The partner bank has created a payables finance solution – an unsecured trade facility that provides NARI Huaisheng (as the buyer) the flexibility to draw loans based on its working capital cycle. The solution leverages a pre-defined credit facility design based on NARI Huaisheng’s asset conversion cycle (facility tenor).

An alternative form of working capital

The challenge

As a traditional manufacturer with regular procurement activities, NARI Huaisheng requires a quick and reliable source of working capital to operate. Like most state-owned enterprises (SOEs) in China, the firm’s treasury team traditionally made use of working capital loans issued by domestic banks to finance its day-to-day operational needs, including paying its suppliers on a monthly basis. To minimise administrative work for multiple drawdowns, NARI Huaisheng would draw a lump sum amount in working capital loans on a six-month to one-year basis to run its operations which include payments to suppliers.

However, as NARI Huaisheng’s working capital cycle ranges between three to six months, its treasury soon found using longer-term working capital loans – which require higher interest pay-outs – inefficient and costly. NARI Huaisheng wanted an alternative solution that is a better match for its working capital cycle and addresses its short-term financing requirements at lower costs.

The solution

NARI Huaisheng approached J.P. Morgan, already a partner providing funding for its overseas projects, to deliver a constructive solution for its onshore financing needs in China. It worked with the bank to create a payables finance solution – an unsecured trade facility that provides NARI Huaisheng (as the buyer) the flexibility to draw loans based on its working capital cycle. The solution leverages a pre-defined credit facility design based on NARI Huaisheng’s asset conversion cycle (facility tenor).

This means NARI Huaisheng no longer needs to rely on costly working capital loans for funding; instead, it now has quick access to trade loans that are transaction-specific and where interests paid are unique to the loans, providing more transparency.

Here is how each loan works under the payables finance solution:

• Upon delivery of goods, the supplier provides commercial invoices and shipping documents of the transaction to NARI Huaisheng.
• NARI Huaisheng sends a loan drawdown request to the bank, together with the required regulatory and supporting documents as proof of the transaction.
• Loan tenor is determined by NARI Huaisheng’s financing needs or facility tenor, whichever is less.
• The bank makes payments to the supplier on behalf of NARI Huaisheng on the contract payment date.
• Loan repayment proceeds are debited from NARI Huaisheng’s account for settlement on loan maturity date.

Best practice and innovation

The payables finance solution offers NARI Huaisheng access to transaction-specific trade loans in a quick and efficient manner to address its operational needs. Having relied on domestic banks for onshore funding in the past which involved high-interest pay-outs, the innovative solution helps the firm access financing that better matches its working capital cycle.

The solution requires minimal administrative work as the firm’s treasury can consolidate documentation of multiple transactions to draw down a single loan. It also facilitates improved transparency in terms of the interests paid. Since the implementation in April 2017, the solution has delivered significant cost savings for the firm because of lower interest payments and a reduction in the amount of unutilised loans.