Trade finance provides funding for businesses to pay suppliers for their goods, normally when an order has already been placed by customers. Trade finance is also referred to as purchase finance. It is mostly sought when there is a definite order or when there is a proven demand for the goods. The term import finance applies where the goods are sourced from outside the country. It can also be presented in the form of letters of credit to fund the value added tax of exports. Trade finance can fund raw materials to be used in manufacturing processes. Provision of trade finance aids to bridge the gap of funding between purchase and the actual sale.
What is trade finance and how it helps import & export Companies
Trade financiers assist companies to attain growth that is in their potential but has been frowned upon by the normal finance institutions like banks. The financiers can open a letter of credit or pay the suppliers directly. In this way they are able to cater for 80 to 100% of the total cost of goods or materials including duty and value added tax. Trade finance is normally not used in isolation, but coexists among other methods of funding like invoice discounting, bank overdrafts and factoring. The finance compliments this other forms of funding allowing a company to take on additional opportunities which would have otherwise been lost.
Trade finance and letters of credit
The letters of credit (LC) segment of trade finance has been the backbone of international trade for years. After an importer and exporter conclude a transaction contract, the importer instructs his bank (issuing bank) to prepare the credit in favour of the exporting party. The issuing bank will leas with a bank in the exporters country to advance him the credit. After the exporter dispatches the goods, he presents the documents to the bank together with a bill of exchange. The bank can pay immediately or commit to pay at a later date. The issuing bank then reimburses the paying bank as it waits for the importer to pay for the goods.
A shipping guarantee is another form of trade finance fit for a company that wants to take delivery of goods before the shipping documents (bill of lading) arrive. For airborne cargo, an airway bill applies. The bank countersigns the shipping guarantee to the company that is shipping. That way a company can avoid incurring surplus expenses at the storage facility. A shipping guarantee also comes in handy in shipping of perishable goods which would otherwise lose value if not collected immediately.
How trade finance helps exporters.
Exporters can also benefit from pre-shipment trade financing when they lack adequate financing upon receiving a purchase order. Such a request can come from the buyer or the supplier. Pre-shipment financing can cater for raw materials or financing of overhead expenses. After the shipment the loan can be repaid in flexible terms with export invoice discounting or export bills advance. Trade finance can offer 90 to 100% protection against bad debt. Should a customer be unable to pay there is a guaranteed soft landing against losses incurred.
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