Trade finance

Trade finance

What Is Trade Finance?

Trade finance typically represent the financial instruments as well as products which are used by business organizations for facilitating international trade and commerce. Trade finance helps in making it possible and easier for buyers and suppliers for transacting business through trade. Trade finance can be seen as an umbrella term which means it can cover certain financial products which are utilized by the banks and companies to make trade transactions feasible.

Understanding Trade Finance

The general function of trade finance is introducing a third-party to transactions for removing the involved payment risks as well as the supply risk. Trade finance facilitated the supplier with receivables or the required payment according to the agreement whereas the buyer might get extended time in order to fulfil the trade order. 

Types of trade finance

Import Trade Finance 

Importing goods and services can be extremely worthwhile for businesses that are looking to provide new products to their customers, while taking advantage of exchange rates, reduced production costs.

Import finance allows firms to buy commodities from global suppliers on credit from a lender by using trade finance tools. It is usually secured against various documentations within the process flow such as invoices, bill of lading, letter of credit and other specific ones.

Export TradeFinance

It helps suppliers financially who are willing to sell goods to international buyers. It results in fascinating more customers for the product followed by increased sales of the customers, and more profit from those sales.

The exporter may require short term, medium term or long-term finance depending upon the type of commodities being exported. There exist different types and structures of export finance depending on the business needs and the nature of the export transaction.

Further export finance can be classified within

Pre-Shipment Export Finance

It is provided to the exporter when they ask for a certain amount of payment for arranging various necessary things such as raw materials. This finance is needed for processing raw material into finished goods. Once the processing is done, they have to be stored at relevant places and for that some cost has to be paid. Also, for packing and shipment of goods to the port finance is needed. Exporter can apply for this finance once order is confirmed by the buyer and its proof have to be shown in the finance institution for further processing. It is granted for 180 days.  If some kind of uncertainty occurs then this can be extended to 90 days. Maximum allowable period is 270 days. 

Post Shipment Export Finance

Once the shipment of goods towards importer is done the exporter is supposed to make bill that has to be paid by the importer. It’s a lengthy process and takes almost 3 to 6 months to receive the payment from the importer and meanwhile production of exporter can get affected. So, to avoid this exporter presents this bill in the finance institution which will pay for the wages and other services such as shipping charges. Post shipment credit is basically to help the exporter financially till payment from importer is received. So, the production and others work keeps on going.

The parties involved in trade finance are numerous and includes:

●        Banks

●        Trade finance companies

●        Importers and exporters

●        Insurers

●        Export credit agencies and service providers

Trade finance provides credit facilities which covers or fulfils the needs of exporters and importers regardless of their trade category. Trade finance helps SMEs to grow and increase their trade. Export and import finance help in online trading, project finance and corporate finance. It helps to mitigate the various risks involved within the international trade and finance such as legal, political, marketing and financial risks. It prevents the exporters from non-payment and prevents importers from inadequate receiving of goods. Various trade finance companies and trade finance institutions are available to finance clients as per their requirement.

                                    

Trade finance

What Is Trade Finance?

Trade finance typically represent the financial instruments as well as products which are used by business organizations for facilitating international trade and commerce. Trade finance helps in making it possible and easier for buyers and suppliers for transacting business through trade. Trade finance can be seen as an umbrella term which means it can cover certain financial products which are utilized by the banks and companies to make trade transactions feasible.

Understanding Trade Finance

The general function of trade finance is introducing a third-party to transactions for removing the involved payment risks as well as the supply risk. Trade finance facilitated the supplier with receivables or the required payment according to the agreement whereas the buyer might get extended time in order to fulfil the trade order. 

Types of trade finance

Import Trade Finance 

Importing goods and services can be extremely worthwhile for businesses that are looking to provide new products to their customers, while taking advantage of exchange rates, reduced production costs.

Import finance allows firms to buy commodities from global suppliers on credit from a lender by using trade finance tools. It is usually secured against various documentations within the process flow such as invoices, bill of lading, letter of credit and other specific ones.

Export TradeFinance

It helps suppliers financially who are willing to sell goods to international buyers. It results in fascinating more customers for the product followed by increased sales of the customers, and more profit from those sales.

The exporter may require short term, medium term or long-term finance depending upon the type of commodities being exported. There exist different types and structures of export finance depending on the business needs and the nature of the export transaction.

Further export finance can be classified within

Pre-Shipment Export Finance

It is provided to the exporter when they ask for a certain amount of payment for arranging various necessary things such as raw materials. This finance is needed for processing raw material into finished goods. Once the processing is done, they have to be stored at relevant places and for that some cost has to be paid. Also, for packing and shipment of goods to the port finance is needed. Exporter can apply for this finance once order is confirmed by the buyer and its proof have to be shown in the finance institution for further processing. It is granted for 180 days.  If some kind of uncertainty occurs then this can be extended to 90 days. Maximum allowable period is 270 days. 

Post Shipment Export Finance

Once the shipment of goods towards importer is done the exporter is supposed to make bill that has to be paid by the importer. It’s a lengthy process and takes almost 3 to 6 months to receive the payment from the importer and meanwhile production of exporter can get affected. So, to avoid this exporter presents this bill in the finance institution which will pay for the wages and other services such as shipping charges. Post shipment credit is basically to help the exporter financially till payment from importer is received. So, the production and others work keeps on going.

The parties involved in trade finance are numerous and includes:

●        Banks

●        Trade finance companies

●        Importers and exporters

●        Insurers

●        Export credit agencies and service providers

Trade finance provides credit facilities which covers or fulfils the needs of exporters and importers regardless of their trade category. Trade finance helps SMEs to grow and increase their trade. Export and import finance help in online trading, project finance and corporate finance. It helps to mitigate the various risks involved within the international trade and finance such as legal, political, marketing and financial risks. It prevents the exporters from non-payment and prevents importers from inadequate receiving of goods. Various trade finance companies and trade finance institutions are available to finance clients as per their requirement.

Export finance

Export finance

Export Finance can be considered as a term for describing the specialist range of finance which focus on the export market. Export financing generally aims for supporting businesses in reaching within an international market efficiently. Once a consignment clears from the domestic customs, there is some specific time period while the commodities are in transit, and are then gets collected by the importer.
Especially for the concern of emerging markets, the ability for extending attractive payment terms for the buyer or importer is often considered as a huge part of winning an order. Export financing helps in maintaining positive cash flow cycle to fulfil the gap between work done and payment received.
Export trade finance helps exporters financially who are willing to sell goods to international buyers. It results in fascinating more customers for the product followed by increased sales of the customers, and more profit from those sales.
 

However, if the buyer is offering conventional repayment terms (usually, within a time period after the goods are received by the buyer), exporters can face lengthy trade cycles and financial uncertainty. So here export invoice finance can be used to advance payment to exporters by a trade financier to ease cash flow pressures. It can be considered as a loan for exporter for accomplishing various tasks involved in the export of goods. Apart from this, there exist various methods of payment in international trade such as letter of credit, cash in advance, documentary collections and open account.

There exist various finance companies which offer financial guarantees and bridge the finance gap from seller to buyer as well as establish trust amongst them. Export finance helps to reduce cash flow problems with payment guarantees from a customer when goods are being exported, advance payments for access to additional working capital and the discounting of customer invoices to avoid payment delays.
Features of export finance
Eligibility: Pre-shipment finance is available to all types of exporters such as:
●    Merchant exporters;
●    Manufacturer exporters;
●    Export and Trading houses:
●    Manufacturers who supply goods to export houses (EH) trading houses (TH) or merchant exporters.
 

 

 

Documentary Evidence: below are the following documents that are required to be submitted by the direct exporter if they wish to avail pre-shipment finance:
=>There should be a confirmed export order/contract and/or
=> Availability of a non-replacing letter of credit which will work in favour of the exporter; or
=> Original cable/fax/telex message that gets exchanged between the exporter and between the buyers.
 

Purpose: Packing credit by the banks are granted only for specific purposes such as purchase, processing, manufacturing or packing of goods that are defined by the Reserve Bank of India. Following are the purposes for which pre-shipment finance is provided:
=>In order to avail raw materials, components, machinery, equipment and technology which are required for export production.
=>It takes measure that the quality of the goods will increase and to confirm the international standards.
=>They also wish to adapt product to the requirements of foreign markets, improve existing products, product addition and product extension.
 

Amount of Finance: Banks have got all the authority to find the amount of pre-shipment finance. The only guideline principle which is important is the concept of Need Based Finance. Banks find out the percentage of margin, depending on factors like:
o    The nature of the following order.
o    The nature of the following commodity.
o    The capability of exporter to bring up the required contribution.

Pre-export Finance

Pre-export Finance

Trade finance

Trade finance personifies financing for trade. It is a specialist finance that can help a company to grow and increase trade. Global trade finance helps business in releasing working capital from domestic trade transactions. 

Export process is lengthy, cumbersome and expensive and involves certain risks too. Moreover, payment terms can be long and very hard to manage. Even after careful time planning and financial management, exporting commodities can place incredible strain on your business. International trade finance thus becomes a key factor in the competition among various business. 

Export Finance

Export trade finance helps exporters in getting finance for various trade relatedactivities. It is for assisting the traders who are willing to sell goods to internationalbuyers. It results in increased sales of the customers, and availing more profit fromthose sales. Export finance helps exporters to get finance for the pre shipment andpost shipment activities so that all the tasks can be performed smoothly even beforegetting paid from the importer.

   

Pre-export finance

After the confirmation of an order by the buyer, mostly through a Letter of Credit, exporters often need working capital finance to fund wages, production cost, buying raw materials, processing and converting into finished goods and packaging. The finance required by an exporter, prior to the shipment of goods, is defined as pre-export finance. 

The banks grant pre-export credits under the concessional rates of interest at 7.5 per cent and it can extend to a maximum period of six months.

Pre-export finance is accessible by the exporters through receivable-backed financing, inventory/warehouse financing and pre-payment financing.

A loan provided by a lender with the goods exported essentially considered as security is called the trade or import finance – wherein the lender can seize the goods in case of defaulting. While the funds provided by the lender can go up to 80% of the total value of the goods, factors like the risk of exporting, the goods being exported and the lender plays a major role on the amount of the allocated loan. In case of goods with little demand, lenders often shy off to finance, since there are higher risks – as during commercial losses the goods might not get re-sold.

Inventory or warehouse financing is often preferable since lenders might demand for the exported goods to be kept in a trusted location or public warehouse or borrower’s premises under the control of a third party. It is also favourable for the borrowers for short term working capital or loans, since they can use the inventory as collateral or flexible terms when they have used up existing credit lines of bank overdraft facilities.

Pre-payment financing is the buyer taking out a loan specifically to pay the seller in advance of the shipment of the goods. According to the borrowing contract, the buyer is liable to pay the loan back to the bank soon after receiving payment of the goods. While pre-payment financing ensures quick payment, the risk of losses in such finance is only shared by the buyer and the lender.

Pre export finance is majorly beneficial in:

·         Purchasing of raw materials to manufacture goods

·         Storage of goods in proper warehouse till shipment

·         Payment for packing, marketing and labelling of goods

·         Payment for pre-export inspection charges

·         Purchase of heavy machinery and other capital goods from domestic market, for the production of export goods

·         Meeting expenses of processing goods

Types of Pre-export Finance

Following below are some special schemes available in respect of pre-export finance:

Extended Packing Credit Loan: it is a type of loan which is given only to those exporters who has a rating of first-class exporters given by the commercial banks on the basis of their creditworthiness. It is basically granted for making advance payment to the suppliers in order to acquire goods that are to be exported. These types of advances are considered as clean advances as it does not include any documentary evidence for a short period of time. 

Packing Credit Loan (Hypothecation):  it is basically provided to the exporters in order to acquire the raw materials, work-in-process or finished goods that are meant for exports. These goods are then treated as security for sanctioning of loan. Under this facility, it is mandatory for the exporter to provide a hypothecation deed in favour of the bank, till the time the possession of goods is in the hands of the exporter.

Packing Credit Loan (Pledge): this loan is given to those exporters who gets the duty to acquire seasonal raw materials or materials which are packed up in odd or brunched lots. The documents relating to raw materials are kept in safety with the bank until the possession remains with the exporter.

Secured Shipping Loan: Secured shipping loan can only be obtained after the goods are handed over to the transporter or the agent who is responsible for clearing and forwarding of shipment. It is either released against lorry receipt or railway receipt. It is provided for a very short period of time, only until the goods are dispatched to the port and completion of shipping and customs formalities is done.

Invoice Discounting

Invoice Discounting

When a company requests for a loan by keeping its unpaid account receivables as collateral, the process refers to invoice discounting. In this type of financing, the financer can alter the amount of the debt as soon as the amount of accounts receivables, kept as collateral, changes; hence the form of the loan offered is also short term.

Also considered as debtor finance, invoice discounting eyes to benefit companies having cash flow problems, as their debtors are expected to pay invoices not before 30 to 90 days. If a company is facing problems with their financial reserves being insufficient to pay corporate expenses, allowing clients to pay in 30-90 days can affect the cash flow of the business. With invoice discounting, instead of waiting for customers to pay within the normal credit terms, companies receive the cash as soon as the invoice is issued; thereby getting an accelerated cash flow from the customers.

Financer usually tend to offer loans of a smaller amount than the amount of the account receivable kept as collateral. Usually the amount is 80% of the total invoices, which are less than 90 days old. Through invoice discounting, the financier providing the short-term loan is benefitted from both the interest rates on the loan and a monthly charge for maintaining the arrangement.

With invoice discounting, the companies always have a power to retain control over its sales ledger and the payments are cased in the usual way. There are also direct payments from the clients and no third party is involved.

Invoice discounting can be beneficial for any company which provides product or service to clients and allows a credit term of 30-90 days. However, businesses which are mostly benefited with invoice discounting are:

●        Construction

●        Recruitment

●        Manufacturing

●        Wholesalers

●        Printers

●        Couriers

How invoice discounting works:

●        Companies provide goods and services to customers and make an invoice

●        Details of invoices are sent to the financer

●        Financer provides the funds based on the amount of the invoices, usually within 48 hours

●        Companies gets back the balance of the invoice once the debtor pays back

Advantages of invoice discounting:

●        Companies can release up to 80 percent of outstanding invoices within 24 hours

●        Invoice discounting is much simpler than other business loans

●        No assets are put on risk

●        Quicker and faster method to procure cash than applying for a Cash Credit

●        Cash flow from the customer is considerably improved

●        Business relations between the seller and buyer remain unaffected

●        Companies get to choose to grow sales in terms of cash or credit

●        Companies continues to get the control over sales receivables

●        Financial agreement between companies and financers is not disclosed to buyers and confidentiality is maintained

●        Companies’ power to negotiate over discounts enhances with seller’s invoice

●        Financers provide companies with excellent business guidance

Disadvantages of invoice discounting

●        Companies’ profit margin decreases as fee charged by the financer is an additional cost

●        Financers allow borrowing only on commercial invoices

●        Focus on strengthening credit norms for debtors can be affected with excessive usage of invoice discounting

●        Invoice discounting can negatively affect the financial statements of new businesses

●        Amount of loan extended is highly volatile

Key features of invoice discounting

●        Perfect alternative solution for traditional business form

●        Cash flow remains unaffected as instant cash is provided over cash tied up with unpaid invoices

●        Adapts with the changing business environments as they change and grow

●        Companies retain control on collection of payments