balances
• Operation of Currency Accounts
• Optimise interest received on surplus cash
• Full access to accounts held with Partner Banks
  overseas

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Common client needs - The Holy Trinity
Finance
Cash Resources
Risk Mitigation
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Common client needs - Risk Mitigation

• Commercial risk
• Currency risk
• Bank risk
• Country risk

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Managing Risk - The Risk Ladder
Low Risk
Open Account
Importer
Documentary Colln
Letter of Credit
Cash in Advance
High Risk
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Managing Risk - The Risk Ladder
High Risk
Low Risk
Open Account
Exporter
Importer
Documentary Colln
Letter of Credit
Cash in Advance
Low Risk
High Risk
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Common client needs - The Holy Trinity
Finance
Cash Resources
Risk Mitigation
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Common client needs - Finance

• Finance requirements for international trade
• In many ways no different from domestic
  requirements
• But the length of a trade transaction is extended
• And uniquely linked to underlying risks
• Funding working capital
• Debtors
• Creditors
• Stock
• Funding for asset purchase
• Often requires additional bank support

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Bank facility requirement

• For example .
• Yawn Ltd
• Turnover 5m
• Buys solely from UK
• Sells solely to UK
• Gross Margin 15 750k
• Net margin 5 250k
• Debtors allowed 30 days (avg 45)
• 600k average outstanding
• Creditors allow 30 days e.o.m. (avg 45)
• 1 months stock at any time circa 350k
• Bank overdraft 0.5m

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Bank facility requirement

• Excite-me Ltd
• Turnover 5m
• Buys 100 from Far East
• Sells 50 to Europe 50 to UK
• Gross Margin 50 2.5m
• Net Margin 25 1.25m
• Overseas Debtors allowed 60 days
• UK debtors allowed 30 days
• All Purchases payable by sight Letter of Credit
• Letter of Credits issued 60 days prior to
  shipment
• 2 months stock retained
• What total facilities does Excite-me Ltd need?

• Yawn Ltd
• Turnover 5m
• Buys solely from UK
• Sells solely to UK
• Gross Margin 15 750k
• Net margin 5 250k
• Debtors allowed 30 days
• 600k average o/s a.o.t.
• Creditors allow 30 days
• 1 months stock at any time circa 350k
• Bank overdraft 0.5m

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Trade Cycle Analysis

• Yawn Ltd
• Overdraft requirement 500k
• Excite-Me Ltd
• Total facility requirement ???k

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Trade Cycle Analysis

• Yawn Ltd
• Overdraft requirement 500k
• Excite-Me Ltd
• Total facility requirement 1440k

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What overdraft might a Bank give Excite-me Ltd?

• Assumptions
• Assume stock at 850k (sales value)
• Assume Debtors
• UK 310k
• Overseas 515k
• Assume preferential creditors of NIL
• Analysis
• 30 stock 255k
• 60 UK debtors 185k
• 0 for overseas
• Total 440k
• Shortfall in finance 1M

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RBS Trade Cycle Finance Solution
Debtor period
Contract period
Stock period
Day 1
Day 60
Day 70
Day 90
Day 150
Day 195
Day 225
Order placed with factory L/C issue
Order shipped from factory
L/C docs presented L/C paid
Other debtors pay
Goods arrive Deliver to Warehouse
Goods to customers Invoices raised
Assume UK debtors pay
410k
480k
550k
1440k
Import Loan
Invoice Finance
L/C Finance
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Importers Trade Cycle Finance

• Mansfield Based Business
• T/O 0.9M - Net Assets 27k - no cash
• Order for 1.3M of goods to be imported from
  China
• Pre-sold to a number of good quality retail names
• Issued Letter of Credit in favour of Chinese
  suppliers
• Once goods arrive in UK, invoices are raised and
  debtor finance then replaces Letter of Credit
  liability
• Supplier guaranteed to receive payment from RBSG
  30 days after shipping
• Retailers pay customer after 60 / 90 days to
  repay debtor finance facility
• End to end solution that finances orders all the
  way through the Trade Cycle

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Finance for Importers - the other options

• Trade Cycle Finance
• Sterling or Currency Overdraft - security and
  balance sheet analysis
• Letter of Credit facility (allowing the supplier
  to gain credit locally)
• Avalising Bills of Exchange (allowing the
  supplier to gain credit locally)
• Multi-Option Facility (bankers problem is that we
  have no idea what we are funding)
• Standby Letter of Credit in favour of overseas
  supplier

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Importers Standby Letter of Credit

• Derby Based Business
• Import pre-cut and shaped timber from Croatia
• Croatian supplier could not finance growth in
  exports
• Derby business needed steady supply
• We issued Standby Letter of Credit to Croatians
• Croatians can use this to secure increased
  finance from their bank
• Supplier has guarantee of payment
• Derby business has security of supply
• Does require element of trust between buyer and
  seller

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Importers Capital Equipment Finance

• Nottingham based business
• Wanted to import Paper Converting machine
• Taiwan wanted deposit with balance prior to
  shipment
• Lombard agreed to finance upon touch metal test
• Stalemate!
• RBS gave Letter of Credit to suppliers (via their
  own bank)
• This gave suppliers the ability to manufacture
  and ship in the knowledge that when machine was
  delivered to the UK payment was guaranteed
• Lombard able to draw down their finance without
  any risk
• Protected client from risks associated with
  paying up front and then being exposed to
  possibility of non/late delivery or incorrect
  spec

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Managing Currency Risk

• Dont leave it up to the market to decide how
  much you pay
• Purchase of goods costing US100,000

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Managing Currency Risk

• Dont leave it up to the market to decide how
  much you pay
• Purchase of goods costing US100,000

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Managing Currency Risk

• Dont leave it up to the market to decide how
  much you pay
• Purchase of goods costing US100,000

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STOCK MARKET CRASH (73 74)
OPEC FIRST OIL PRICE SHOCK (OCT 73)
REAGAN PRESIDENT (NOV 80)
BRETTON WOODS SYSTEM COLLAPSES (AUG 71)
MINERS STRIKE, 3 DAY WORKING WEEK (73 74)
OPEC SECOND OIL PRICE SHOCK (IRAN/IRAQ WAR) (SEP
1980)
UK CPI INFLATION HITS 15-YEAR HIGH (MAR 07)
REAGAN SHOT (MAR 81)
END OF SOVIET UNION (DEC 91)
HISTORIC 3RD LABOUR ELECTION VICTORY (MAY 05)
VIETNAM WAR ENDS (APR 75)
FIRST GULF WAR (JAN 91)
TERRORIST BOMBING OF LONDON TUBE (JUL 05)
UK JOINS EU (JAN 73)
UK NORTH SEA OIL PLATFORMS BEGIN PUMPING (NOV 75)
ASIAN TSUNAMI (DEC O4)
US SUB PRIME MORTGAGE CRISIS (AUG 07)
UK JOINS ERM (OCT 90)
ARGENTINA INVADES FALKLANDS (APR 82)
UK EXITS ERM AFTER CRISIS (SEP 92)
VIETNAM CEASEFIRE SIGNED (MAR 73)
RUSSIA CRISIS (AUG 98)
STOCK MARKET CRASH (OCT 87)
ASIA CRISIS (AUG 97 DEC 97)
ARGENTINA FLOATS PESO AFTER CRISIS (JAN 02)
UK VAT INTRODUCED (APR 73)
THATCHER THIRD TERM (JUN 87)
EURO LAUNCH (JAN 99)
THATCHER FIRST TERM (MAY 79)
US HURRICANES KATRINA RITA (SEP/OCT 05)
US COALITION INVADES AFGHANISTAN (OCT 01)
CHERNOBYL NUCLEAR ACCIDENT (APR 86)
ERM BANDS WIDEN (SEP 93)
NIXON RESIGNS (AUG 74)
CHINA REVALS RENMINBI (JUL 05)
WINTER OF DISCONTENT (DEC 78)
PLAZA ACCORD (SEP 85)
FED CUTS RATES TO 1, A 49 YEAR LOW (AUG 03)
GREENSPAN APPOINTED FED CHAIRMAN (AUG 87)
THATCHER SECOND TERM (JUN 83)
BRAZIL REAL FLOATS (JAN 99)
UK FINANCIAL CRISIS (MAR 76), IMF BAILOUT (NOV
76)
LOUVRE ACCORD (FEB 87)
SECOND GULF WAR (MAR 03)
SECOND MINERS STRIKE STARTS (MAR 84)
LTCM (AUG 98)
FTSE PEAKS AT 6950.6 (30/12/99)
1st LABOUR ELECTION VICTORY (MAY 97)
CLINTON PRESIDENT (NOV 92)
UK EQUITY MARKET BIG BANG (OCT 86)
IRA BOMB TORY PARTY CONFERENCE (OCT 84)
SEPT 11 2001
CORPORATE SCANDALS (ENRON DEC 01, WORLDCOM
FEB 02, TYCO SEP 02)
2nd LABOUR ELECTION VICTORY (JUN 01)
SECOND MINERS STRIKE ENDS (MAR 85)
BOE INDEPENDENT FOR UK INTEREST RATES (MAY 97)
BT PRIVATISED (DEC 84)
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Managing Currency Risk - the options

• Try to insist on buying in Sterling - impossible?
• Do nothing - high risk
• Buy at Spot and hold funds on a currency account
• Fixed Forward Contracts
• Option Forward Contracts
• Structured deals for higher amounts and more
  complex transactions eg Vanilla Options
• Best form is Self-Hedging

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Executive Summary

• The Holy Trinity
• Cash Resources
• Risk Mitigation
• Finance
• Our solutions
• Trade Cycle Finance
• Capital Equipment Finance
• Other methods
• Protecting against Exchange Rate Movements

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