One of the most common and standardized forms of bank-intermediated trade finance is a letter of
credit (L/C). L/Cs reduce payment risk by providing a framework under which a bank makes (or
guarantees) the payment to an exporter on behalf of an importer once delivery of goods is confirmed
through the presentation of appropriate documents. SAP has introduced new products to cover the
trade finance in S/4HANA Treasury.
Letter of Credit
Bank Guarantee
Standby Letter of Credit
The Trade Finance Management process generally covers the creation of financial transactions and
executes payments for fees and cash collateral for bank guarantee issuing. For further processing, the
roll over and termination of transactions is possible. All of the financial transactions can be monitored
and reported in S/4HANA.
Functions and Business Values Available in SAP
S/4HANA Treasury For Trade Finance
Master Data Management
Master data for Letter of Credit, Bank Guarantee, and Standby Letter of Credit
Support Master Data Management for both buyer and seller
Customizable user interface with many tab screens
Comprehensive and Flexible document management for Letter of Credit
Lifecycle Management
Status Management with different steps, Contract – Settlement – Rollover – Termination
Customer Specific workflow can be configured
Full support of presentation and payment process for letter of Credit
Integration
Represented as a new product category in TRM – covering Transaction and Position Management
Integration with Accounting and Cash Management
Full support of Loan generation out of Letter of Credit Directly
Integration with Facility
Integration with Credit Risk Analyzer
Support the combined usage of the facility and cash collateral for the Applicant.
Provide comprehensive BAPI’s for Transaction Management
Communication
Integrated in the correspondence Framework
SWIFT Messages with respective sub-messages
Trade Finance Customization
We will start by configuring the Trade finance instrument in S/4HANA. In this activity, you can
maintain the product type as per your requirements. This will help you differentiate between your
financial transactions and the transaction types used for each product type and their assignment.
In SAP S/4HANA Trade Finance, 2 product type categories available, namely:
1. 850 – Letter of Credit
2. 860 – Bank Guarantee
An underlying transaction is used in presentation to create an import bill advance for buyers or create
export bills negotiation loans for sellers.
Defining Product type
Defining Transaction Types
Defining Flow types
In the S/4HANA Trade Finance area the following flow categories are available:
10 – Principal Increase
11 – Principal Decrease
84 – Payment Obligation
85 – Trade Finance payment
86 – Remaining credit amount
90 – Other flow condition
91 – Collateral
Reference Flow types
1. Flow category 85 could be assigned with 84 in reference type 1 and flow category 11 in reference
type 2, which is assigned for the same product type and transaction type.
2. Flow category 86 could be assigned with 10 in reference type 1 and flow category 11 in reference
type 2, which is assigned for the same product type and transaction type.
Defining Update types
Assigning General Valuation class
Defining Document type
Defining Conditions for Payment and Presentation Period
In this Customizing activity, you define conditions for presentation and payment period.
The system provides one default presentation period condition Shipment Date, and one default
payment period condition Presentation Date. You can define other presentation and payment period
conditions based on your needs.
Defining Rejection Reasons for L/C Presentation
In this Customizing activity, you define rejection reasons for L/C presentations by assigning a reason
code and a description that you can select later when you reject a presentation.
Defining Field Selection
In this step, you can set up the user interface for transaction management according to various criteria:
All fields that are visible in the entry screens are grouped according to business criteria. For each
field group, you can define whether it should be shown or hidden and whether the entries should
be required or optional.
You can also configure the various tabs in the transaction entry screens (such as administration or
correspondence); you can set the tabs to hidden, optional entry or display only. However, you
cannot define tabs as mandatory.
Exception:
You cannot hide the Structure tab.
Accounting
Indicate Update Types as Relevant to Posting.
In this IMG activity you specify (whether or not) the update type is relevant for posting.
This can depend on the valuation area. This means that you can post an update type in one valuation
area and not in another.
Defining Account Determination
You define the account determination settings for the flows in the parallel valuation areas. The
account determination settings define the accounts to be used when the flows are posted to Financial
Accounting.
The system only posts flows in the parallel valuation areas if an update type is set as relevant for
posting under Indicate Update Types as Relevant to Posting and if posting specifications have been
defined for the corresponding update types in this IMG activity.
Enabling Position and Cash Management
In the following activities, you make basic organizational settings for the parallel valuation areas.
You first define the valuation areas and accounting codes, and then assign them to each other. You
also have the option of defining product categories not to be transferred to the parallel valuation
areas.
Settings for Position Management
Link to Cash Management
Enable Credit Risk Analyzer
This component has the following functions:
1. Quantifies different risk items relating to the market
2. Assigns risks to their respective sources
3. Allows you to control risks by assigning and monitoring limits
In this section, you can make all the system settings necessary for calculating risks and aggregating
them according to different criteria.
Activate/Deactivate Financial Object Integration
To be able to enter financial object data at the same time as you create master data, set the
Component Active indicator. When you set this indicator, the system displays during online processing
the relevant screens for entering transaction data for the component in question (such as Profitability
Analysis and Default Risk Limitation). You can then enter the information required for the financial
objects.
You can also define how the system reacts to errors. You can select:
Completely Active if you do not want the system to save the master data for the transaction when
there are errors.
Partially Active if you want the system to save the master data but not the financial object part
that is incorrect. In this case, a warning message is triggered when the system saves the data.
When you have made these settings on the company code level, you must then assign the product
types for which these settings need to be active.
Activate Integrated Default Risk Limit Check
Summary
SAP S/4HANA Trade Finance Management helps you to better manage your Trade Finance
instruments. This scope item supports common functionalities of Bank Guarantee, Letter of Credit and
Stand by Letter of Credit. The system is able to capture the clear information classification with all
details. The drawing and release facility can be automatically triggered based on the changes of the
trade finance deal. Credit risk analyzer can be activated based on the product types with customizable
limit rules and limit types. The utilization and release of limit can be triggered automatically from the
deals themselves.
Preset status can cover the whole lifecycle of these financial instruments. You can configure approval
processes for status changes and posting releases. In addition to functions for creating and changing
Bank Guarantees/LC, the system also supports functions for rollover, contract settlement, and
contract termination. Cash collateral and Bank Guarantee fees are also covered.
Stay tuned for my next blog post, where I will cover the following: –
Integration with Sales
Facility Management
Correspondence
Customization at BP level
Use of Special G/L indicator
