The Client’s sales contract and Customer payment

The Client must have acceptable and secure conditions of sale to a Customer who a lender knows can pay. It is normal in such contracts that:

• Goods are not delivered on “Sale or Return”
• Payment will be on delivery, or by incoming letter of credit assigned to a lender, or…
• The Customers get credit because they are insurable, or there is a spread of acceptable Customers.

There will normally one of the following methods under which a lender can recover their funds:

1. The Customer pays a lender to get access to the Goods, usually when in transit to them, or
2. The debt from the Customer is assigned to a lender under a factoring agreement  (the Customer might be a leasing company for the company using the Goods), or
3. The sales contract with the Customer is novated to a lender. The Client delivers the Goods as a lenders agent and invoices the lender, and the lender sells the Goods (or Services) to the Customer who then pays the lender. This method is often used when there are other funders to the company to avoid conflicts in agreements, or
4. Debts from the Customer are assigned to an acceptable factoring company who pays a lender direct

The Client’s purchases and payment to the supplier

Before a lender can buy any Goods or Services it needs to be confident about the process to a lenders repayment, and the risks in the Client’s circumstance. That will be a matter for continuous review.

There are normally the following methods of buying from suppliers:

1. For suppliers in the UK a lender invariably buys on normal credit. The lender issues a Supplier Undertaking to confirm the terms under which the lender will pay the Client’s order to the supplier. The supplier invoices the lender and can credit insure debts from us. Fundamentally, a lender pays if the supplier meets their contractual commitments. Payment is anything from 7-90 days from supply, as is separately agreed.
2. For suppliers in the EU a lender would expect to use the same process. Occasionally a lender uses LCs at the supplier’s insistence, but LCs are rarely the best way to secure the EU supplier.
3. For suppliers outside the EU there are four purchasing options:
   1. Supplier Undertakings (SU) are the normal method from Western economies
   2. Letters of Credit (LCs) are used where the local regulations require it, eg Bangladesh and Sri Lanka, and sometimes in purchases from China and other FE countries, especially for the first purchase from a supplier. They are mostly used where the supplier needs an LC to get local funding to enable their supply.
   3. “DP” (Documentary Presentation, also known as Cash Against Documents – CAD) is the most common method for purchasing from the FE. This is also common when buying from South America, Russia, and many other countries where Goods come by sea. A modified DP process can also be used for Goods supplied by air. In exchange for payment a lender buys title and the relevant documents, eg Bills of Lading. DP is much cheaper than LCs.
   4. “DA” (Documentary Acceptance, also known as Documentary Drafts) is cheaper than DP. In this process a lender takes the Bills of Lading (or other documents required for customs clearance) in exchange for accepting a Bill of Exchange payable, say, 60 or 90 days after date of shipment. Although this sounds as if the supplier gets paid later, they might get paid much earlier if a lender sends them the Bill of Exchange soon after shipment and they discount the insurable Bill at their bankers.

Trade finance lenders also normally pay:

• Import VAT and duty. When the Goods are imported into the UK a lender normally uses a duty deferment bond to pay the duty and input VAT. To do this a lender needs to have an input invoice from the supplier, or from the Client if the supplier has invoiced them.
• Freight and Insurance. When appropriate a lender normally also pay for these.