In a major change in the provision of trade finance services at Lloyds TSB Corporate, the bank has combined its cash management and trade finance units to form a single department – Corporate Transaction Services (CTS). Peter Sargent, formerly head of international trade finance at the bank, is to become director of sales for the merged division.
The move takes advantage of two trends in corporate finance: the increasing drive for corporates to improve return on equity – or shareholder value – without external funding, and the improved efficiencies trade finance techniques can bring to corporate cash management, largely thanks to new technology.
“Cash management is now a major growth area in corporate finance – even to the exclusion of loans and overdrafts,” says Sargent. “Why? Because the impact of banks and corporates together focusing on the liquidity and profitability of all individual transactions – no matter where they lie on the value chain – has the potential to transform entire company or group balance sheets.”
The means for maximising this financial efficiency will be the online client-bank trade finance platforms such as Lots (the Lloyds TSB Online Trade Services platform).
“As the timeframe and error margin on cash movements becomes narrower due to online documentation and payment mechanisms such as Lots,” says Sargent, “there is a real opportunity for the micromanagement of payments and receivables to impact directly on the overall level of working capital – as well as the profitable use to which excess liquidity is put via the treasury portfolio.”
The impact of banks and corporates together focusing on the liquidity and profitability of all individual transactions has the potential to transform entire company or group balance sheets.
Lloyds TSB Corporate considers that this online precision allows a new degree of confidence when moving cash away from – and to – the well-hedged, high-value locations created for it by treasury and risk managers. This confidence allows the procurement and commercial functions of the company to be brought together into the same cash management framework, rather than making often contradictory demands at opposite ends of the value chain. Instead, the supply chain should be geared around orders, meaning the amount of time goods spend in the warehouse before sale should be reduced to a minimum.
“By combining these goals with the cheapest available mechanisms, such as bank-provided e-commerce solutions,” says Sargent, “the value-chain itself can become a driver of growth at all levels of the business. And the ultimate results will be less lazy capital on the balance sheet, less strain on both debt and equity capital markets funding, greater profitability from the treasury portfolio – and increased profitability on individual trade transactions.”
This ambitious agenda requires both bank and customer to build the best mutual understanding of the opportunities provided by the various “cash points “along the value chain, then the application of a broad range of trade and cash bank products to maximise those opportunities. In terms of accounts payable, the aim is to push out payment terms towards precise future dates. For receivables, it means piggybacking on the credit quality of counterparties to gain the fullest possible benefit from invoice discounting.
“Basic cash management products still equate to clearing and transmission services,” says Sargent. “But such basic products alone are not enough to maximise transactional profitability on trade transactions. This requires the application of cash accelerants to facilitate transactions and minimise company exposure via more efficient cashflows. Such products have often been developed for application to import and receivables finance, but can also be applied domestically – in the case of supplier finance, for instance.
“Alternatively, some banks – ours included – now offer the availability of working capital based solely on the comfort provided by a company’s outstanding receivables – meaning this short-term debt does not have recourse to the company balance sheet.”
The bank’s new focus on cash management – as well as the development of the synergies with trade finance – also allows for greater attention to risk mitigation in treasury operations.
Actively engaging with the risks attached to an operating profit is as important as earning it in the first place.
“Actively engaging with the risks attached to an operating profit is as important as earning it in the first place,” says Sargent, “although over-hedging due to poor reporting can itself negatively impact revenue.”
Matching credit and debt positions will be a major element of this, which can be taken cross-border – meaning banks use a customer’s cash position in one country to provide comfort for the provision of a net:nil facility to amortise debt in another.
“Successful risk management may mean banks absorbing certain risks on behalf of their clients – such as country and buyer risk,” says Sargent. “This is in order to bring substantial reduction to companies’ balance sheet exposures. And, again, web-based systems allow for these risks to be increasingly well identified and managed.”
Indeed, Sargent cites the rapid development of web-based solutions as the main driver that allows Lloyds TSB Corporate to bring this new offering to their clients. The new generation of provision uses a single browser portal to access a central bank-provided hub – making it no more expensive than web-based email. Combining automated document checking with dedicated service centres allows customer queries and discrepancies to be ironed out more rapidly. The result is a greatly reduced number of hold-ups in the value chain on account of documentary error.
“Waiting for a letter of credit to be confirmed, for instance, can have a ruinous effect on the cash management structure underpinning a value chain,” he says, “from placing orders with suppliers to booking shipping and other logistics. And given that something in the region of half of the documents presented under manually prepared LCs alone are currently rejected on first presentation, it is easy to see why documentary error is a primary reason for working capital excesses.”