The new policy initiatives by Central and State governments to boost the ease of doing business have immensely facilitated the growth of Indian commerce. If you wish to start a trading business involved in global commerce, availing the trade finance option may provide you with the funds to get rolling
Trade finance is a financial instrument that facilitates trading companies to undertake international trade and commerce. This financing facility allows exporters and importers to run their businesses and make transactions.
Trade credit is an umbrella term used to denote various financial products that enable companies to trade internationally.
Here are five types of trade finance facilities your trading company can avail:
Payments-in-advance: This finance type allows the importer to pay for imported goods in advance. Hence, trade finance is considered risky and is not popular in the global commerce space.
Working Capital Loans: Such professional loans are designed to fulfil everyday working capital requirements. These may include anything from procuring raw materials to hiring skilled labour.
Overdraft Facility: An overdraft credit works on a line of credit mechanism, where your company can withdraw the amount needed. Your company will only have to repay interest on the amount it uses.
Factoring: Factoring is a post-export funding facility that provides upfront payments to the seller. Financial entities called ‘factors’ fund these payments by purchasing account receivables. In lieu of this, they receive payments from the actual buyer when the invoice is due.
Forfaiting: Forfaiting is also a post-export trade finance mechanism based on account receivables. They only differ from factoring in the sense that they fund trade transactions for medium- to long-term durations.
Trade financing is a large industry involving many groups that use it. Here are some users of international trade and finance:
Producers
Manufacturers
Traders
Importers
Exporters
The following are some features of financing foreign trade:
The amount of trade finance varies according to the lender and various other factors. The trade financier may assess your company’s creditworthiness before sanctioning it.
The tenure of this financing facility also depends on the lender and trade finance type.
Such loans are generally secured which means you will have to pledge an asset to avail it.
To sum up, trade finance is a financial instrument your trading company can utilise to keep up with the global commercial market. This financial facility does not just make the transaction possible between trading parties, but also improves cash flow.
Traders can also use these funds to meet working capital needs like buying machinery, procuring raw materials, or hiring labourers. On top of all this, trade finance products also act as risk-mitigation instruments against the ups and downs of global markets.
The five types of trade finance products are payments-in-advance, overdraft facility, factoring, forfaiting, and working capital loans.
Yes, trade finance is a credit facility that allows you to streamline payments with your exporter/importer. You can also use it to meet the expenses of working capital requirements.
While the trade finance fee may vary depending on the lender, some financiers charge a 0.15% commission on the issuance of the line of credit.
It refers to the difference between the total demand for trade finance by the companies and the money that banks pump in. In simple words, the distinction between the demand and supply of trade finance.
The three elements of trade finance are the parties involved in the process, i.e., an importer, an exporter, and a trade financier.
Consider an Indian company named A places an order for certain goods through an exporter B in the USA. In such a case, A can request their bank to issue a letter of credit for the transaction.
This letter acts as a guarantee by the bank to the exporter. Once the shipment is made, B can visit the same bank with the proof of delivery to get the due payment.
Trade finance has multi-faceted roles. One, it acts as a guarantee of payments between exporters and importers. It also improves cash flow and reduces financial hardships.
The benefits of trade finance are many. One, it enables trust for transactions between exporters and importers. Moreover, they also improve the company’s cash flows along with meeting working capital requirements.
International trade finance also mitigates the risks associated with global commercial markets and supply chains.
The trade financial products are those financial instruments that allow trading companies to run their business smoothly. These include professional loans as well as invoice billing facilities.