Key person protection is important for business continuity and to protect against financial loss in the event a key person dies or becomes critically ill. It helps minimize business interruption, ensures loan obligations are met, and protects startups and management buyouts that rely heavily on certain skills and relationships.

1. The Finance Factor
4th July 2012

2. Seven Deadly Sins of
Raising Finance
Yvette Coles
Finance Coach

3. Finance Workshop Agenda
• Introduction to Programme
• The “Seven Deadly Sins” of Raising Finance
• Working Capital Management, Budgeting & Tax
Planning
• Funding Options for Growth
• Invoice Finance
• Asset Finance
• Financial Planning for Business Owners
• Trade Finance
• Questions & Next Steps

4. The “Seven Deadly Sins” of Raising Finance
1) Asking for Too Little, Too Late
• Plan Ahead
• Working Capital Budgeting for Growth
• Capital Expenditure Requirements
• Invest in Relationships

5. 2) Jumping In Without Considering All Your Options
• Banks
• Specialist Finance
• Government Backed Schemes
• Money for Nothing
• Investors

6. 3) Failing to Provide enough Financial Data
• Quality Financial Information is Critical
• Market Research
• Credible Assumptions
• KPIs
• Serviceability - Capital & Repayment

7. 4) Skipping Over non Financial matters
• Business Acumen
• Track Record
• Culture of Organisation
• Management & People
• Operations & Processes
• Customers
• Competition
• Risk Management

8. 5) Underestimating what`s involved in Investment
• Challenges
• Timeframes
• Personal Commitment
• Due Diligence
• Negotiations
• Valuation

9. 6) Not being sufficiently Attractive to Investors
• Investors Options
• Reality of Success
• Growth Potential
• USP
• IP
• Exit Strategy

10. 7) Not Delivering a Great Pitch
• Plan
• Prepare
• Practice
• Props
• Professional Support

11. Remuneration Planning, Capital
Allowances & R&D Tax Credits
Martin Atkins
Francis Clarke Accountants

12. Understanding Finance For
Business
TAX, TAX, TAX
Martin Atkins

13. Subjects to Cover
• A little about us
• Budgeting, Cashflow and Working Capital
• Remuneration Planning
• Capital Allowances
• Reliefs for Innovation (R&D and PatentBox)

14. A Little About Us…
• Established over 90 years
• 7 offices across region
• Over 350 staff and 48 partners
• Award winning

15. Budgeting, Cashflow and
Working Capital
• Planning
• Monitoring
• Problems
• Solutions

16. Remuneration/Tax Planning
• Salary and Dividends
• Income sharing
• Home as office
• Vehicles
• Other sundry items (phone, staff party, goodwill)

17. Capital Allowances
• Annual allowances
• What qualifies?
• Vehicles
• Retrospective building claims

18. Reliefs for Innovation
• Research and Development
• PatentBox

19. Register for access to factsheets,
updates and newsletters at
www.francisclark.co.uk

20. Break

21. Funding Options for Growth
Yvette Coles
Finance Coach

22. Funding Options for Growth
• Bank
• Alternatives
• Debt
• Equity
• Grants

23. Business Challenges
• Economic recovery – do we or don’t we?
• Business as usual or opportunity = RISK
• Intention to expand – but have the tools in place to support?
• Connected – Global Marketplace
• Right people/skills?
• Available resources/funding?
• Network – who to ‘tap into’ and when?

24. GROWTH
Entrepreneurial
Exploitation
Business Evolution
Fast Growth
Mature
Decline
TIME

25. Current Finance Landscape
• Banks – “Open for Business”??
• Risk Profile
• Financial Packaging – Capital
Expenditure/Working Capital/Expansion
• Asset Finance
• Invoice Finance
• Solutions For Business Schemes

26. Banks
• Risk
• Overdrafts & Loans
• Ability to Repay = Serviceability
• Financial Viability (Ratios)
• Security
• Track Record

27. Enterprise Finance Guarantee (EFG)
• Replaces SFLGS
• Accredited Lenders
• Min £1k Max £1m
• Refinance of existing debt
• Government Guarantee 75% on debt
• 2% premium
• Personal Security

28. Other Lenders (Debt)
• South West Loan Fund
• Funding Circle
• Regional Growth Fund – Assisted Asset
Purchase
• Cleantech Fund

29. Grants
• R & D Grant – TSB
• EU Grants – EEN
• Environmental – IYRE
• Grant for Business Investment (GBI)

30. Equity Sources
Investment for shares in a Limited Company
• Dragons Den!
• Friends, Family, Staff
• Crowd Funding
• Angel Investors
• SWAIN
• Venture Capital – YFM Ventures
• Private Equity
• Flotation/AIM listing

31. Characteristics of Equity
• Risk Capital
• Ownership dilution
• No interest cost but high returns required
• No Security
• No repayment until maturity
• Potential skills of investor
• Leverage for debt

32. Equity Statistics
• Most equity invested in mature larger
companies
• 6% of private equity into start up & early stage
companies
• 5% average success rate with angel investors
• Expensive money – ROI 35%+
• 6 months average lead time

33. Investor Attractiveness Criteria
• Management Team – experience & skills
• Strong USP – product/service
• Growth & future ROI
• Strategic assets or defendable IP
• Market research & demonstrable demand
• Commercial reality & scaleable
• High profitability & cash generation
• Committed to a credible exit strategy

34. Investment Ready Process
• Understanding Equity & Investor Attractiveness
• Valuing the Business
• Deal Structure/Negotiation/Due Diligence
• Taxation (SEIS & EIS)
• Professional Advisers
• Costs
• Timing

35. Invoice Finance
Ruth Bethel
Bibby Finance

36. Invoice Finance – what it is; how it works;
and how it might help your business to grow

37. Ruth Bethel
Business Development Manager
07889 643625

38. agenda
1. What is Invoice Finance?
2. Factoring – a description
3. Invoice Discounting – a description
4. What it costs
5. How to apply – what a financier asks for
6. Security
7. Additional “extras” – credit insurance
8. Specialist products offered
9. 1

39. What is Invoice Finance
Do you ever think – “if everyone paid what they owe me
I‟d be fine”?
Well invoice finance solves that cashflow dilemma,
where customers will pay you next month (or the month
after) but you have wages or suppliers to pay this month.
You send a copy of your invoices to your financier and
they advance you a percentage of the gross invoice
value.
Typically this is 75%-85%
You receive it usually the day after you upload (or email)
the invoice(s) to the financier
You get the rest, less the financier‟s fee, when your
customer pays.

40. Factoring
Factoring offers you cash
against your invoices
PLUS the factor will do
your credit control and
sales ledger administration
for you.
This can be done either in the name
of the factor or confidentially – as if
you were doing it yourself.

41. Factoring- money plus credit control
You issue your invoices to your
customer and send copies to your
factor. You have your money a day
or so later – and leave the credit
control to the factor. You should
have a dedicated professional credit
controller who will work hard to
develop good relationships with you
AND your customers. The factor will
phone, email and write to the
customers, and send monthly
statements.

42. Invoice Discounting
Invoice discounting just offers advances against
invoices without any credit control service.
It is usually offered to businesses that are large
enough to have their own credit controller and can
prove that they are effective in managing their
sales ledger and collection of money – the
financier wants to make sure they get repaid!
The business will need to provide regular
management information to the financier and
reconcile ledgers to them monthly.
The financier will also audit the business
regularly.

43. What does it cost?
There are two elements of the cost.
1. Service charge – expressed as a percentage of
the annual factored or discounted turnover.
This is usually subject to a minimum annual cost;
e.g. T/O £400k. Service fee 1.5% subject to an
annual minimum charge of £5,500.
2. Discount (interest by another name) on the
money advanced. Typically between 5%-8% per
annum. E.g. If a business‟s average advance was
£100,000 all year round, they would pay between
£5000 and £8000 discount (interest)

44. How to apply – what a financier looks for
Criteria is more stringent for invoice
discounting. This is a higher risk
product for a financier, so
businesses usually have to be
established with a history of making
profits. They also must
demonstrate ability to collect their
debts and run a computerised
accounts package like Sage. A
traceable paper trail is also needed,
with proof of deliveries or job sign
offs.

45. How to apply
You need to be prepared to supply both
financial and operational information to your
potential financier.
As well as wanting to know that your business
has a future and a game plan, the financier will
want to know that your paper trail is robust and
that the debt is collectable.
Your potential financier may want to conduct an audit of
your business which will involve spending most of a day
with you

46. How to apply; the info you will need
Sales ledger (customers who owe)
Purchase ledger (supplier/bills to pay)
Your latest accounts and/or MI
Details of your major customers
Examples of paid and outstanding invoices
with paper trail, (delivery notes/sign offs)
Proof that your VAT and PAYE are paid
You will need to provide full details of your
company and ID for Directors and major
shareholders to comply with UK law.

47. Security
You will be asked for:
A debenture –from a limited
Company
Possibly a bill of sale if unlimited
A personal guarantee from
Directors
Other priority deeds if appropriate

48. Addition options: Credit insurance
NOTE: this may not be an option as your
financier may insist that you have this
protection
Credit insurance covers failure of your
customers: i.e. If your customer goes bust the
insurance will pay out – provided they agree
cover in the first place
Like all insurance, it is up to the insurer to
agree to take the risk
Expect to pay between 0.5-1.5% of T/O

49. Specialist products offered
Export factoring. Usually restricted to
20/30% of ledger. 100% available from
Bibby Factors International Ltd
Construction sector will struggle to
get funding as high risk of failure:
Exception, Bibby Construction Finance
IT. Again, not a popular sector as
products unseen and often subject to
disputes.

50. Conclusion and ANY QUESTIONS?
Thank you for your attention
I will be happy to speak to
individuals during lunchtime
if anyone has more
questions after this session

51. Lunch & Networking

52. Asset Finance
Oliver Nash
Armada Finance

53. Independent Financial Planning
for Business Owners
Martyn Sullivan
St James Place

54. Financial Planning for Business
Owners
Martyn Sullivan BA (Hons) DipCII
Associate Partner
The Partner Practice represents only St. James‟s Place Wealth Management plc (which is authorised and
regulated by the Financial Services Authority) for the purpose of advising solely on the Group‟s wealth
management products and services, more details of which are set out on the Group‟s website
www.sjp.co.uk/products. „The St. James‟s Place Partnership‟ and the titles „Partner‟ and „Partner Practice‟ are
marketing terms used to describe St. James‟s Place Representatives

55. Purpose of today
• Introduction
• RDR
• Shareholder protection
• Loan protection
• Key man protection
• Gender Neutral Pricing
• Pension Reform
• Close and Questions

56. Introduction

57. Introducing St. James‟s Place Wealth
Management
• An award-winning, FTSE-250 Company
• Founded in 1991 by Lord Jacob Rothschild,
Sir Mark Weinberg and Mike Wilson
• Providing tax-efficient wealth management
solutions to private and corporate clients.
• £31.5 billion client funds under management
• Over £24 million donated to the St. James‟s
Place Foundation

58. Wheel of Corporate Services
Retirement
Planning
Tax and Corporate
Accountancy Protection
Wealth
Exit Trustee
Management
Planning Investment
Insurance Group
Broking Pensions
Employee
Benefits
Some of the above will involve services that are separate and distinct from those offered by St. James‟s Place

59. The Retail Distribution Review
(RDR)

60. The Financial Services Profession
• 1985 – UK population 60 million
• 365,000 Registered Financial Advisers
• 2007 – UK population 61.7 million
• 57,000 Registered Financial Advisers
• 2009 – UK population 62 million
• 25,000 Registered financial advisers
• How many advisers are expected to be left standing
post 2012?

61. The Financial Services Profession
By 2012 it is estimated there will be only
10,000 qualified professional
advisers…….and with a UK population of 62.3
million.

62. Worrying statistics……..
• 95% of businesses have at least one key individual.
• 43% of businesses have unprotected corporate debt
• 39% of business owners expected their businesses to fold
within 18 months of the death or critical illness of a key person
• A third of businesses (33%) have no Share Protection in
place.
• 58% of businesses have no formal agreement to establish
what would happen in the event of the death or critical illness
of a business owner.
Source: L & G Business Protection Research

63. Key questions?
• How will you continually cover your costs / make a profit??
A great many business owners we speak to currently are
managing to cover wages and no more..
• How will you cope if a key employee dies or is unable to
work?
• How will you eventually exit your business?
• What happens to your business if you die/a business
partner dies?
• Will your family be looked after?
• Will your business partner/yourself be looked after?
• What plans have you made to lessen the impact of
forthcoming and future legislation changes?

64. SHAREHOLDER PROTECTION

65. Aim
This section is designed to provide an overview of
shareholder protection, the issues and tax position of this
type of planning

66. Agenda
• Why is shareholder protection important?
• Calculating the value of the company
• How do you write shareholder protection?
• The shareholder agreement
• Wills

67. Why is shareholder protection
important?
• Business continuity
• Funds are available to the people who want to buy the
shares
• To improve the tax position on the death of a
shareholder
• The deceased‟s estate receives the funds in a timely
manner

68. Calculating the value of the company
• Multiple of maintainable profits
• Dividend Yield
• Net Assets
• How providers assess the level of life cover

69. How do you write shareholder
protection?
• Own Life Plan
• Business Trust
• Equalisation of premiums
• Critical Illness Cover

70. The shareholder agreement
• Why set up a shareholder agreement?
• Cross Option Agreement
• Single Option /Critical Illness
• Buy and sell agreement

71. Wills
• Why should Wills be reviewed?
• How to structure the Will correctly
• Working example

72. Shareholders Policy Beneficiaries
= =
placed in trust
Life Assured Co-Shareholders
Shares passed Proceeds
via will/trust of Policy
Proceeds
Discretionary Trust
exchanged Co-Shareholders
Shareholder’s Will for shares

73. Key Person Protection

74. Aim
This session is designed to provide an overview of
key person protection the issues and tax position
of this type of planning

75. Key Person Protection
Who is a key person?

76. Why is Key Person protection important?
• Loss of profit – key sales person
• Minimise business interruption – future projects /
important contacts
• Loan Protection – Is KP guarantor with the bank for
loan?
• Business start up – combination of key individual skills in
early stages
• Management buy out – Investors/backers request cover
for managers key to success

77. How to structure key person cover?
• Life cover
• Income Protection
• Critical Illness Cover

78. How do you calculate the cover
required?
• Multiple of profits – 2 x gross profit; or 5 x net profit (higher in
some cases)
• Multiple of salary – up to 10 x gross salary
• Proportion of salary roll – contribution to turnover / can be
distorted via low salary, high dividends
• Outstanding Loans

79. Questions to consider
• If a key person died what would be the effect on the business
value?
• How long would it take to replace a key person?
• How much would it cost to replace a key person?
• Do any of the Directors or Partners have outstanding loans to
the business?
• Will the business be able to service their existing loans on the
loss of one of their key people?

80. LOAN PROTECTION

81. Loan Protection
What is it for?
Businesses, partnerships and sole traders need to
borrow for:
• New machinery
• New premises
• Credit or overdraft facility
• General development/expansion
Amount of cover = sum of the above

82. Loan Protection
Tax treatment...
Taxation of premiums
• Premiums are not an allowable deduction from profits
• They are regarded as part of the cost for raising the
capital
Taxation of benefits
• Generally not liable to Corporation Tax
• Treated as a capital receipt and not taxed

83. Corporate Protection
Summary...
Shareholder Protection
is to ensure that both
the family members and
co-shareholders are
protected on
death/critical illness of a
shareholder.
Key Person Protection
is to replace loss of Loan protection is to
profits caused by the repay outstanding
death or serious debts or loans in those
illness of the key circumstances
person

84. Gender Neutral Pricing

85. Agenda
• Changes in protection pricing
• Important Considerations

86. Gender Neutral Pricing
• Challenge by Belgian consumer group, Test-Achats,
regarding car insurance
• European Court of Justice ruling 1 March 2011
• Cannot use gender to charge different premium rates
• No appeal allowed
• Effective from 21 December 2012
• Life assurance, pension annuities, car insurance

87. Possible Effect on Protection
• Female life and critical illness cover up by 20 – 25%
• Male income protection rates up by 10 – 20%
• Female income protection rates down by 15 – 25%
• Actual changes unknown but rates will change

88. Act Now
• Plan must be issued by 21 December
• Application status is not issued
• Applications needing underwriting to providers by
September
• Providers may impose gradual increases at any time

89. Summary
• Protection rates are at an all time low
• ACTION
– If you need to audit your protection arrangements
then act now with the view to secure protection rates
before the costs rise

90. Pension Reform - Auto
Enrolment

92. Headlines….
More people having to defer retirement
Source: Daily Telegraph, 29 August 2011
Half of pensioners too broke to stop work
Source: Daily Mail, 15 January 2011
Millions must work after 70
Source: Daily Express, 18 May 2011

93. Issues to consider….
We are all living longer!!
We will all inherit less “The Parent
Trap”!!
We will all be working longer!!

94. A third of today‟s babies
will live to be 100
Source: Daily Telegraph, 27 March 2012

95. “Till death us do work….
Children born today may have to wait
until they are 80 before they can
retire”
Source: Metro, 22 March 2012

96. The Over 75‟s
• 2008, 9.5 Million people were aged 75
or over
• By 2033 this will increase to 17.3
Million
• Businesses will have to adapt!
Source: Daily Mail December 2012

97. “Many millions of us will be spending
around a third of our lives or more in
retirement”
Source: Steve Webb, Pensions Minister,
Source: Steve Webb, Pensions Minister, DecemberDecember 2010
2010

98. Most believe “retirement is over”
Nearly three quarters of people believe
retirement as we currently understand
it will not be possible in the future
Source: BBC Newsnight, 7 September 2010

99. “Where as it used to be the case
that up and coming generations
tended to be more prosperous
than their parents, now we‟re
going to be in reverse”
Source: Historian, Jeremy Black

100. “Work until 70 to pay for your
old age”
Source: Daily Telegraph – 3 January 2012

101. Retirement Provision
• 4 in 10 companies said that by 2020, staff will work
to 67.
• 1 in 6 companies expect Retirement age to be
between 68 and 70.
• 9 out of 10 workers will work part-time/set-up own
business to supplement income.
• 9 out of 10 final salary schemes shut to new
members.
Source: Daily Telegraph – 3 January 2012

102. Alarming decline in saving for
retirement
Source: Daily Telegraph – 30 December 2011

103. Income needs in retirement are not
smooth or certain
Active Life –
Higher Income
Income
Residential Care –
Higher Income
Less Active –
Lower Income
Age

104. Back to the Future!
Life used to be easy!
£ £
Do you want a small one or a big one?

105. Back to Basics
• How are you going to afford to retire?
• My business is my pension?
• Inheritance?
• Downsizing?
• Property portfolio?
• Investment Portfolio?
• Pension portfolio?
• What does retirement look like for you?
• Are you prepared to work until 75?
• What provisions have you made already?

106. Workplace Pension Reform
• The Government wishes to promote personal
responsibility for retirement savings
• State Pensions are currently unaffordable and this
will only get worse as we live longer
• The current pension system does not reach all of the UK
population
• Employers will share the responsibility (and cost) of
employees retirement
• Auto enrolment ensures employees join an employer‟s
pension scheme
• Where no employer scheme exists then a Qualifying
Workplace Pension Scheme (QWPS) will need to be
established. The National Employment Savings Trust
(NEST) is an example of one.

107. Timetable
• Auto enrolment will start from 1 October 2012
• Exception – large employers with 50,000 or more
employees are able to start earlier
• Start date (known as the staging date) for
individual employers depend on size and PAYE
reference
• Employers with several PAYE numbers, start from
the earliest date
• Minimum contribution rates phased in over a 4 year
period commencing October 2012.

108. Minimum Contributions
of „Banded Earnings‟
Minimum Minimum
Tax Relief
Employer Employee
Oct 2012 – Sep
1% 0.8% 0.2%
2017
Oct 2017 – Sep
2% 2.4% 0.6%
2018
From October 2018 3% 4% 1%

109. Auto enrolment - the basics!
• Employees aged 22 to State Pension Age and
• Working or ordinarily working in the UK and
• Earning more than the „income trigger‟ for automatic
enrolment (£8,105 in 2012/13) and
• Not currently in a QWPS.

110. Auto enrolment - the basics!
• Default: Must be auto enrolled into a QWPS within one
month of the later of:
– the employer‟s staging date
– date of joining the employer
– attainment of age 22
– exceeding the „income trigger‟.
• An employer can use the optional waiting period of three
months rather than the default one month before an
employee needs to be automatically enrolled.

111. Qualifying Workplace Pension Scheme
(QWPS)
• All employers must automatically enrol employees into a
QWPS
• Note there will be no exemptions!
• Includes business owners employing their spouse!
• Employers will be able to certify that their current
Defined Contribution scheme meets the required
contribution levels but
– This scheme may only be used for existing members if the auto
enrolment requirements are met
• Where no QWPS already exists, the employer has to
designate an alternative for auto enrolment.

112. Auto enrolled scheme
• Alternative qualifying pension includes a personal
pension or occupational pension scheme
• Employees who choose to opt out have to be
automatically re enrolled every three years when they
can choose to opt out again
• There is some flexibility around the timing of re
enrolment of employees. This allows employers a
window of three months before and after the scheduled
date
• If an employee volunteers to rejoin, the employer must
allow this at least once a year.

113. Nest (National Employment Savings Trust)

114. What is NEST?
• A QWPS
• Designed to meet needs of low to moderate earners and
their employers
• Can be used to fulfil auto enrolment duties
• A trust based defined contribution scheme
• Run by NEST Corporation – a not for profit corporate
trustee
• Contributions currently subject to maximum of £4,200 pa
• No transfers in or out permitted, to be reviewed in 2017
– Except monies in or out under a pension sharing order and at
retirement to purchase benefits
• Charges are 0.3% AMC and contribution charge of 1.8%

115. Scheme Registration
• The employer must advise The Pension Regulator
within four months of the employer‟s staging date
details of their QWPS
• And they must reconfirm details of the QWPS every
three years

116. Penalties!!
The Pension Regulator will have the ability to impose
penalty notices
if an employer does not comply with their new duties
• Fixed penalty of £400 where an employer fails to
respond to a warning notice from The Pension Regulator
• An escalating penalty of £50 to £10,000 a day
(depending on the size of the employer). For example if
the employer fails to pay contributions on time
• Fixed penalty of £1,000 to £5,000 for prohibited
recruitment conduct, for example where an employer
screens job applicants for their intention to join the
pension scheme.

117. Things for you to consider
• What is your staging date?
• Can you use an existing scheme if it qualifies (check with
scheme provider)
• Are you able to amend an existing scheme to meet
qualifying criteria
• Either, set up a new scheme which meets the qualifying
criteria; and/or
• Use NEST – for some or all of your employees
• Offer a combination of options for different areas of the
workforce.

118. Assessing the impact on costs and proposed
strategies for minimising this
• Review costs of different contribution options (certify
alternative to „banded earnings basis‟)
• Strategies for minimising costs including review of salary
sacrifice
• Consider impact on current reward strategy
• Review of payroll, HR and admin processes and relevant
support

119. Where can I obtain more information?
The Pension Regulator (including staging dates)
Visit www.thepensionregulator.gov.uk/pensions-reform
Call 0845 600 1011
NEST
Visit www.nestpensions.org.uk
Call 0300 303 1949

120. Next Steps
• Know when you need to act
• Start the planning process
• Brief key management personnel
• Mobilise an implementation team
• Communicate the changes to staff

121. Other areas of Financial Planning not
covered…
• Business Profit Extraction
• Business Succession Planning
• Relevant Life Plans
• Exit Strategies
• Investment planning for business owners

122. QUESTIONS?

123. Important Information
Please be aware that past performance is not indicative of future performance
and the price of units and the income from them may go down as well as up.
The information contained herein represents the view and opinions of the
individuals quoted, and not those necessarily held by other investment managers
or St. James‟s Place Wealth Management.
Tax rates, trust information and all other limits shown in the this presentation or
discussed are set by the UK Government and correct as at 30/04/2012.
UK members of the St. James Place Wealth Management Group are authorised
and regulated by the Financial Services Authority. The „St. James‟s Place
Partnership‟ and the titles „Partner‟ and „Partner Practice‟ are marketing terms
used to describe St. James‟s Place representatives. St. James‟s Place Wealth
Management Group plc Registered office: St. James‟s Place House, 1 Tetbury
Road, Cirencester, Gloucestershire, GL7 1FP.
St. James‟s Place guarantees the suitability of the advice given by members of
the St. James‟s Place Partnership when recommending any of the wealth
management products and services available from companies in the group,
more details of which are set out on the Group‟s website www.sjp.co.uk/products

124. Break

125. Trade Finance
Tim Burden
Lloyds TSB International
Trade, South West

126. Introduction to Trade Finance
Tim Burden
International Business Manager
&
Nigel Scott
International Business Manager

127. Introduction to Trade Finance
Agenda
 What is Trade Finance
 The Impact of Foreign Currencies
 Why use Trade Finance
 Examples of Trade Finance
Page | 127

128. Introduction to Trade Finance
What is Trade Finance?
Trade Finance is a term for services provided by a bank to assist
in financing of Trade Transactions and can include:
 Trade Services
 Import L/C
 Export L/C
 Export L/C Confirmations
 Inward (import) Documentary Collections
 Outward (export) Documentary Collection
 Guarantees, Bonds, Indemnities
 Standby L/C‟s
 Trade Finance
 Import Finance
 Pre-Shipment (Export) Finance
 Post Shipment Finance
Page | 128

129. Trade Transactions involve
Seller
Movement of
Goods & Trade Movement of
Cash
Documents
Buyer
Page | 129

130. Introduction to Trade Finance
Foreign Exchange - the impact of using other currencies
UK Furniture Business who purchase from China and sell to UK retailers.
 Receive an order on 01 January 2010 from John Lewis to supply 1000 sofas in
April 2010 @ £700.00 per sofa (they expect to receive £700,000.00).
 Cost of Goods to Co - $1000.00 per Sofa.
 Exchange rate at the time of the order is 1.6100.
 At this exchange rate each unit costs £621.11
 Expect to make £78.89 per sofa; a total margin/profit of £78,890.00
 Company will receive the goods in April and have 90 day payment terms
(therefore, will be settling the invoice on 01 July 2010)
 They have the choice of fixing the exchange rate at 1.6100 for delivery in June
or doing nothing and paying at whatever the exchange rate is when they come
to settle the bill.
Page | 130

131. Introduction to Trade Finance
What happened to the rate?
Page | 131

132. Introduction to Trade Finance
Rate went to 1.5060 – increasing costs reducing GPM
Page | 132

133. Introduction to Trade Finance
Lock in Profit, or take a risk?
PROTECTED GBP/USD Rate GBP cost from Profit/Loss
POSITION $1,000,000.00
supplier invoice
YES 1.6100 £621,118.01 £78,890.00
NO 1.5060 £664,010.62 £35,997.39
Break Even 1.4285 £700,000.00 £0.00
Page | 133

134. why use trade finance?
Page | 134

135. Introduction to Trade Finance
why use trade finance…
 provides transactional borrowing aligned to underlying contract
(not balance sheet driven)
 Gives a pre-shipment conditional guarantee of payment to suppliers
 protect title to goods pending receipt of payment
(documentary collection / export letter of credit)
 improve end-buyer (debtor) risk
(export letter of credit / export letter of credit confirmation)
Page | 135

136. Introduction to Trade Finance
why use trade finance…
 assist exporters to raise finance to complete order
(export letter of credit)
 Assist importers to finance goods
(import letter of credit)
 speed up receivables
(export letter of credit / avalised bill of exchange
 slow down payables
(import letter of credit / documentary collection / avalised bill of exchange)
Page | 136

137. Introduction to Trade Finance
Please Remember……
In order to provide trade finance facilities, the bank will usually want to be
involved in the underlying transaction, i.e. have „control‟ of commercial &
shipping documents relating to the transaction.
The banks ability of provide trade finance therefore depends upon the
payment terms agreed between the importer & exporter.
For this reason early involvement of the bank in any transaction where
finance might be required is essential.
Page | 138

138. Introduction to Trade Finance
CASE STUDIES
Page | 142

139. Introduction to Trade Finance
case study 1 – import finance
 wholesale & retail of books, stationary & toys
 funding through CID line – 85% advance rate – including export
lines in USD & EUR
 new large order received
 50% Gross Margin
 goods sourced from suppliers in Far East
 suppliers require payment when goods on water
 additional $320K required – but current facilities fully utilized
 but CF wont discount until goods delivered and invoice raised
Page | 143

140. Introduction to Trade Finance
case study 1 – Import Finance
1 30 35 60 65 170
Supplier Goods Goods Arrive Goods Cleared End-Buyer Pays
Order Shipped In UK Port & delivered
Placed
Supplier
Payment
Made Invoice raised
& Discounted
Increased
Overdraft Invoice Discounting
Required
Page | 144

141. Introduction to Trade Finance
case study 1 – Import Finance
 Import Finance agreed on a documentary collection basis
 as goods „pre-sold‟ we pay collection using import loan and release
documents to customer against trust receipt
 goods cleared & delivered to buyer
 invoice raised and discounted – proceeds repay import loan
 safer then overdraft lending because
 we control the payment to supplier and retain ownership of stock
 we know the end buyer and receive repayment through CF.
Page | 145

142. Introduction to Trade Finance
case study 1 – Import Finance
1 30 35 60 65 170
Supplier Goods Goods Arrive Goods Cleared End-Buyer Pays
Order Shipped In UK Port & delivered to
Placed ASDA
Supplier
Payment
Made Invoice raised
& Discounted
Import Loan Invoice Discounting
Page | 146

143. Introduction to Trade Finance
Case Study 2 – Pre Shipment Finance
 Manufacturer of Air Traffic Control Simulation Systems
 Undertakes contracts around the world
 Received order for delivery to Buyer in Turkey
 End buyer payment terms - Letter of Credit
 Working Capital required to fund project build stage
 After due diligence agreed a Pre Shipment Finance Facility
Page | 147

144. Introduction to Trade Finance
Export Order timeline
Day: 1 30 60 90 120 127
Activity:
Order hardware Pay developer Pay developer
£250k (£0) overheads (£50k) overheads /goods
Receive LC ready to ship (£50k)
from Turkish
Bank Pay developer Ship goods/present
Pay developer overheads (£50k) docs under LOC
overheads (£50k) for first 40%
Pay hardware of payment (£1.2m)
Supplier (£250k)
Page | 148

145. Introduction to Trade Finance
case study 3 – post shipment finance
 established UK exporter (middle-man)
 contract to supply kit to middle east
 goods delivered in stages over 7 months
 end-buyer seeking finance over 6 months post delivery
 suppliers offering 60 day open a/c terms
 contract and payment terms beyond scope of company‟s balance
sheet
 but very good track record in the sector & region
Page | 149

146. Introduction to Trade Finance
case study 3 – post shipment finance
1 7 42 62 102 242
Order Orders Placed Goods Shipped End-Buyer Pays
Received With Suppliers To End-Buyer
60 Days Credit
Goods Received Suppliers Paid
From Suppliers
Funding Gap
140 days
Page | 150

147. Introduction to Trade Finance
case study 3 – post shipment finance
 end-buyer able to provide series of letters of credit
 usance terms of 6 months from shipment agreed
 with risk on middle eastern bank
 bank and country risk acceptable to LTSB
 „post-shipment‟ discount (without recourse) of middle eastern banks
payment obligations (payment risk confirmed by LloydsTSB)
Page | 151

148. Introduction to Trade Finance
case study 3 – post shipment finance
1 7 42 62 92 102 427
Export L/C Orders Placed Goods Shipped L/C Acceptance L/C Paid &
Received With Suppliers To End-Buyer & Discounted Discount Repaid
Docs Presented
60 Days Credit
Goods Received Suppliers Paid
From Suppliers
Page | 152

149. Introduction to Trade Finance
case study 3 – post shipment finance
 bank & country risk mitigated
 not balance sheet driven
 suppliers paid on normal terms
 exporter paid cash on shipment of goods
 end-buyer has 12 Months credit
Page | 153

150. Introduction to Trade Finance
If your business requires trade finance facilities, your bank will usually want to
be involved in the underlying transaction, i.e. have „control‟ of commercial &
shipping documents relating to the transaction.
The banks ability of provide trade finance therefore depends upon the
payment terms agreed between the importer & exporter.
For this reason early involvement of the bank in any transaction where
finance might be required is essential.
 Government Support is available for Exporters
 UKEF – Working Capital Scheme
 UKEF – Bond Support Scheme
 UKEF – Insurance scheme
Page | 154

151. Introduction to Trade Finance
QUESTIONS?
Page | 155

152. Questions, summary &
coaching engagement

153. Summary
• Overview of Coaching Support
• Coach Engagement 1:1
• 01275 376233
• www.businesswest.co.uk

154. Thank you for attending
The Finance Factor
workshop.