Garment Ltd. have a long established relationship with a Bangladesh based manufacturer who require a Letter of Credit (LC) before they will start the manufacturing process; from order to dispatch takes approximately 8 weeks.
The manufacturer in Bangladesh have an arrangement with their local bank that once they receive a Letter of Credit they will provide the manufacturer with a line of credit to allow them to purchase fabrics and trimmings.
Buyer Ltd. place an order for £250K ($360K) worth of product to be delivered in 12 weeks’ time. Garment Ltd. has been in negotiation with Buyer Ltd. for a number of months which has involved the production and approval of samples and “an ethical audit” of the manufacturing facility by Buyer Ltd.
Many of the larger retailers check the factories in Asia to ensure that working conditions are acceptable and that there is no evidence of child labour etc.
Garment Ltd. have already advised the manufacturer that the goods will be purchased by Growcap under a Supplier Finance facility. Growcap’s legal agreements (including an invoice assignment agreement) with Garment Ltd. have been completed by Growcap’s solicitors. This includes debentures and director guarantees.
Growcap have credit insurance limits on Garment Ltd. and the Buyer Ltd. is credit worthy. Growcap have taken a 10% deposit from Garment Ltd. but this is not always required.
Once the LC is opened and received by the manufacturer, goods are manufactured and shipped. Upon shipment the manufacturer will present documents for payment under the LC.
Growcap then invoices Garment Ltd. for the goods, and a pre-agreed margin, as soon as the LC is opened. Garment Ltd. signs a Bill of Exchange or a promissory note in favour of Growcap.
When the goods arrive in the U.K. Growcap work with the clearing agents and freight forwarders whom Growcap have pre-approved. Growcap pay any duty and taxes on the imports and invoice Garment Ltd. for the goods. Goods are then delivered to Buyer Ltd.
In this case the Buyer Ltd. will only take an invoice from Garment Ltd. Growcap work with Garment Ltd. to ensure that the invoice is raised; payment terms are 14 days.
Growcap have an assignment over the invoice and the payment is made directly into Growcap’s bank account. Growcap receives the funds and pays Garment Ltd their profit.
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