At the second quarter of 2015, one of our brokers in Singapore contacted us about his client, a large supplier of aluminum in Asia. Like most commodities, aluminum prices have been depreciating in 2015. Our aluminum supplier was suffering from a drop in prices and was looking for a way to increase its cash-flow.
Seeking to find a monetary solution to its need in liquidity, our supplier contacted his branch manager at the bank. The manager at the bank knew our supplier well, they had a long and fruitful relationship for years. After reviewing the company’s books he was optimistic, and assumed that the company could overcome the decrease in its product price.
The manager told the supplier that if they can arrange a letter of credit to be issued, the bank would give the supplier financing in the period between the shipment of the goods and receipt of payment. This proved to be very helpful since the LC had a deferred payment.
Through the issuance of a documentary letter of credit, the aluminum supplier was be able to calculate the payment date for the goods. In addition, the supplier reduced its production risk, in case the buyer cancels or changes their order, and they also have the issuing bank’s obligation to pay for the shipped goods.
We started issuing instruments on behalf of the aluminum supplier, on a weekly basis, covering a big portion of its sales. The buyer also benefited from the issuance of the letter of credit, since they had a deferred payment.
At the beginning of 2016 aluminum prices started rising, increasing by roughly 15% in a relatively short period of time. Having its margins increase, the aluminum supplier was then able to slowly reduce its use of our services.