Structured Trade Finance (“STF”) is a growing form of finance which aims at circumventing some of the funding challenges identified in our article last week.
STF involves the creation of instruments (“structures”) that “mitigate” the unique risks inherent to participants in a transaction which include:
Inadequate collateral security
High cost of debt
Short term nature of funding
Inadequate markets and offtake arrangements
Failure to demonstrate track record and historical performance
STF was mainly used in international trade but has since been adopted for local banking and microfinance transactions and the most common instruments locally are:
Factoring and reverse factoring — this is a service offered by financial institutions whereby clients (traders) can “sell” their trade receivables at a discount to raise funding. The financial institution in this case is referred to as a “factor”. Factoring allows the trader to offer favourable payment terms to clients but still maintains a healthy cash-flow for the business. This works particularly well for small traders who supply goods to big retail chains who usually prefer 30-60-day payment terms. As part of SME promotion some corporates under Confederation of Zimbabwe Industries had reverse factoring arrangements which allowed their suppliers to receive payment upon supply from a designated factor.
Order Finance — Order Finance allows a trader access to finance on the back of an order from a credible buyer. The financier would typically fund the production process or purchase of the materials required to fulfil the order. This particularly works when the buyer promises to pay on delivery and the trader has capacity to fulfil order but lacking in working capital funding.
Invoice discounting — this is closely linked to factoring except that this involves the financier discounting the invoice amount for a specific invoice after confirmation of receipt of goods or services. It differs from order finance since invoice discounting relates to pre-delivery finance, whilst invoice discounting relates to post-shipment finance.
Contract farming/mining- this has become popular in Zimbabwe since most of the people with land or mining rights have limited access to finance. The transactions revolve around the “offtaker” seeking to buy produce from the farmer/ miner but the farmer/ miner lacks capacity to deliver. The offtaker engages a financier who will fund the process of “production” with the offtaker taking up all the produce and paying the farmer/miner the difference between selling price and production cost. The difference is then remitted back to the financier. The instrument guarantees supply to the offtaker and capacitates the producer.
Genesis Global Finance has, over the years, assisted a number of clients in structuring transactions designed to fit specific customer needs. Some of the transactions we have done include:
Maize imports — through the Grain Millers Association of Zimbabwe (GMAZ) we worked with small millers to access maize for milling. The structure involved the millers submitting bonds from institutional credit insurance guarantors which were pledged to the supplier’s bank. The supplier therefore got their payment early whilst the millers had the ample time to mill and offer favourable terms to clients before payment to supplier.
Maize purchase — through a collateral, managers funding was raised for a major grain buyer to purchase maize from farmers. This allowed the grain buyer to increase their intake without straining their balance sheet as the collateral for the funding was the product itself. The buyers were also able to supply and receive payment promptly.
Fuel facility for transporters — at the height of the drought years back a lot of NGOs were keen to distribute food to remote areas but lacked transport as major truckers were not keen to go to these areas. They had to rely on small transporters who unfortunately lacked working capital to purchase fuel a major component of the cost. On their part NGOs are not allowed to prepay for services before delivery. GGF structured a facility that allowed transporters to obtain fuel for payments on receipt of transport fees from the NGOs. The food was delivered and the transporters boosted their business.
Flight finance — the travel agency business is difficult especially for small/new players because the population that traditionally travel have some loyalty to their agents. Working with a travel agent a flight finance product was developed that targeted the “untravelled” market through discounts and value promotions. The travel agent boosted its revenue and people who previously could not “afford’ to travel are now able to travel through the product.
Please call our offices for a structured solution to your financial problem.
This article was compiled by Carlton Simbarashe Takawira a resource mobilisation consultant at GENESIS GLOBAL FINANCE. The contents herein are for information purposes only, and GGF does not accept responsibility for any loss arising from the use of materials or opinions contained in this article.