SME Clinic

Q My company was incorporated last year and we are in the wholesale, import and export business of computer hardware and peripherals.

Our suppliers are the distributors of established brands and expect us to pay on cash terms. However, our overseas buyers are paying us through 180-day letters of credit.

We have approached a few banks to request banking facilities but have been told that our track record is too short.

What can we do to obtain some form of financing from the banks? Also, the letters of credit from my overseas buyers are issued by their local banks. How can I be assured of payment from them?

A Start-ups like yours often find it difficult to obtain financing from banks, most of which require the lender to have been in business for at least two or three years.

However, banks may be more willing to offer banking facilities if you are able to pledge some acceptable security as collateral, usually cash or property.

In the structure you described above, you are paying cash to your suppliers, and are selling to your buyers on 180-day letters of credit. Therefore you have a funding gap of 180 days.

One solution would be to get banks to provide facilities against the letter of credit issued to you.

This is usually referred to as "discounting" the export letter of credit by the bank.

In order to "discount" the letter, you will require sufficient credit lines from banks, and the letter of credit will also need to be issued by an overseas bank which your bank is prepared to accept.

Discounting usually allows you to draw up to 100 per cent of the letter of credit value in the form of a loan. It is recommended that you use the same bank for advising, negotiating and discounting so that you need to deal with only a single point of contact.

If the bank that issues the letter of credit is from a bank that you have concerns about, you may request that you bank "confirms" it before discounting it.

Confirmation will eliminate the risk to you should there be adverse news of the issuing bank or the country where it is located. However, there will be additional costs involved. Here are some alternative solutions:

  • Ask for a Standby Letter of Credit. This is like a guarantee that can be pledged to your bank for loans if your buyer repeatedly buys from you. It is not suitable for a one-off arrangement.
  • Reduce the 180-day letter of credit term. Most sellers finance shorter periods, so consider reducing this to 150 days, then 120 days to ease the burden on your cash flow.
  • Consider an incentive (discounted prices, for example) for the shortened credit term to your buyer. If your cost of borrowing is 5 per cent a year, you could consider giving a discount of 3 per cent a year to the buyer, which will ease your cash flow further.
  • Provide a letter of credit to your seller for the purchase price. This will continue to give your seller comfort that you can pay, but get some credit terms of maybe 30 days with the seller to shorten the funding gap further.
  • Ian Teo, head of business banking, Standard Chartered Bank (Singapore).
  • Do you have a question for an expert? Send your SME-related queries to yasminey@sph.com.sg.
A version of this article appeared in the print edition of The Straits Times on October 12, 2016, with the headline 'SME Clinic'. Print Edition | Subscribe