Managing Working Capital with no Cash and No Working Capital Lines with Banks

Hi Friends I just thought of sharing an experience with all of you which might be helpful.

Case Study

A Multinational Malaysian company buys in a brown field project started by First Generation Entrepreneurs as a Toll Processing unit for one of the world's Largest Food Company. As it is a back to back arrangement where the Principle was supposed to supply crude oil to be processed and refined by the unit there was no working capital limit except for SG&A which was also guaranteed out of margins and therefore the company had not availed any Working Capital Facility.

However for some reason there was disagreement between the Principle and the Toll Proceessor and the business could not start even with the state of the art Facilities and an Investment of USD 20 Million back then in 2003 /04 and they were look out for selling the unit.

The Malaysian company which had it's CPO ( Crude Palmolien ) manufacturing wanted to set up a manufacturing facility in India and it made sense for them to acquire an existing unit at a discounted value.

The deal was done and then the company wanted to start business but having no working capital lines were unable to Import CPO and start the manufacturing/processing. As the typical Indian Banking system it was a long gestation period as the Land leased and the holding company did not wanted to give any personal or corporate guarantees.

While we started the process of applying for the lines we started looking for alternate channels of funding . Incidentally I bumped upon finding that MMTC and STC have huge unutilized FC LC Limits . I went and met the STC and MMTC team in Delhi and after going through a process of getting profile reviewed of the Parent company got Line set up for utilising their LC limit. the model was the principle shipped CPO , we opened the LC through STC/MMTC ( with an interest cost of 6%) , the LC was discounted by the bankers of the Malaysian Enterprise and once the material reached we stored it in our Custom Bounded Ware house. Now we start processing edible oil of 150 - 200 tonnes daily by paying the equivalent amount to STC and customs duty . In fact we were able to get credit DEPB licenses by paying little premium over the market rate which became our secondary working capital for managing the order to cash cycle and business started running.

The bulk sale is typically cash sales and so we were able to start our operations smoothly . I networked with the Broker Community and were able to set up the sales function. The Production and Technical team was handled by a very competent person who ensured the best quality and soon we become a preferred choice as we never compromised on quality by doing any unethical means ( keeping the Fat percentage high is a method used by local companies ) .

There is a long story after that of expansion and other things but just thought of sharing the same.

Infact I attended a session by Raj Jaswa recently and came to know that the Taiwan govt encourages export oriented units by providing State Backed LCs for Computer manufacturers for importing Parts ( typically Mother Boards and Chips which are highly technology intensive products ) .

I would look forward to comments and questions if any.