SAP S/4HANA Treasury – Trade Finance –

Overview and Configuration

Introduction
Global and Local Banks support international trade through a wide range
of products that help their customers manage their international
payments and associated risks, and provide needed working capital. The
term “trade finance” is generally reserved for bank products that are
specifically linked to underlying international trade transactions (exports
or imports). As such, a working capital loan not specifically tied to trade is
generally not included in this definition. Trade finance products typically
carry short-term maturities, although they trade in capital.

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