THE TRADE CYCLE PART II
Updated: Aug 8, 2018
Readers will recall that in part I of the article “Understanding the Trade Cycle & Credit Terms”, we explained that a business enterprise’s trade cycle is, in essence, the measurement of time that elapses between your outlay for payment, and the inflow received from your debtor.
We explained that typically, a bank overdraft facility is used to bridge the time period between cash flow out and cashing coming back in. In many cases this may not be the optimum method of financing the cash flow gap, because:
(a.) Typically, overdraft facilities are fixed at a certain level, and because of the inherently conservative nature of bank lending practices in South Africa, it is not always easy to increase an overdraft, and;
(b.) Existing bank facilities are normally used to fund the daily operations of the business, e.g. to pay rent, salaries, wages, electricity, vehicle expenses and so on.
It is in these circumstances, especially when the business is growing, that a separate trade finance facility, which does not affect your existing bank facilities, may provide the correct financing option.
In Part I we described how a typical trade cycle gap of 90 days can be bridged by using a trade finance facility from Anglo Cape. In the example used in Part I, we showed how Anglo Cape could make the payment to your supplier, and then draw an invoice on you (in S.A Rand to avoid currency fluctuations during the 90 days) at up to 90 days.
Although this is the standard model, we did mention that it is possible to vary this model.
The following are the most common variations:
1. In certain cases, your business may receive a period of credit from your supplier. For example, your supplier may only require payment 30 days from date of Bill of Lading. In this case, Anglo Cape would make the payment on your behalf after the 30 day period, and then still draw an invoice on you at 90 days, thus effectively giving you a 120 day credit period.
2. In exceptional cases, your business cycle may be more than 90 days, for example where you must pay for your goods well before they are shipped to you, or where you grant longer credit terms to your customers (not recommended, especially in the current tough economic environment, but sometimes unavoidable in order to secure the business.) In these cases, Anglo Cape, may, as an exception, draw our invoice on you at 120 days.
3. It is also possible to tailor our invoices to suit your cash flow. You may want our invoice split into, say, 3 separate payment dates, a common example being to draw 3 separate invoices at 60, 90 & 120 days, giving an average credit period of 90 days.
There are of course other variations, with the overall message being that a separate trade finance facility of the type offered by Anglo Cape can be tailored to your business’ particular requirements.
Please feel free to contact is for any further information you may require. We are happy to discuss any aspect with you.