Trade finance in SAP – treasury function supporting your global trade process

Initial functionalities to support trade finance were introduced in SAP Treasury Transaction manager relatively recently in 2016, within the ECC EhP 8 version. Covering the obtained and provided guarantees and letters of credit, they offer a seamless integration between the processes in treasury and the purchase-to-pay, order-to-cash area.

Trade finance covers financial products which help importers and exporters to reduce credit risk and support financing of the goods flow. Almost 90% of world trade relies on trade finance (source: WTO).

What is covered?
Most instruments used in trade finance are supported by the available functionality, namely:

• Guarantees
  • Issued – (direct or indirect through correspondent bank) to support the purchase-to-pay process of the buyer.
  • Received – to support the order-to-cash process of the seller.
• Commercial and Standby letter of credit (L/C)
  Commercial L/C represents direct payment method, while Standby L/C is secondary payment method, used to pay the beneficiary only when the holder fails.
  • Issued – to pay (on behalf) of the buyer (purchase-to-pay process)
  • Received – collect the payment by the seller (order-to-cash process)

How is the functionality integrated with supply chain functionalities?

Once activated, the trade finance financial products are fully integrated to the existing framework of the Treasury transaction manager: you can manage them using the existing transaction codes in front office, back office (settlement, payments, correspondence framework for MT message exchange), accounting, reporting and risk management functions. In case of received guarantees and L/C, the contracts can be included in the respective credit risk limits for the issuing bank. This excellent integration helps the treasury team integrate the trade finance flows to their existing operations with which they are already familiar.

Beyond that, issued L/Cs can be connected with an existing bank facility and (advance) loan contract, in order to be correctly included in its utilisation and to be integrated in the corresponding facility fee calculation.  In case of L/C, when conditions to release the payment are fulfilled, a new financing deal can be created or an existing one assigned to the trade finance contract.

Beyond the treasury functionality, the solution offers two unique features to support the trade process:

• Support of Trade documentation management
  Fields are available, for example, to note L/C document number, shipment period, places of receipt and delivery, ports of loading and discharge, incoterms. Further it can be defined, which documents are needed to be presented to release the payment, and their scans can be attached to the trade finance deals. Accounting documents can be generated based on flow types, when payment conditions are fulfilled (for off-balance sheet recognition).
• Integration with Material management and Sales and distribution modules
  One or multiple related sales order numbers (received L/C, guarantee) or purchase order numbers (issued L/C, guarantee) can be maintained in the trade finance contracts. Related FI Customer (applicant) or FI Vendor (beneficiary) can be maintained as business partner.

Integration with the sales module

In case of received trade finance instruments, a tight integration with the sales module is possible. The system is able to check the relevant data in the sales order against one or multiple assigned trade finance transaction for compliance. On the condition that the applicant in the letter of credit is identical to the payer in the sales order. The checks are triggered when:

(a) User saves a sales order after updating the assigned trade finance transactions;
(b) User saves the trade finance transaction after changing the risk-check relevant fields;
(c) User processes goods delivery (e.g. outbound delivery, picking, posting goods issue).

The checks make sure that the sales order amount does not exceed the total of trade finance transactions, considering the tolerance. The currency needs to be identical in both documents. The schedule lines of the goods issues must be within the trade finance document term period.
In case of commercial (standard) L/C, shipment period, partial shipment, places of delivery, ports, shipping methods can be checked. The result of the consistency check is displayed in a dedicated report and can be used as a guide for further action.

Figure 1: Example available fields for L/C in SAP Trade Finance

In some deployment scenarios, the SAP Treasury is not located in the same system instance as logistic functionalities. For purpose of system integration, APIs (BAPIs) are available for creation and update of trade finance transactions from external systems.

Conclusion
In many companies, trade finance is often an area still managed in separate solutions or in Excel. The SAP S/4HANA Trade finance management helps you to cover the whole lifecycle of trade finance instruments in your SAP Treasury management system and can integrate well with your supply chain functionalities, especially with the sales management.