Global and local banks promote international trade by offering the required operating capital as well as a range of solutions that help clients manage the risks involved with managing foreign payments. The term “trade finance” is typically used to describe financial products that are primarily related to the underlying international trade transaction (export or import). Working capital loans that are not particularly connected to trading are typically excluded by this criterion. Trade financing instruments often entail capital but have quick maturities.
One of the most common and standardised methods of trade financing that banks enable is a letter of credit (L/C). L/Cs decrease payment by establishing a framework wherein a bank pays (or guarantees the payment to be paid) to an exporter on behalf of an importer once delivery of the products has been confirmed through the presentation of the necessary documentation.
There are two product type given by SAP for trade finance :
- 850 – Letter of Credit
- 860 – Bank Guarantee
Here we will see configuration process of Letter of Credit. The configuration is same for both product Bank guarantee and Letter of credit
Defining Product type
First step is by Defining product type by giving entering name and unique product type to recognize which it belongs to.
SPRO- Financial Supply chain management- Treasury and risk management – Transaction management – product type – Define product type
After clicking on define product type click on new entries. to create product type.
Enter Product category 850 for letter of credit and 860 for bank guarantee. Enter long and short text.
Defining Transaction Types
\Define type of transaction as issue or receive in product type as per client requirement.
SPRO- Financial Supply chain management- Treasury and risk management – Transaction management – product type – Transaction type
First step create number range for each transaction type
- Create Number Range
Create a number range first, then specify the transaction type for each product category.
- Transaction types
Type in the transaction type and product type. Allocate a range of numbers to each type of transaction.
Define flow type
Flow types are used to categorise payment flows such as principal growth, final repayment, and nominal interest. Flow types are combined with FI and cash management for analysis purposes.
Specific transaction types must be given flow types in addition to the Product type.
SPRO- Financial Supply chain management- Treasury and risk management – Transaction management – product type – Flow Types – Define Flow types – Trade Finance Transaction
Create below flow type :
Defining below Flow types for transaction in Trade Finance area:
Flow type Description
10 Principal Increase
11 Principal Decrease
84 Payment Obligation
85 Trade Finance payment
86 Remaining credit amount
90 Other flow condition
Assign flow type
In previous steps we created Product type and transaction type. now assign the created flow type to product type and transaction type.
SPRO- Financial Supply chain management- Treasury and risk management – Transaction management – product type – Flow Types – Assign flow type to transaction type -Trade Finance Transaction
Define update type and assign usage
We need to create as many update type as flow type created with +/- sign
SPRO – Financial Supply chain management – Treasury and risk management – Transaction management – product type – Flow Types – Define Flow types – Define update type and Assign Usage
Create update type for every flow type previously created.
Now Assign Update Type to Usage.
Assign Flow type to Update type
Now , we assign all flow type previously created to respective update type.
SPRO – Financial Supply chain management- Treasury and risk management – Transaction management – product type – Update type – Assign flow type to update type
Assign Flow type inflow (+) and outflow (-) in flow type.
Assign General valuation
You can create valuation class as per client requirement as per product type.
SPRO- Financial Supply chain management- Treasury and risk management – Transaction management – product type – Assign General Valuation
Now we will configure payment condition. There are two condition Presentation period and payment. Presentation condition is based on shipping date and Payment condition is based on own enter date by user.
SPRO- Financial Supply chain management- Treasury and risk management – Transaction management – Define condition for payment and presentation period
Enter both condition by clicking on new entries.
We must now declare which update types will post an accounting record and which are virtual. Every case scenario is different because it depends on the business requirements.
SPRO – financial supply chain management – Treasury and Risk management – General Settings – Accounting – Link to Other Accounting component – Indicate update type as relevant to posting
Only click on update type which are relevant to posting.
In next step ,we will assign Posting Specs to update type and Account Determination to those who are relevant to posting.
Enter Relevant General Ledger account to posting specs.
Both bank guarantees and letter of credit have particular features offered by SAP, and the procedure is totally automated.