Introduction
A Revolving Acceptance Facility by Tender (RAFT) is a financing tool used in international trade and corporate finance. It allows companies to access short-term credit on a continuous basis through a competitive bidding process. This article explores the definition, process, benefits, and examples of RAFT, along with key calculations.
Table of Contents
What is a Revolving Acceptance Facility by Tender?
A Revolving Acceptance Facility by Tender is a structured financing arrangement where financial institutions submit bids to provide short-term financing to a borrower. The facility revolves, meaning once a loan matures and is repaid, the borrower can draw a new loan under the same agreement.
Key Features of RAFT
- Revolving Nature: Borrowers can re-utilize funds once repaid.
- Competitive Bidding: Lenders submit interest rate bids.
- Short-Term Finance: Typically 30, 60, 90, or 180 days.
- Bankers’ Acceptances (BAs): Often used as negotiable instruments.
How the Revolving Acceptance Facility by Tender Works
The process follows specific steps:
- Borrower Requests Bids: The borrower informs banks of its financing needs.
- Lenders Submit Bids: Banks offer competitive rates.
- Selection of the Best Offer: The borrower chooses the most favorable bid.
- Issuance of Bankers’ Acceptance (BA): A BA is issued as a commitment to pay.
- Discounting the BA: The lender discounts the BA and provides funds.
- Repayment and Rollover: Upon maturity, the borrower repays or rolls over the facility.
Example Calculation of RAFT
A company requests $1,000,000 for 90 days. Banks submit bids with the following discount rates:
| Bank | Discount Rate (%) | Discounted Amount ($) |
|---|---|---|
| A | 4.5 | 987,500 |
| B | 4.2 | 989,500 |
| C | 4.3 | 989,250 |
The borrower selects Bank B, as it provides the highest discounted amount.
Mathematical Expression for Discounting BAs
The discount amount is calculated as:
D = F \times \frac{r \times t}{360}where:
- D = Discount amount
- F = Face value of the BA
- r = Discount rate (decimal form)
- t = Number of days until maturity
For Bank B:
D = 1,000,000 \times \frac{0.042 \times 90}{360} = 10,500Thus, the borrower receives:
1,000,000 - 10,500 = 989,500Benefits of RAFT
- Cost-Effective Financing: Competitive bidding ensures lower rates.
- Liquidity Management: Continuous access to working capital.
- Flexibility: Borrowers can choose the best bid each time.
Challenges of RAFT
- Market-Driven Rates: Interest rates fluctuate based on market conditions.
- Credit Risk: Borrowers must maintain strong creditworthiness.
- Administrative Complexity: Requires regular tendering and monitoring.
Comparison of RAFT with Other Financing Methods
| Feature | RAFT | Traditional Loan | Line of Credit |
|---|---|---|---|
| Interest Rate | Competitive via tender | Fixed/Variable | Variable |
| Reusability | Yes, upon repayment | No, requires new approval | Yes, within credit limit |
| Flexibility | High, borrower selects bids | Moderate | High |
| Cost | Lower due to competition | Higher due to bank markup | Depends on usage |
Real-World Example
A manufacturing company uses RAFT to finance raw material purchases. It requests $2,000,000 every 60 days. The process follows these steps:
- Bank A offers 5%, Bank B offers 4.8%, Bank C offers 4.6%.
- The company selects Bank C.
- The discount is:
The company receives:
2,000,000 - 15,333.33 = 1,984,666.67Conclusion
The Revolving Acceptance Facility by Tender is a valuable financing option for businesses needing short-term liquidity. It offers flexibility, competitive pricing, and efficient capital access. By understanding the bidding process and cost calculations, businesses can optimize financing strategies.
