Note: Descriptions are shown in the official language in which they were submitted.
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SYSTEM, METHOD AND ARTICLES FOR FACILITATING
TRADE CREDITS
Field of the Invention
The present invention relates to a system and method for enhancing
cash-based and non-cash-based commerce.
Background of the Invention
Cash-based commerce systems involve one party delivering to another
party goods or services in exchange for cash payment or the promise of cash
payment. Alternatively, countertrade forms of commerce involve the use of non-
cash forms of payment using different concepts such as corporate barter,
currency generation, or offset. Countertrade commerce uses different
transactions for a variety of purposes, including asset value recovery,
financing,
15 and cost reduction programs.
Over the last two decades, national and international commerce have
undergone significant changes. Various network systems have been created to
facilitate the computerized purchase and sale of goods and services, or
exchange of various goods and services. These network systems connect buyer
2o computers, merchant computers, advertiser computers, and payment computers,
sometimes to or through one or several sites on the World Wide Web existing on
the global Internet.
In cash-based commerce, a first type of a network system is based on
offers from a merchant computer. That is, the merchant computer provides
25 advertised products or services. A buyer uses a buyer computer to request
and
view the advertised products and then send from the buyer computer a purchase
message describing a selected product to the merchant computer. The
merchant computer constructs a payment order, sends it to a payment computer,
and receives authorization from the payment computer. After receiving the
so authorization, the selected product is sent to a designated computer
electronically (when the selected product is a software program, a picture,
data
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or another digitized product) or shipped to an address provided by the user
(when the selected product is not or cannot be digitized).
There are other variations to the above-described purchase method
conducted over a network system using cash-based transactions. For example,
when purchasing a selected product or service, the buyer computer can send the
purchase order directly to a payment computer and the payment computer can
send authorization back to the buyer computer, in the form of a secure digital
certificate. This secure certificate is then sent to the merchant computer,
which
causes the electronic transfer or physical shipment. Alternatively, the
payment
1o computer can send the authorization to the merchant computer, which causes
the electronic transfer or physical shipment. The buyer computer can also have
secure "cash certificates," pre-authorized by the payment computer. Then, the
buyer computer can send directly the purchase message, describing the
selected product or service, together with the secure "cash certificates" to
the
~5 merchant computer. The merchant computer "recognizes" the cash certificates
as a valid form of cash payment and causes the electronic transfer or the
physical shipment of the ordered product. The merchant computer assembles a
number of the cash certificates received from several purchase transactions
and
presents them to the payment computer. The payment computer causes a cash
2o transfer to the merchant's account.
There are other types of network systems that connect buyers and sellers
and provide efficient ways to conduct the transactions. For example, a network
system may enable a buyer to submit a detailed request that specifies
requested
goods or services and their price to a merchant computer. The merchant
25 computer may be also a network site accessible by several seller computers
or
service provider computers, each of which can supply one or several goods and
services. After submitting the request for goods or services, a number of
seller
computers or service provider computers may respond to the buyer with
customized responses and offers to sell goods or services. The buyer computer
3o can then compare the responses and determine which seller or provider best
meets his needs.
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Another type of a network system can include one or more intermediaries.
These intermediaries collect advertisements or offers of goods or services
with
detailed descriptions and prices from buyer computers and seller computers.
The intermediaries then post the collected information on their web site or
actively seek buyers or sellers using their databases. For example, the
collected information can be matched to the addresses of different businesses
expected to have a need for advertised goods or services or a supply of
desired
goods or services. The entire process may be fully automated and transacted
over a computer network. Thus, these networks can improve market efficiency
o by avoiding an extended search or advertising, and by expediting the
selection
and order process.
Existing on-line business marketplaces and portals enable efficient
screening, selection and matching of buyers and sellers of goods and services.
Furthermore, the on-line exchanges enable efficient trading in raw material,
~5 parts, surplus inventory or customized items. Several companies have
seamlessly integrated their enterprises with such exchanges and created
content
management platforms and applications that provide flexible solutions built on
open application servers. These networks can also provide security and
confidentiality using encryption techniques.
2o Non-cash based commerce provides the possibility for asset value
recovery in cases where assets have diminished values due to market factors or
other factors. Asset valuation recovery enables recovery of up to the original
value (or the book value) of the asset (e.g., raw material, products, real
estate,
services). Businesses experience significant needs in this area because of the
25 frequent differences between the book values and the market values of their
assets. Asset valuation recovery may be practiced using corporate barter,
where the deficient asset having a diminished value is sold for trade credit
having potentially a higher price than the fair market value of the asset. The
asset is exchanged not for an immediate delivery of goods, services, or cash,
but
3o only for a trade credit which may or may not be exercised depending on the
market conditions. Since this trade credit has a lower value than the book
value,
the deficient asset may need to be "written-down" to the lower cost or market
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value. Such "write-down" is usually mandated by the Generally Accepted
Accounting Principles (GAAP) in the U.S., the International Accounting
Standards, or counterpart accounting principles used in other countries.
Writing
down the value of the asset means the seller must declare a loss on its books,
which in turn may negatively affect the perception of the seller's financial
condition (and thus the seller's stock valuation).
The use of a barter exchange, however, may result in a smaller loss than
would have been experienced if the assets were sold conventionally for cash.
In
the barter exchange, a trade facilitator issues a trade credit to a seller for
a
o higher price than the fair market value of the asset (e.g., raw material,
products,
real estate, services). Since the seller can potentially achieve cash savings
in
future purchases, the seller can realize a degree of asset valuation recovery.
It
is important to note that the recipient of the trade credit (e.g., the seller
of the
deficient asset), in an effort to realize asset valuation recovery, has
invested in
~5 the corporate barter process and assumed the associated risk. The
investment
is equal to the cash liquidation value of the asset given in exchange for the
trade
credit. Over the life of the trade credit, if the trade credit cannot be used
fully,
this investment (or some part of the investment) is lost. Thus the seller can
potentially loose more than the difference between the book value and the
2o market value of the deficient asset. This is a major weakness of corporate
barter
when used for asset valuation recovery.
In general, there is a need for an efficient use of the trade credit, which
also depends on efficiently selecting and matching the needs of buyers and
sellers of goods or services. Furthermore, there is a need for a system,
method
25 and product that will permit a business to exercise its future purchasing
power or
future selling abilities to achieve a present financial advantage.
Summary of the Invention
The invention relates to a system, method, and insurance product that
3o create a marketable asset (i.e., a saleable asset) based on purchasing or
selling
capabilities of an entity coupled to an insurance product that protects the
value
of the purchasing or selling capabilities quantified in a contract. The novel
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insurance product supports and enhances the use of and/or value of a purchase
credit agreement. Alternatively, the novel insurance product enhances the use
of and/or value of a cross sell option contract.
The invention enables, inter alia, asset value recovery, financial services
and cost reduction programs applicable to cash-based and non-cash-based
commerce. The present system, method, and insurance product singly, or in
any combination, enable prospective sellers and buyers to exchange goods or
services at their desired, different prices by coupling this exchange to their
purchasing or selling capabilities. Thus, the present system, method, or
product
provides or supports a highly effective commerce system that improves the
ability of sellers to achieve their price objectives while providing buyers an
opportunity to acquire the product and or services for a current outlay
substantially lower than the seller's price.
One aspect of the invention is a computer system for facilitating
~5 commerce based on trade credits. It includes one or more trade facilitator
computers, one or more client computers, and a communication system
interconnecting the computers as necessary. From time to time, a client inputs
to a client computer information identifying to the trade facilitator computer
the
client's needs for goods or services. The trade facilitator computer has a
2o database of available goods and services and in response to the
identification of
needs from the client computer, attempts to assemble a map of one or more
transactions to supply the needed goods or services from available sources
while achieving a positive cost spread. At least one of the client computer
and
the trade facilitator computer maintains a database of trade credits available
to
25 the client and, on successful assembly and execution of said transaction
routing,
deducts an appropriate number of trade credits from any said database.
The system may further include one or more buyer computers and one or
more seller computers. In this arrangement, the trade facilitator computer
maintains a database of buy offers and sell offers from the buyer computers
and
3o the seller computers. The trade facilitator computer is operated to match
the
client's entered needs and ones of said buy offers with ones of said sell
offers to
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build a trade routing map of transactions which can supply the needed goods or
services.
According to another aspect, a method is provided for financing the sale
of an asset. A seller of an asset, having a capacity to purchase at least one
of
goods and services (generally expressed as "goods or services" herein, which
expression should be understood to include both goods and services or either
of
them singly), in the usual course of business, sells the asset to a buyer. The
seller receives from the buyer trade credits in an amount and on terms and
conditions, and with a duration, acceptable to the parties, the amount of the
trade credits being greater than the fair market value of the asset. The
seller
also receives from the buyer an insurance contract from an insurance company,
naming the seller as a loss payee in the event that over said duration the
full
amount of the trade credits is not utilized by the seller and providing that
the
insurance company will pay to the seller the amount of the unused trade
credits
~5 if the terms of the insurance contract were satisfied. Preferably, the
seller
agrees with the buyer on a permissible amount of trade credits relative to
monetary payment that may be used to purchase specific goods or services in
retirement of the trade credits. Optionally, the seller may receive from the
buyer
a monetary compensation in addition to the trade credits. This method may be
2o used for asset value recovery. Thus, the asset may have a book value to the
seller greater than the fair market value of the asset but the seller may not
be
required to recognize a loss on the sale of the asset.
According to another aspect, there is provided a method for engaging in
commerce. A buyer buys from a seller that has a capacity to purchase at least
25 one of goods and services, in the usual course of business, an asset having
a
fair market value. The buyer gives the seller, as at least partial
consideration,
trade credits usable over a given duration and which, when utilized, are
designed
to return to the seller a value greater than the fair market value of the
asset. The
buyer buys for the benefit of the seller insurance contract from an insurance
3o company and names the seller as a loss payee in the event that over said
duration the full amount of the trade credits is not utilized by the seller
and
providing that the insurance company will pay to the seller the amount of the
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unused trade credits if the terms of the insurance contract were satisfied.
The
buyer may buy goods or services pursuant to needs expressed by the seller,
from time to time during the duration, and sell those goods or services (as
well
as goods or services to which it otherwise has access) to the seller in
exchange
for a payment including an amount of trade credits. Desirably, a spread
between
a price paid by the buyer and a payment received from the seller is sufficient
to
generate a profit for the buyer.
Yet another aspect of the invention is a method for providing to an entity
an immediate financial benefit. A predetermined amount of trade credits are
granted to the entity. An agreement is made with the entity on a procedure for
consuming the trade credits. An insurance policy is obtained for the benefit
of
the entity, the insurance policy providing, in part, that if the entity
adheres to the
terms of the trade credit consumption procedure and the trade credits have not
been consumed over a defined term, then at the conclusion of that term the
~5 insurance company that issued the insurance policy will pay to the entity a
value
of the unconsumed trade credits. It is possible to assign to a third party,
for
value, a right to receive proceeds from the consumption of the trade credits
and
payments from the insurance policy.
Still another aspect of the invention is a trade credit insurance product,
2o comprising an insurance contract which obligates an insurance company to
pay
to the holder of trade credits a sum equal to the value of trade credits the
holder
has been unable to consume during a predetermined term, provided the holder
has complied with the provisions of a trade credit consumption procedure
referenced in the insurance contract.
25 The above-described features, aspects and advantages will be more
readily understood from the accompanying drawing figures, which should be
read in conjunction with the detailed description which follows.
Brief Description of the Drawings
3o Various embodiments of the present invention will now be described by
way of examples with reference to the drawings in which:
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Fig. 1 illustrates a network sale system connecting client computers,
trade facilitator computers, buyer computers, seller computers and insurance
institution computers;
Fig. 2 illustrates an exemplary application of trade credit insurance that
enables a seller to obtain for an underperforming asset a value higher than
the
market value;
Fig. 3 illustrates another exemplary application of trade credit insurance
that enables a seller to obtain for an underperforming asset a value higher
than
the market value;
1o Fig. 4 illustrates yet another exemplary application of trade credit
insurance that enables the trade facilitator to support international trade
transactions; and
Fig. 5 illustrates steps performed by a management information system
operating over the network sale system shown in Fig. 1.
Detailed Description
Fig. 1 illustrates a network sale system connecting a trade facilitator
computer network 20, a client computer network 30 (e.g., a computer network of
a seller who is a client of a trade facilitator), a buyer computer network 40,
a
2o seller computer network 45 and an insurance institution computer network
50.
The network sale system is connected together by a communication network
(e.g., an ATM network 12) and private networks 20, 30, 40, 45 and 50. The
communication network includes links 13, network switches 14, 15 and 16, and a
router 17.
Trade facilitator computer network 20 includes a bridge 22 connected to a
token ring network 24 and an Ethernet network 27. Token ring network 24
provides connection, for example, to a general purpose computer 25 and a
storage device 26. Ethernet network 27 is connected to general purpose
computers (for example, computers 28A and 28B), a printer 29 and other
3o devices. Client computer network 30 includes an Ethernet network 34
connected to switch 15 by a bridge 32. Ethernet network 34 connects general
purpose computers 35 and 36, and a printer 37. Buyer computer network 40
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includes a private network 42 connected to switch 14 by a bridge 44. Private
network 42 connects a computer 43B and a printer 43A to the network sale
system. Seller computer network 45 includes a computer 46 and printer 47, both
connected to switch 16.
Insurance institution computer network 50 includes a bridge 52
connecting a private network 53 to router 17. Private network 53 connects
general purpose computers 54 and 55, and a storage device 57. The above is
only an example of networks 20, 30, 40, 45 and 50, which may include other
devices and may be connected together differently. Each element of these
o networks is optional and the claimed invention may also be practiced even
without any network system, with any of the networks replaced by a single
computer, or even without any computer.
Fig. 2 illustrates a system and a method that can be practiced on the
above-described network system. A client 102 (e.g., a seller who is a client
of a
~5 trade facilitator) owns a building 105 (i.e., an underperforming or
deficient asset),
having, e.g., a book value of $15 million, but a market value of only $8
million. A
trade facilitator 116 enters into a contract with client 102 pursuant to which
trade
facilitator 116 receives building 105 in exchange for $15 million in trade
credits
(indicated as a transfer 110). That is, trade facilitator 116 and client 102
agree
20 on a purchase credit agreement, pursuant to which trade facilitator 116
will sell
to client 102 goods or services needed in the client's usual and ordinary
course
of business, and client 102 can use the trade credits in partial payment for
the
purchased goods or services. The purchase credit agreement, among other
terms, specifies for different purchases the ratio of cash to trade credits
that can
25 be used by client 102 as the payment. For example, the agreement may
provide
that client 102 can pay for the purchased goods or services using 20% of the
price in trade credits and 80% in cash. The relative amount of trade credits
to
cash may range from 100% trade credit and no cash to just one or two percent
trade credits and the rest in cash.
3o Furthermore, trade facilitator 116 pays to an insurance company 120 an
insurance premium (indicated as a transfer 122) and receives an insurance
policy (indicated as 124), which names client 102 as the beneficiary. The
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insurance policy (e.g., Barter Trade Credit Insurance explained in detail
below)
insures that client 102 will use the entire $15 million in trade credits
within the
term of the purchase credit agreement (e.g., three years). Otherwise,
insurance
company 120 pays the unrealized difference in cash to client 102 after the
term
of the agreement. The main characteristics of the insurance policy are
described
below.
In the above transaction, client 102 receives the insurance policy (transfer
106) and the trade credits (transfer 110), which together guarantee future
savings in the amount of $15 million for purchases made in the client's usual
and
ordinary course of business (pursuant to terms it would normally employ).
Trade
facilitator 116 receives building 105 (transfer 108), which he can sell
(transfer
118) on the open market (global market) and for which he can receive $8
million
(transfer 119). Trade facilitator 116 can use the $8 million as his working
capital
to fund the insurance premium (transfer 122) and to buy goods or services from
~5 trading partners 136 for sale to client 102 under the purchase credit
agreement.
In the above transaction, trade facilitator 116 sells building 105 for $8
million on the open market (indicated as a transfer 118) and uses the proceeds
from the sale of building 105, i.e., $8 million indicated as a transfer 119,
as his
working capital. Trade facilitator 116 uses his trading partners 136 (i.e.,
2o numerous buyers and sellers of goods or services) to sell goods or services
to
client 102. Trade facilitator 116 conducts numerous transactions with his
trading
partners 136, all of which are indicated as transfers 128 and 130. The trade
facilitator's profit depends on the cost spread (i.e., the price differential
between
his purchase price and the sale price of the goods or services to client 102)
and
25 other transactional costs, including the insurance premium paid to
insurance
company 120. Based on an order from trade facilitator 116, a trading partner
(136) provides goods or services to client 102 (indicated as a transfer 132),
and
client 102 pays trade facilitator 116 in the form of cash and trade credits,
both of
which are indicated as a transfer 134. Optimally, the amount of trade credits
3o applied to each purchase is not larger than the trade facilitator's cost
spread.
The insurance policy 124 from an insurance company 120 guarantees
that client 102 will realize the entire amount of $15 million during the term
of the
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purchase credit agreement. Thus, client 102 will not loose $7 million as
otherwise would have occurred if he had sold building 105 on the open market
(i.e., the difference between the asset's book value of $15 million and the
market
value of only $8 million). Furthermore, depending on the transaction and the
s applicable accounting rules, client 102 may avoid a write-off upon the
transfer of
building 105 (i.e., the deficient asset) since the insurance policy guarantees
that
client 102 will recoup the entire $15 million of book value within the term of
the
purchase credit agreement. Indeed, the purchase price of the building could
even exceed $15 million if the trade facilitator and insurance company are
willing
to issue and back trade credits of a larger amount.
In the prior art transactions, when an entity disposed of a deficient asset
(such as obsolete inventory having a book value greater than its market
value),
the entity usually had to realize a loss if the transfer of the deficient
asset did not
generate a new asset with a value equal to the book value of the deficient
asset.
15 Recognition of such a loss (and the corresponding write-off on the
business'
financial statements) is usually mandated by the Generally Accepted Accounting
Principles (GAAP) in the U.S., the International Accounting Standards, or
counterpart accounting principles used in other countries. Under GAAP,
according to recently issued Emerging Issues Task Force Release (93-11), an
2o entity has to "write-down" the difference between the book value and the
market
value, if existing prior to any transfer, and cannot mark-up the difference
after the
transfer if the book value was not received in cash. Thus, client 102 may have
to
"write-down" the difference in cases where the book value is clearly lowed
than
the market value. However, client 102 will recoup the difference over the term
of
25 the agreement, based on the insurance contract (and thus ultimately avoid
the
loss).
In general, a purchase credit agreement provides an opportunity for a
client to avoid a loss upon selling or transferring a deficient asset, and
provides
an opportunity for a trade facilitator to supply his client with goods or
services in
3o accordance with a mutually agreed procedure, described in a Countertrade
Consumption Procedure. In this process, the client uses (or exercises) the
trade
credits received from the trade facilitator and insured by an insurance
company.
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The client and the trade facilitator must exercise at least reasonable efforts
and
act in accordance with the terms of the insurance policy when supplying goods
and/or services to the client to exercise the trade credits; otherwise, the
insurance company is not obligated to -- and typically will not -- cover the
unexercised trade credits. The process enables the trade facilitator to profit
from
the price differential between his purchase price for the supplied goods or
services and the sale price of the goods or services to the client (i.e., the
cost
spread). By agreement, if there is no cost spread, the trade facilitator is
not
obligated to supply goods or services to the client. The term of the purchase
credit agreement is limited to a specified number of years or the consumption
of
a specified number of trade credits, whichever occurs first. Thus, the trade
credits are a measure of the purchase credit agreement term.
Based on the purchase credit agreement, trade facilitator 116 can supply
to client 102 the goods or services as needed in the usual and ordinary course
of
business. For this purpose, trade facilitator 116 and client 102 preferably
establish a list of benchmarks. That is, trade facilitator 116 and client 102
jointly
identify specific spending areas of client 102, which will form the basis of
the
purchase credit agreement. Client 102 may identify in the purchase credit
agreement lists of pre-approved suppliers for various goods or services.
2o Furthermore, client 102 may establish benchmark pricing based on its
existing or
historical need to purchase goods or services. To sell under the purchase
credit
agreement, trade facilitator 116 has to match all agreed commercial terms and
benchmark pricing. If trade facilitator 116 is unable to match the commercial
terms and benchmark pricing of client 102, client 102 is free to procure the
goods or services, under the same terms, elsewhere, and will collect the
unused
trade credits in the form of cash from the insurer at the end of the agreement
term.
The amount of the trade credits set in the purchase credit agreement also
reflects the trade credits usage ratio historically achieved (or expected to
be
3o achieved) by trade facilitator 116. The trade credits usage ratio varies
depending on the type of goods or services covered by the purchase credit
agreement. For a specific "deficient" amount (i.e., the difference between the
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asset's book value and the market value), the amount of the trade credits must
be set high enough so that there should be profits realized when exercising
when the purchase credit agreement is completed. That is, trade facilitator
116
needs to realize a known (hopefully minimum) profit over the (typically three-
year) term of the purchase credit agreement.
Based on the procedure established in Countertrade Consumption
Procedure terms, prior to any purchase of goods or services, client 102
submits
a description of its needs to trade facilitator 116. If trade facilitator 116
can
supply the needed goods or services to client 102, he has the right to do so
under the purchase credit agreement. After this transaction is completed,
client
102 will have used a certain amount of the trade credits. The actual amount of
applicable trade credits depends on the cost spread to trade facilitator 116.
Therefore, the specific amount of the goods or services to be provided under
the
purchase credit agreement cannot be predetermined because the spread (i.e.,
15 the price differential) for the needed goods and services will vary
depending on
the prevailing market conditions.
Alternatively, the purchase credit agreement can specify the goods or
services to be sold to client 102, their quantity, price and/or the amount of
applicable trade credits. This type of a purchase credit agreement may
2o resemble the standard options contracts to sell ("puts"). Trade facilitator
116 can
then evaluate the market forces and acquire the standard options to buy
("calls").
Trade facilitator 116 links the PUT and CALL positions in the network system
(shown diagrammatically in Fig. 1) to evaluate the value of the purchase
credit
agreement. This type of a purchase credit agreement is more "predictable" for
25 trade facilitator 116, but it binds client 102 to specified commercial
terms and
thus may have to be negatively reflected on the client's accounting statement.
The entire trading process may be carried out over the network sale
system shown in Fig. 1. Pursuant to a purchase credit agreement, trade
facilitator 116 supplies needed goods or services to client 102. Client 102
enters
30 (for example, on computer 36) the description of goods and services as
needed
in their ordinary course of business. This description is transmitted via
network
12 to trade facilitator network 20 and stored, for example, in storage device
26.
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Different sellers can submit to trade facilitator network 20 their
advertisements or
even offers to sell their goods or services from their networks 45. Storage
device 26 thus includes a database of goods and services available for sale by
various sellers received via network 12. Different buyers can submit to trade
facilitator network 20, using their network 40, their advertisements or offers
to
buy goods or services. Trade facilitator 116 (for example, by using computer
25)
determines if the client's requirements can be met: that is, whether he can
generate a sufficient spread between the prices of goods and services offered
by
the seller and those for the goods and services needed by client 102. If trade
facilitator 116 cannot generate a sufficient spread, client 102 is free to
procure
these goods or services, under the same terms, from another source.
The trade facilitator's database includes the terms of numerous goods or
services available for sale (or offered for sale) and wanted for purchase (or
offered to buy). The system links together the offers and creates a trade
routing
~5 map achieving a cost spread. The map shows a match between the goods or
services needed by client 102 and those available to trade facilitator 116.
The
individual links in the map may have different forms and can be executed
automatically or under the supervision of a human. For example, the trade
facilitator's system may directly match a telecommunications put and a
2o telecommunications call, while achieving a cost spread. The trade
facilitator's
system can indirectly match a put in delivery services to a trade routing map
that
includes a trade position in a raw plastic material to acquire automobile
tires.
The automobile tires can then be used to acquire the delivery services. The
terms of sale and purchase of the raw plastic material and automobile tires
are
25 entered by the respective seller and buyer using seller computer network 45
and
buyer computer network 40. There may, of course, be numerous seller
computer networks 45 and buyer computer networks 40, which are connectable
to network 12 for entering the individual terms.
The feasibility of a selected trade routing map is assessed by the cost
3o spread, i.e., a cash benefit arising from the price differential for the
purchase
under the purchase credit agreement. The trade routing map includes a series
of performable transactions. In some situations, one or several individual
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transactions may not achieve a cost spread, but the overall transaction can
still
achieve the cash benefit. The value of the purchasing activities depends on
trade capabilities derived from (i) investments in time-sensitive surplus
products
and excess (production or other) capabilities; (ii) marketing alliances, (iii)
purchasing alliances; (iv) trade positions and availabilities to trade
facilitator 116;
(v) trading strategies designed to move financial leverage acquired in one
type of
goods or services to another type of goods or services; and (vi) trading
techniques using tolling, spiral trades, or trade-up in commodities to
increase
their value (e.g., manufacturing or processing of acquired raw materials to
realize additional value created by the manufacturing process).
Trade facilitator 116 is in a unique position to generate additional profits,
beyond those others might achieve, by selling the goods and services to client
102. By granting the trade credits, trade facilitator acquired a preferential
position to sell specific kinds of goods or services to client 102 over a
~5 predetermined period. Trade facilitator 116 can then approach purveyors of
those goods or services to bargain for the best prices on future guaranteed
sales. Moreover, trade facilitator 116 can participate in one or more trading
organizations and may enter into similar purchase credit agreements with
several clients. Furthermore, trade facilitator 116 may enter into various
cross
2o purchase option contracts described in the co-pending U.S. Application Ser.
No.
60/130,581 filed on April 21, 2000, entitled "System, Method and Articles for
Facilitating Secured Option Contracts," which is incorporated by reference.
Thus, trade facilitator 116 may acquire the ability to aggregate various
rights or
abilities to sell the same kind of goods or services to multiple clients. By
2s aggregating purchasing power, trade facilitator 116 can obtain price
concessions
from suppliers. Moreover, trade facilitator 116 can obtain, through other such
transactions, the right to sell goods or services to those suppliers.
Fig. 3 illustrates another system and method that enable a seller (i.e., a
client of a trade facilitator) to obtain for an underperforming asset a value
higher
3o than the market value of the asset. A client 103, e.g., a clothing
manufacturer,
owns an obsolete inventory 107 such as clothing that has a market value of
only
$8 million, but a book value of $15 million. A trade facilitator 116 enters
into a
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purchase credit agreement with client 103 pursuant to which trade facilitator
116
receives obsolete inventory 107 (indicated as transfer 109) in exchange for $8
million in cash (indicated as transfer 111) and $7 million in trade credits
(indicated as transfer 112). Pursuant to the purchase credit agreement, trade
facilitator 116 will sell to client 103 goods or services needed in the
client's usual
and ordinary course of business, and client can use the received trade credits
as
a partial payment for the purchased goods or services. The purchase credit
agreement, among other terms, specifies for different purchases the ratio of
cash
to trade credits that can be used by client 103 as the payment.
As described above, trade facilitator 116 buys from insurance company
120 an insurance policy (indicated as transfer 124) and pays an insurance
premium (indicated as 122). The insurance policy names client 103 as the
beneficiary and guarantees that client 103 will receive the benefit of the
entire $7
million in trade credits within the term of the purchase credit agreement.
~5 Otherwise, insurance company 120 pays the unrealized difference up to $7
million in cash to client 103 after the term of the agreement.
In the above transaction, client 103 receives the insurance policy (transfer
106) and the trade credits (transfer 112), both of which together guarantee
future
savings in the amount of $7 million for purchases performed in the client's
usual
2o and ordinary course of business. Trade facilitator 116 receives deficient
inventory 107 (transfer 109), which he sells on the open market (transfer 113)
and receives $8 million (transfer 114). Trade facilitator 116 buys from
trading
partners 136 goods or services for sale to client 102 under the purchase
credit
agreement.
25 Trade facilitator 116 conducts numerous transactions with his trading
partners 136 (indicated as transfers 128 and 130) in order to sell goods or
services to client 103. Based on an order from trade facilitator 116, a
trading
partner (136) provides goods or services to client 103 (indicated as transfer
131 ),
and client 102 pays in the form of cash and trade credits, both of which are
3o indicated as a transfer 133. The feasibility of these transactions depend
on the
cost spread trade facilitator 116 can achieve. The purchase credit agreement
defines the amount of trade credits client 103 can use for each type of sale.
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Under, the purchase credit agreement illustrated in Fig. 3, client 103
received
immediately $8 million in cash and thus, in general, can apply a smaller
amount
of trade credits to each purchase than in the purchase credit agreement
illustrated in Fig. 2.
As described above, the insurance policy issued by insurance company
120 guarantees that client 103 will realize the amount of $7 million during
the
term of the purchase credit agreement. Thus, client 103 will not loose $7
million
which would have occurred if he had sold inventory 107 on the open market.
Depending on the transaction and the applicable accounting rules, client 103
may also avoid a write-off upon the sale of inventory 107 (i.e., the deficient
asset) since the insurance policy guarantees that client 102 will recoup the
entire
$7 million within the term of the purchase credit agreement.
From time to time, before any purchase of goods or services, client 103
enters the terms of the proposed purchase into client computer 36 and provides
~5 this data via network 12 to facilitator network 20. The sale data is
entered into
the database stored in storage device 26, used by trade facilitator 116. As
described above, the trade facilitator's system links one or more different
transactions for the purpose of generating the cost spread.
Similarly as described above, client 103 may derive an important
2o advantage from the purchase credit agreement by avoiding a write-off when
disposing of a deficient asset. The insured trade credits provide a guarantee
that client 103 will recoup the entire book value of inventory 107 (the
deficient
asset) transferred to trade facilitator 116. Thus the deficient asset
generated a
new asset that may have a value equal to (or even exceeding) the book value
25 under GAAP, depending the type of goods or services and the purchase credit
agreement. Thus, client 103 can avoid a write-off.
The above-described transactions can also be used to create various
marketable or saleable assets. These assets derive from the purchase credit
agreement that couples trade credits having predefined cash value with an
3o insurance policy guaranteeing the entire usage of the trade credits. If
there is no
sale of an obsolete inventory (or another asset having a diminished value) the
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_ 1g _
above-described transactions can simply generate extra cash for client 102 or
103.
Referring to Fig. 4, according to another example, a client 104 wants to
finance export (international trade) transactions. Client 104 is selling
tractors for
$10 million to an emerging market country 140, but the foreign buyer does not
have the needed up-front cash or is not creditworthy. Trade facilitator 116
enters
into a purchase credit agreement with client 104 pursuant to which trade
facilitator 116 gives to client 104 trade credits in the amount of $10 million
(transfer 110). In return, client 104 agrees to assign to trade facilitator
116 the
receivables 142 (i.e., payments to be made) from the foreign buyer of the
tractors, and client 104 agrees to "supplier access" (also indicated by arrow
148),
as described below. Trade facilitator 116 receives the payment of $10 million
(transfer 142) from the foreign buyer immediately upon delivery of the
tractors
(indicated as a transfer 141), if it is capable of doing so, or over a
predetermined
~5 period, depending on the purchase credit agreement.
Trade facilitator 116 buys from an insurance company 120 an insurance
policy (indicated as transfer 124) and pays an insurance premium (indicated as
122). The insurance policy names client 104 as the beneficiary and guarantees
that if client 104 does not use the entire $10 million in trade credits within
the
2o term of the purchase credit agreement, insurance company 120 will pay the
unrealized difference (up to $10 million) in cash to client 104 after the term
of the
agreement.
In this transaction, client 104 receives from trade facilitator 116 the
insurance policy (transfer 106) and the trade credits (transfer 110), which
25 together assure future savings in the amount of $10 million on purchases
performed in the client's usual and ordinary course of business. Trade
facilitator
116 receives the payments) totaling $10 million (transfer 142) from the
foreign
buyer and uses this income as working capital for its different transactions.
Furthermore, trade facilitator 116 buys from trading partners 136 goods or
3o services for sale to client 104 under the purchase credit agreement.
Trade facilitator 116 may receive "supplier access" from client 104 and
uses the supplier access whenever possible to buy goods or services.
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Spedilcally, client 104 will arrar~e fiat trade iaalitator 118 meetings with
client's suppl~rs 150 and will help trade fadlttator 918 to obta~ goods and
services from them under similar terms to those e~erienced by client. If
client
104 is a large manufacturer, he may receive goods or services from suppliers
s 150 under prei~erred rates or ~tetms (transactions shown by arrows 156 and
158).
Under the existing supplier access, trade faalitator 118 may be able to obtain
trading opportunities for goods and services at signHican! savings
(transactions
shown by arrows 152 and 154).
For example, client 104, who is a tn~c~or and track manufacturer, may
to have existing agreements with suppUers 150 to buy steel, paint or tires et
significant discounts due to i#s high volume of purchase orders (transacblona
shown by arrows 158 and 168). Trade facilitator 118 may ,be able to utilize
the
same discounts in achieving the coat sproad. Suppliers 150, in turn, can
increase market shares and gain access to the trade facilitator's database of
~s goods and seniroes (shown as amaw 16~). Thus, the supplier acxess granted
to
trade tacilitator 118 by client 904 is a valuable business opportunity for
creating
the cost spread,
Retorting still to Fig. 4, trade facilitator 118 conducts numerous
transactions with his trading partners 138 (indicated as transfers 128 and
130) in
20 order to sell goods or services to client 104. Based on an order from trade
fe~diitator 11B, a trading partner (938) provides goods or services to client
104
(indicated as transfer 134), and client 904 pays in the fiorm of cash and
trade
crediib, both of which are indicated as a transfer 132. The feasibility of
these
tr0nsactions depend on the oust spread which is sent to trade facilitator 118
25 (transfier 130).
As described above, the en5re trading process end the process of using
(or retiring) the awarded trade credits may be computerized. Client 104 enters
via computer 30 the description of goods and services es needed in their
ordinary course of business. This description is transmitted via network 12 to
3o trade facilitator network 20. Trade facilitator 116 uses computer network
20 to
determine if the client's requirements can be met; that is, whether he can
generate a sufficient cost spread for the transaction. If trade facilitator
116 can
AMENDED ~H~~~
~~PEAIEi''
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generate a sufficient spread, the transaction is automatically confirmed over
network 12 and is executed. After executing the transaction, client 104 in
addition to transferring a cash payment uses (and automatically "retires")
some
amount of trade credits consistent with the terms of their grant. Trade
facilitator
s 116 and client 104 use the computer network to provide periodic updates to
insurance company 120 over the term of the purchase credit agreement.
According to another example, a client wants to finance export
(international trade) transactions. An Export Credit Agency (ECA), such as the
U.S. EXIM Bank, makes funds available to promote commerce. The EXIM Bank
can guarantee only a portion of the funding typically up to 85% of a given
transaction. To generate the remaining 15% in cash (or more depending on the
guaranteed portion), the client and a trade facilitator enter into a purchase
credit
agreement. In the purchase credit agreement, the trade facilitator grants to
the
client a selected amount of trade credits and the client assigns to the trade
~5 facilitator the 15% cash portion to be received from a foreign buyer. At
the same
time, the trade facilitator buys from an insurance company an insurance policy
that guarantees to the client the consumption of all trade credits within the
term
period of the purchase credit agreement, as described above. Thus, the client
can generate the needed cash from the trade facilitator in a situation where
2o commercial banks will not participate because they do not want the foreign
loan
exposure.
According to yet another example, the client wants to sponsor a not-for-
profit organization, but does not currently have the cash to provide funding.
The
client and a trade facilitator enter into a purchase credit agreement, wherein
the
25 trade facilitator grants to the client a selected amount of trade credits.
The trade
facilitator may also provide cash which the client donates to the not-for-
profit
organization up front or over time. Furthermore, the trade facilitator buys
from
an insurance company an insurance policy that has the effect of guaranteeing
to
the client that it will receive the benefit of the consumption of all trade
credits
3o within the term period of the purchase credit agreement, as described
above.
The insured trade credit (i.e., the opportunity to consume the trade credit
and to
receive the insurance proceeds resulting from a failure to consume all of the
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trade credits) also can be donated. For example, the goods to be purchased
might be food products and the not-for-profit might be a homeless shelter able
to
make good use of the food it would be able to purchase for a cash outlay below
market prices. Thus the client turned his ability to buy or sell goods or
services,
s into a new asset (e.g., cash or an insured trade credit) donated to the not-
for-
profit organization without incurring a cost or liability and generating a
current
and/or future tax deduction for the donation.
According to yet another example, the client wants to create a reserve to
fund potential exposure to warranty or other legal claims. The client and a
trade
facilitator enter into a purchase credit agreement, wherein the trade
facilitator
grants to the client a selected amount of trade credits and the trade
facilitator
provides cash to fund a warranty reserve up front or over time. Furthermore,
the
trade facilitator buys from an insurance company an insurance policy that has
the effect of guaranteeing to the client that it will receive the benefit of
the
consumption of all trade credits within the term period of the purchase credit
agreement, as described above.
According to yet another example, the client wants to finance mergers
and acquisitions. In an acquisition, a seller (i.e., a party to be acquired)
seeks a
higher price than the client is willing to pay. The client and a trade
facilitator
2o enter into a purchase credit agreement, wherein the trade facilitator
grants to the
client a selected number of trade credits and the trade facilitator provides
cash
up front or over time to finance mergers and acquisitions. Furthermore, the
trade
facilitator buys from an insurance company an insurance policy that guarantees
to the client the consumption of all trade credits within the term period of
the
25 purchase credit agreement, as described above. Thus, the client can
generate
the needed cash to meet the seller's price without additional cost.
According to yet another example, the client may be a governmental
organization. The governmental organization may need initial cash for an
infrastructure project. The governmental organization and a trade facilitator
enter
3o into a purchase credit agreement, wherein the trade facilitator grants to
the
governmental organization a selected number of trade credits, and the trade
facilitator provides cash up front or over time. Furthermore, the trade
facilitator
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buys from an insurance company an insurance policy that guarantees to the
governmental organization the consumption of all trade credits within the term
period of the purchase credit agreement, as described above. Thus, the
government can generate cash from the private sector with no cost or liability
to
the private sector (or another part of the public sector).
Importantly, in any one of the above examples, the trade facilitator may
borrow funds from a financial institution or may sell their accounts
receivable to a
financial institution. The financial institution buying the trade receivables
can be
the insurance company also issuing the insurance policy. In these situations,
the
above-described Countertrade Consumption Procedure and Barter Trade Credit
Insurance Contract are modified to reflect appropriately the additional
interests.
Fig. 5 illustrates the operation of a system for managing trade finance
insurance. In step 160, a perspective client (e.g., client 102, 103 or 104)
submits to trade facilitator 116 an application for trade insurance in the
form of a
~5 request for proposal. In the request, the client discloses the asset, where
he
would like to achieve asset valuation recovery. Alternatively, the client
identifies
any other form of a saleable asset to be generated.
In step 165, the client describes his own purchasing and sale activities,
and any other expenditures expected to occur within the next three years (or
2o another predetermined period). This client data is entered over client
computer
network 30 and provided to trade facilitator computer network 20. (In the
embodiment where no network is used, the client may provide the above
information in any other suitable form.) Storage device 26 stores the provided
client information, and any one of trade facilitator's computers (i.e.,
computer 25,
25 28A or 28B) processes the client data.
In step 170, the trade facilitator's computer classifies the client data
based on the selling or purchasing activities of the client and all relevant
commercial terms associated therewith. In step 170, the system also identifies
a
potential purchase credit agreement. The system also performs a GAAP
3o expense classification such as operating expense, cost of goods or capital
expenditures.
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In step 180, the system accesses an internal database of various goods
or services available for purchase or sale. This database of goods and
services
is created and frequently updated by receiving buyer data from buyer computer
network 40 (step 190) describing goods or services needed by a buyer, and by
receiving seller data from seller computer network 45 (step 200) describing
goods or services offered for sale.
In step 210, the system determines and reports various trade links by
using the database. The system searches for goods and services available for
sale or needed to be purchased. The system then determines a future value of
the client's purchasing and selling activities based on trade capabilities
determined using a number of factors. The trade capabilities depend on (a)
investments in time-sensitive products and excess capabilities (or other
capabilities); (b) marketing alliances; (c) purchasing alliances; and (d)
trade
positions and the database information stored by trade facilitator 116. These
~5 trade capabilities also include options to acquire and options to sell
positions.
In step 210, the system also takes into account the trade capabilities
obtained from prior investments and the trade capabilities based on marketing
or
purchasing alliances. Different alliance agreements may restrict the type of a
product or service or the amount of a product or service that can be acquired
for
2o an existing customer or purchased from an existing customer that is an
alliance
partner. Therefore, the system also classifies the individual clients and
compares them to lists of existing alliance partner customers. In this
process,
the system evaluates the client's request for a proposal and determines
possible
direct links (i.e., direct transactions, step 220), or indirect links (i.e.,
in direct
25 transactions, step 230) if there are no direct links or the indirect links
generate a
larger spread. In step 240, the system displays the direct links found in step
220.
In step 250, the system displays various alternative trade route "maps"
that show the required trades to supply goods or services to a client under a
3o purchase credit agreement. One objective of the system is to determine the
value of a potential purchase credit agreement by evaluating the cost spreads
for
the individual transactions.
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In steps 260 and 265, the system assesses demand for trade capabilities
and the demand on trade positions held. As the result, the system determines
the necessary trade credits associated with the proposed purchase credit
agreement (step 270). As described above, the difference between an
acquisition price and the sale price for linked goods or services forms the
cost
spread. The total cost spread (the total cost difference) must be at least
equal to
the total amount of the trade credits. If insurance company 126 requires
modification of the amount of trade credits usable in each purchase by the
client
to reduce their risk, this factor is also taken into account in step 270.
Thus, the
system calculates a total number of trade credits and the amounts of the trade
credits usable for different types of purchases associated with a potential
purchase credit agreement, and provides this information to trade facilitator
116.
The total number of trade credits and the usable amounts of the trade credits
is
incorporated into the approval requirements for the insurance contract (step
280).
Insurance company 120 provides their contract compliance criteria, for
example by their insurance company network 50 (step 310). Based on the
above-described information, the system formulates a trade credit consumption
procedures) specific to the client information (step 300). In step 320, the
2o system generates an insurance request submission and delivers the
submission
to insurance computer network 50 electronically. Alternatively, the submission
may be delivered to insurance company 126 by mail or facsimile.
The above transactions utilize the above-described purchase credit
agreement, a trade credit consumption procedure, and an insurance contract.
As a condition for receiving trade credits, the client agrees to adhere to the
purchase credit agreement, and follow the trade credit consumption procedure
when acquiring goods or services. The trade credit consumption procedure is a
written procedure describing expenditure policies and guidelines to which the
client is obligated and intended to enable the trade facilitator to supply
goods or
3o services to the client, who then uses trade credits as a partial payment.
Furthermore, the client and the trade facilitator agree to adhere to the terms
of
the insurance contract. While the trade credit consumption procedure can be
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designed individually on a per-transaction basis to meet the needs of the
parties,
it is notable that one of the terms of the insurance contract is that the
agreed
consumption procedure will be followed as a condition of the insurance company
being liable. Typically, the consumption procedure will grant to the trade
s facilitator a right of introduction or a right of first refusal to meet the
needs of the
client for the goods and services covered by their agreements, provided the
client's usual and customary business terms are met. If the client should buy
from another in violation of that right of first refusal or fail to make the
required
introductions, the insurer is relieved of its obligations to pay any proceeds
from
the policy. Thus, the client has a great incentive to adhere to the agreed
procedure.
An example of a suitable insurance policy is provided in Appendix A
titled: Barter Trade Credit Insurance.
The Barter Trade Credit Insurance policy specifies conditions under which
15 It covers any loss resulting from any trade credits not being consumed
before the
expiration date of the policy. During the policy period, the trade facilitator
and
the client have to conform their actions in all material aspects to the trade
credit
consumption procedure, to the reasonable satisfaction of the insurance
company. The insurance policy also includes standard definitions, exclusions,
2o representations, as known in the insurance industry (e.g., audit
provisions,
arbitration provisions, liability limits, exclusions due to bankruptcy, acts
of war,
etc.). During the term of the insurance policy, the trade facilitator and the
client
periodically provide to the insurance institution a written report detailing
the
amounts of trade credits consumed.
25 A trade credit insurance product, comprising an insurance contract which
obligates an insurance company to pay to the holder of trade credits a sum
equal
to the value of trade credits the holder has been unable to consume during a
predetermined term, provided the holder has complied with the provisions of a
trade credit consumption procedure referenced in the insurance contract.
3o Having thus described the invention and various illustrative embodiments
and uses as well as some of its advantages and optional features, it will be
apparent that such embodiments are presented by way of example only and not
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by way of limitation. Those persons skilled in the art will readily devise
further
modifications developments and enhancements to and improvements on these
embodiments, such as variations on the disclosed methods and systems, as well
as additional embodiments, without departing from the spirit and scope of the
invention. It is impossible to enumerate all of the variations that will quite
quickly
occur to those in the art. Accordingly, the invention is limited only as
defined in
the following claims and equivalents thereto.
What is claimed is:
