Photo of Maggie Shi, Citi collects the award on behalf of Shandong Linlong Tire Co., Ltd.

This is a tailored trade financing solution to support the company’s monthly suppliers’ payments in China and avoided the need to enter into any commodity hedging because of its high volatility. The solution was executed in a short timeframe and has resulted in reduced costs and increased efficiencies.

Tailored trade finance solution for China’s number one tyre exporter

The challenge

Given tight RMB liquidity in 1H 2018, the financing cost was very high and each financial institution had very limited asset quotas to support their clients for working capital needs. Shandong Linglong Tire required the flexibility and stability of a funding solution to ensure financing could be rolled over within a reasonable and set period with a stable and low financing cost. It also required documentation simplification, coupled with high efficiency to secure timely payment.

Global commodity prices, particularly rubber, inventory levels and speculative news were combining to put pressure on the company’s income and working capital management. As Hong Meng, CFO & VP explains, “We needed short-term financing to support our monthly suppliers’ payments in China. We also required a low-cost and stable pricing finance solution to help us reduce our financial cost. Furthermore, we were reluctant to enter into any commodity hedging because of its high volatility.”

The solution

The company worked with its bank to structure a tailored trade financing solution under open account trade terms. It was a domestic accounts payable financing solution with streamlined process.

Best practice and innovation

1. Flexibility of the funding tenor – The tenor is less than 180 days to ensure it falls under the trade background. The company can use this funding solution with two-month tenor or longer tenor up to six months, subject to the RMB cost of funds in the market and it can take advantage of the lowest cost of funds within 180 days. Alternatively, the company can also draw on this trade loan with two-month tenor if the rate is lowest and roll over twice within 180 days.
2. Very competitive pricing – Citi is the first foreign bank to provide this kind of funding solution with a flexible tenor. The financing rate was also the best among all banks, especially during Q1 2018 when RMB liquidity was very tight in the market.
3. Simplification of the documentation and the process is streamlined – The standard requirement is to submit the contract and invoices prior to the funds being released. Because thousands of invoices were being processed it was proving extremely difficult to verify their authenticity in a single day. Citi therefore provided the flexibility for Linglong to submit a copy of the invoice certification list issued by the tax authority via a tax e-platform.
4. Efficiency of the solution execution – Shandong Linglong has a very tight timeline to pay its suppliers each month and the date is fixed. Any delayed payment will result in a penalty. Once the company has submitted the required documents, Citi can execute the funding solution within the same day and also ensure the funds can be paid to suppliers that comply with Linglong’s internal policy.

Key benefits

• Reduced finance costs.
• Improved working capital efficiency.
• Improved cash flow forecasting.
• Saved on labour, time and funding costs; 5% in funding cost when compared to other banks.
• Consolidated all the account payables that needed to be financed conveniently into one bank.
• Simplified procedures and documentation gave Linglong greater flexibility and internal efficiency to prepare for funding.

“The solution, executed in a short timeframe, resulted in reduced costs and increased efficiencies and helped us extend our account payable tenor and also its short-term financing needs as a bridge funding solution, especially during a time when liquidity was tight,” concludes Meng.