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Working Capital Management

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Working Capital Management

There are various possibilities for managing the working capital of companies. It can be divided on the basis of qualities and values.

  • To hedge purchase and sales risks, primarily in cases where the buyer and the seller do not know each other very well, we recommend using guarantees and letters of credit.

  • To finance stocks it is wise to use a working capital loan.

  • Revolving credit line is recommended to be used in case of repetitive deliveries when the need for cash fluctuates.

  • Overdraft is a good product for ensuring constant liquidity if incoming and outgoing payments are made at different times.

  • Factoring is suitable for financing accounts receivable with the aim of ensuring quick accrual of funds from buyers and allowing for the desired growth of the company. Factoring helps to save the company's resources upon administration of invoices/receivables.

 

Guarantees

A bank guarantee is the obligation of the bank to pay a party to the agreement (a recipient of a guarantee) compensation to the extent of the amount indicated in the guarantee if the other party to the agreement (applicant) does not perform its contractual duties. The bank cannot guarantee the recipient of the guarantee that the latter's counterparty will perform its obligations, but can only guarantee the payment to the extent of the guarantee amount. Bank guarantees give the recipient the security that if the operation indicated in the agreement is not performed for any reason, the recipient shall be entitled to monetary compensation.

Advantages of guarantee:

  • The customer has the opportunity to delay payments and thus, increase the amount of available circulating assets.

  • The customer will be able to reduce the purchase price of the goods because the risk of the supplier decreases.

According to risk, guarantees are divided as follows:

Payment Guarantee

For exporters, it is essential to reduce the payment risk of buyers. For that purpose, a payment guarantee that guarantees the seller (exporter) payment for goods if the buyer has not fulfilled its payment obligations by the due date. The amount of a payment guarantee is usually the value of the goods and the due to which a certain number of days for making a claim have been added is the term of validity.

Tender Guarantee

The aim of a tender guarantee is to guarantee compensation to the extent of a guarantee amount to the recipient of the guarantee if the applicant of the guarantee refuses to conclude an agreement on the tender that it has made and that has been approved by the recipient, withdraws its tender before the deadline or fails to present a functionality guarantee to the recipient after conclusion of the agreement.

Advance Payment Guarantee

An advance payment guarantee guarantees that an advance payment made to the applicant of the guarantee to the extent of a guarantee amount is returned to the recipient if the applicant of the guarantee fails to perform its contractual obligations (for example, does not deliver goods after receipt of the advance payment). The amount of an advance payment guarantee is the amount of the advance payment and the expiry date is usually the date of receipt of goods or provision of the service or other date or a certain number of days as of the due date. In general, banks issue advance payment guarantees with a clause that the guarantee does not enter into force before the guarantee amount has been received by the beneficiary of the advance payment.

Performance Guarantee

The aim of a performance guarantee is to guarantee compensation for the recipient of the guarantee if the counterparty does not perform its contractual obligations (for example, delivery of goods, performance of work, provision of services, etc.). The amount of a performance guarantee is agreed between the parties. Usually, a performance guarantee is 5-20% of the value of the agreement. The date of expiry of a guarantee is the due date of performance of contractual duties set forth in the agreement.

Guarantee for Warranty Obligations

It guarantees compensation to the recipient of a guarantee if any defects appear in delivered goods, constructions, etc. The amount of a guarantee is agreed in an agreement and the date of expiry depends on the field of activity, the object of guarantee, etc.

Bill of Exchange

A bill of exchange guarantees the recipient of a payment under the bill of exchange, i.e. the drawer compensation if the payer of the bill of exchange, i.e. the drawee, does not redeem the bill of exchange on the due date, i.e. does not make the payment.
Both the acceptance of the drawee and the bank guarantee is noted on the bill of exchange with a relevant note and signatures.
Operations of the bill of exchange are regulated by the laws of different countries. There are no general international rules like, for example, in case of letters of credit (UCP 500) and guarantees (URDG 458). In Estonia, the issues related to bills of exchange are regulated by the Contracts and Extra-contractual Obligations Act.

Other Guarantees

The above guarantees belong to the most common bank guarantees used for reduction of risks. There are a lot more risks, for instance, incorrect loan repayment risk, unduly rent payment risk, failing payment of customs duties risk, etc., for covering of which banks issue corresponding guarantees.

General conditions in applying

Period: maximum 5 years.

Amount: minimum amount not specified.

Currency: EEK, EUR or other currency quoted by the Bank of Estonia.

Fees:

  • Agreement fee

  • Guarantee fee

The guarantee fee is calculated on the basis of the actual number of days of the term of the guarantee and a 360-day year.

Collateral

  • Mortgage on immovable.

  • Pledge on a building as a movable.

  • As supplementary collateral, commercial pledge on fixed assets and other movable property.

  • If necessary, other collaterals accepted by the bank as supplementary collaterals.


    Application  
    Recommendations for formalisation of documentary credit documents  
Letters of Credit

To put it in the simplest way, documentary credit is a promise given by the bank of the buyer of goods (or services) to the seller that if you present us with such-and-such documents, we will pay you such-and-such an amount of money. Thus, the seller does not have to be afraid that it will not receive any money if the buyer changes its mind or becomes insolvent - in documentary credit transactions the bank is obliged to pay.

The bank is obliged to pay the seller only if the documents presented by the seller are in accordance with all the conditions indicated in the documentary credit. The conditions of documentary credit are not determined by the opening bank, but the buyer, i.e. the bank opens a documentary credit in accordance with the instructions given by the buyer.

Although conditions and documents of a documentary credit describe the details of purchase and sales, banks verify only whether the documents are in accordance with the conditions of the documentary credit and do not take liability for the goods (services) related to the documents.

Advantages of documentary credit

  • Using documentary credit allows for guaranteeing the risk of payment for goods. For the buyer, using documentary credit means that the money shall be paid to the seller only if the seller has sent the goods to the right place at the right time. For the seller, documentary credit is a security that if they present the documents certifying the fulfilment of the conditions set forth in the documentary credit, they will receive money for the goods sold.

  • The customer has the opportunity to delay payments and thus, increase the amount of available circulating assets.

  • The buyer can negotiate with its partner over reduction of the purchase price of the goods, because the supplier's risk is reduced.

  • The buyer can reduce stock reserves without any damage to sales, which reduces the business risks of the company.

Types of documentary credit

  • Irrevocable and revocable documentary credit

    Irrevocable documentary credit is an obligation assumed by the opening bank, which cannot be cancelled or amended without the consent of the recipient of the documentary credit.
    Revocable documentary credit can be cancelled or amended by the opening bank without the consent of the recipient of the documentary credit.
    Since revocable documentary credit is a major disadvantage to the seller, such documentary credits are used only in special cases.

  • In case of confirmed documentary credit, the confirming bank and the opening bank assume an obligation to pay the seller for the goods upon the fulfilment of the conditions of the documentary credit. A confirmed letter of credit is used mostly when the seller has doubts about the buyer's bank or the country of origin of the buyer's bank. A confirmed letter of credit gives the seller a twofold guarantee that the payment will be made.

  • Transferable documentary credit

    Transferable documentary credit gives the intermediary an opportunity to apply to the bank for a transfer of the documentary credit for the benefit of the supplier. Thus, the intermediary buys the goods from the supplier with the same documentary credit that the intermediary sells the goods with to the buyer. The intermediary transfers its right to the documentary credit amount paid against documents that are in accordance with the conditions of the documentary credit to the supplier.
    Transferable documentary credit is an opportunity to intermediate large trade transactions without having to use one's own funds. The conditions of documentary credit have to be fulfilled and the documents submitted by the supplier; the intermediary exchanges only the supplier's invoice and the bill of exchange upon receipt of the documentation to the transferring bank (against that including its intermediation fee).

  • Standby documentary credit

    In case of standby documentary credit, the buyer has to make a simple bank transfer for the goods dispatched by the seller outside the documentary credit; the seller presents the documents to the bank only if the buyer does not fulfil its contractual payment duties. Often, the list of documents of such documentary credit often contains only a copy of an invoice left unpaid by the buyer and the seller's claim to the bank for payment of the documentary credit amount; a movement form is rarely required.
    Standby documentary credit differs from the letter of guarantee by the fact that it is treated like all documentary credits according to UCP 500.

Rules for treatment of documentary credits and requirements of documents are international and they have been established by the International Chamber of Commerce as Uniform Customs and Practice for Documentary Credits, ICC publication No. 500.

If the seller and the buyer have agreed to use documentary credit, the buyer has to apply to Hansabank for opening documentary credit. Since by opening documentary credit, Hansabank assumes the obligation to pay the seller notwithstanding the opinion or solvency of the buyer, Hansabank treats the application for opening documentary credit similarly to an application for a loan.
To apply for documentary credit, the buyer has to contact a business client executive
in Tallinn, outside Tallinn.
For help and further information about documentary credits, call the Documentary Payments Unit of Hansabank at 613 1334.

Working Capital Loan

Advantages:

  • The client receives funds for the acquisition of seasonal stock of goods;
  • The client receives funds for the acquisition of primary stock;
  • The client is able to make the planned short-term investment in fixed assets;
  • The client is able to incur extraordinary and indispensable expenses;
  • The client is able to support a large-scale marketing campaign;
  • The Working Capital Loan is suitable for bridge financing of projects assisted by the Structural Funds of the European Union.

Financed amount: Minimum amount is EEK 30,000 or its equivalent in a foreign currency.

Financing currency: EEK, EUR or another currency quoted by the Bank of Estonia.

Financed period: up to 1 year.

Financing expenses:

  • Contract fee – 1% of the amount, minimum EEK 1,000; 0.5% in case of projects assisted by the Structural Funds of the European Union;
  • Interest – depends on the client's debt service ratio;
  • Expenses related to establishment and insurance of the collateral.

Disbursement of the loan amount:

  • The bank disburses the loan amount either in a lump sum or in instalments;
  • The deadline for disbursement of the loan amount is usually up to 3 months;
  • The bank transfers the loan amount to the borrower's current account in the bank or, at the request of the borrower, to the seller of the financed object / provider of the respective services.

Repayment of the loan:

  • On a monthly basis in equal instalments or in a lump sum at the end of the loan term;
  • In case of projects funded out of the Structural Funds of the European Union the early repayment of the loan is free of charge.

Possible collateral:

  • Mortgage of immovable property or, in case of a rural life and agriculture loan, of arable land as well;
  • Security over movable buildings;
  • As supplementary collateral, commercial pledge of fixed assets and other movables;
  • If necessary, other collateral accepted by Hansabank as supplementary collateral – for instance, suretyship.
  • You can apply to Kredex for supplementary collateral to the extent of up to 75% of the loan amount.
  • In case of a rural life and agriculture loan you can apply to the Rural Development Foundation for supplementary collateral to the extent of up to 60% of the credit amount.

Early repayment of the loan:

  • In case of projects funded out of the Structural Funds of the European Union the early repayment of the bridge-financed portion of the assistance is free of charge.


Revolving Credit Line

RCL is a loan product, where the borrower can make single transactions, i.e. take specific loan amounts in its use within the framework of the credit limit and the term specified in the Credit Line Agreement. The credit limit can be used repeatedly, i.e. when one loan amount is repaid, the borrower can take the same amount in its use again. The purpose of RCL is, therefore, to allow flexible financial management, where the borrower can repeatedly finance their activities with interest expenses corresponding to the length of the financed period.

Advantages of Revolving Credit Line

  • The customer receives funds for the realisation of a favourable business opportunity (purchase of goods in a larger amount, etc.)

  • The customer overcomes unexpected circumstances that are connected to the accrual of accounts receivable

  • The customer overcomes the shortness of circulating assets caused by the cyclical nature of business

Benefits of Revolving Credit Line

  • The application procedure of the service is much simpler than that of short-term loans

Credit Limit: Minimum credit limit is 100,000 EEK or its equivalent in any other currency.

Currency: EEK, EUR or other currency quoted by the Bank of Estonia.

Period: maximum 2 years.

Fees

  • Agreement fee

  • Interest

  • Obligation fee

    • Two different interest rates are specified in the agreement: fixed interest and floating interest. The floating interest rate shall be based on the EURIBOR or LIBOR valid on the loan amount disbursement date and corresponding to the loan amount repayment period, and the margin established in the agreement shall be added.

    • The borrower shall determine the interest rate to be applied to the loan amount in the application, i.e. it shall always decide between the fixed and floating interest.

    • Interest rate of one month shall be applied in case of a loan amount repayment period less than one month.

    • Interest shall be calculated from the day when the bank transfers the loan amount or part of it to the current account of the borrower.

    • Interest shall be payable on the final repayment date of the loan amount unless the bank and the borrower have agreed otherwise.

    • The bank shall inform the borrower of the interest amount payable on the final repayment date of the loan amount upon disbursement of the loan amount.

Disbursement of loan amount

  • In order to obtain use of the loan amount, the borrower shall every time submit a duly filled out application to the bank.

  • The borrower may submit the application to the bank either by post or by fax, if this has been agreed in the special conditions of the agreement.

Collateral

  • Mortgage over immovable;

  • Pledge over buildings as movable;

  • As a supplementary collateral, commercial pledge of fixed assets and other movable property;

  • If necessary, other collaterals accepted by Hansapank as supplementary collaterals.


Overdraft

Advantages:

  • The client can balance irregular cash flow;
  • The client can pay for minor unexpected expenses;
  • The client can react flexibly to lesser sales growth;
  • The client can use the funds at his/her own discretion;
  • The overdraft is suitable for bridge financing of projects assisted by the Structural Funds of the European Union.

Financed amount:

  • Minimum limit is EEK 30,000 or its equivalent in a foreign currency;
  • Maximum limit is up to 50% of the net sales of the company in the last 3 months.

Financing currency: EEK, EUR or another currency listed by the Bank of Estonia.

Financed period: up to 1 year.

Financing expenses:

  • Contract fee – 1% of the total amount, minimum EEK 1,000;
  • In case of projects funded out of the Structural Funds of the European Union – 0.5% of the total amount;
  • Interest – depends on the client's amount of self-financing and the debt service ratio;
  • Expenses related to establishment and insurance of the collateral;
  • The obligation fee is up to 2% of the total amount of the unused limit.

Disbursement of the credit amount:

  • During the term of validity of an overdraft agreement, the client can make credit payments remaining within the fixed credit limit from and to his/her settlement account at any time;
  • If the funds repaid by the client exceed his/her liabilities to the bank set forth in an overdraft agreement, the overdraft account shall be treated as a settlement account.

Collateral:

  • Real property mortgage;
  • Security over movable buildings;
  • As supplementary collateral, commercial pledge of fixed assets and other movables;
  • If necessary, other collateral accepted by Hansabank as supplementary collateral – for instance, suretyship.
  • You can apply to Kredex for supplementary collateral to the extent of up to 75% of the credit amount;
  • In case of a rural life and agriculture loan you can apply to the Rural Development Foundation for supplementary collateral to the extent of up to 60% of the credit amount.

     
     
     
Factoring

Factoring is a range of services based on assignment of monetary claims (accounts receivable) to the factor, involving:

  • financing;

  • administration and collection of accounts receivables from buyers;

  • minimising of risk related to doubtful invoices.

Advantages of factoring

  • Instead of waiting for payment by buyers for 30-120 days, we allow the client immediate financing of up to 90% of the amount of an invoice. The liquidity of the customer improves - simplifies the planning of cash flows and keeps cash flows under control.

  • The client gets financing without additional collateral.

  • The administration of accounts receivable by the factoring reduces the customers general administration costs, which would otherwise be spent on dealing with buyers, collection of money, keeping a sales ledger and the performance of credit control.

  • If necessary, the client receives non-recourse factoring for his/her transaction, i.e. the factoring company ensures a stable and reliable cash flow.

  • Factoring company assists the client with knowledge of the legal and cultural differences of foreign countries - this reduces the amount of bureaucracy and dealings with complicated documents.

Benefits of factoring

  • The client has an overview of the operations at any time - you will receive a report on each transaction as well as monthly consolidated reports.

  • Via the Internet bank Telehansa.net that has been designed for companies, the customer can view invoices based on factoring contracts and transferred for financing and administration as well as reports about transactions conducted during the month, and import them directly to his/her accounting program, if possible.

For further information call 6 133 867, 6 131 324.

Domestic factoring

The client assigns invoices to the factoring company:

  • For immediate financing of invoices;

  • For administration of invoices and insurance of the credit risk related to doubtful invoices.

Non-notification factoring

The client assigns invoices to the factoring company:

  • for immediate financing of invoices.

Export and import factoring (See more)

The client assigns globally issued invoices to the factoring company:

  • for immediate financing of invoices;

  • for administration of invoices and insurance of the credit risk related to doubtful invoices.

Maturity factoring

The client assigns invoices to the factoring company:

  • For administration of invoices and insurance of the credit risk related to doubtful invoices.

Tax factoring

ax factoring is financing of the value added tax return.

  • For immediate financing.

General conditions in applying

Financed period: maximum 12 months.

Financed amount: the total amount of assigned invoices to the extent of which the claims of the seller are financed.

Immediate financing: up to 90% of the amount of the claim.

Service charges :

  • Contract fees

  • Commission fees

  • Discounting interest

Collateral

  • Accounts receivable certified on the basis of original invoices and an instrument of delivery of goods/provision of services, transportation documents or an order form and in case of tax factoring, overpaid value added tax amount certified by the Tax Board.

  • Upon the request and need of the customer, the right of restitution;

  • Other (a guarantee, surety, etc.).




 

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