UniCredit has used an innovative financing solution combining letters of credit (L/Cs) with forfaiting to provide supply chain finance for a transaction involving a highly-rated supplier and a lower-rated buyer according to the Italian banking and financial services company's director of global transaction banking, Luis Quilico.

In an article written for Global Banking and Finance Review, he says the solution is particularly relevant as the global economy struggles under the strains of the coronavirus pandemic.

The challenge

The buyer, an emerging-market buyer in the oil and gas industry, was looking to extend its payment terms with a larger supplier in the US in order to enhance its cash flow position.

But the US supplier was uncomfortable extending payment terms, due to the perceived risk.

Supplier concerns

In particular, it was concerned that it would not be able to recoup its capital in the case of non-payment.

Extending payment terms would also incur costs for the supplier, creating a liquidity gap that would need to be bridged via financing.

Solution

To solve this problem, the buyer turned to an innovative solution, whereby UniCredit issued an L/C guaranteeing payment of the buyer, through which the US supplier could request a cash advance against presented documents.

This offered quick, secure liquidity at an advantageous financing rate that could not be achieved through supply chain financing under the circumstances.

The buyer essentially paid the premium for its own risk by issuing the L/C, while the supplier paid for the liquidity through forfaiting. This ensured that the financing costs for the supplier were better aligned with those of its existing revolving credit facility.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.