Trade Financing for businesses

When entrepreneurs engage themselves in cross-border transactions, they have to send goods and products to foreign buyers and wait for the credit period to complete. This interim period of exporting products and getting payments creates issues and, within the process, sometimes delays in completing the following orders. In such cases, both exporters and foreign buyers can rely on Trade Finance and resolve this liquidity issue.

Read the following sections to learn about everything about Trade Finance.

What Is Trade Finance?

Trade finance refers to the financing of international trade flows.

In short, in Trade finance, companies use financial products and instruments to continue international trade and commerce.

It is an umbrella term that includes a wide range of financial products that financial institutions provide to exporters and importers to ensure enough liquidity within the business. This type of financing allows importers and exporters easy business transactions through trade.

How Does Trade Finance Work?

Trade Financing involves a third party backing exporters with payments or receivables per the agreement. Simultaneously, it extends credit to the importer to complete the trade order.

Various parties are involved in Trade Finance. These are banks, exporters and importers, Trade finance companies, insurers, export credit agencies and service providers.

Individuals must know that there is a huge difference between Trade Finance and conventional financing or credit issuance.

General financing can be used to tackle liquidity issues. However, Trade Financing not only focuses on managing liquidity or gap in funds but also gives coverage against the potential risk involved in international trade.

What Are The Types Of Finance Available In India?

An extensive range of products comes under Trade Finance. These are as follows:

Term Loans

Term loans are a type of Trade Finance where borrowers get the chance to repay the credit amount in instalments over a certain period of time. This credit period can be up to 10 years, but it can stretch up to 30 years in some cases.

The lending institution offers this product at a certain percentage of interest, and borrowers have to repay the loan amount along with the agreed interest rate.

Individuals can utilise term loans for a long-term project when anticipating the return on investment to come after a specific time.

Letters of Credit

A letter of credit is a letter from a bank that guarantees a buyer's payment to the seller under specific conditions.

This type of Trade Finance reduces the risk of non-receipt.

Here, the buyer's bank offers a payment guarantee to sellers for the shipped products and goods.

Financial institutions usually provide finance against Letter of Credit as there is inbuilt security of the issuing banks’ making payment in case of default.

Working Capital Limits such as Overdraft and Cash Credit

Various types of credit are available for financing foreign trade, including overdraft and cash credit. These credit instruments enable importers and exporters to cash in advance whenever they need it.

However, they have to keep in mind the available period in the credit line while applying for the same. These credit lines are similar to a general form of borrowing with a slight difference in credit period.

Overdraft and cash credits are short-term funding, and borrowers have to pay only for the amount and period they have utilised.

Export Credit

Export credit is an effective mode of Trade Finance.

Borrowers can take pre-shipment finance from lending institutions against an export order that they have obtained from an importer in the form of packing credit.

Once overseas buyers receive funds, financiers can adjust the packing credit amount, and borrowers can close the loan against that order.

Insurance

Insurance falls under the ambit of international trade finance products.

Export Trade Finance products offer coverage against the payment, shipping and delivery of goods.

Thus, Export Trade Finance products can easily protect the foreign exchange receivable risk of businesses.

Invoice Discounting or Invoice Factoring

Invoice financing that includes invoice discounting and invoice factoring can also help individuals involved in overseas trading manage liquidity shortages efficiently. Invoice Factoring refers to how businesses can sell their invoice to a third party at a discount and fund cash flow.

On the other hand, individuals can use a company’s unpaid invoices to raise working capital and manage financial needs. This process is known as Invoice Discounting. In this process, individuals will need a third-party financier known as a financing company to get pledge invoices and get the required cash.

In such cases, individuals involved in overseas business can opt for the Invoice Discounting offered on the KredX platform. Business persons can unlock the cash tied up in invoices. Thus, individuals can use their export company’s invoice as collateral without waiting for buyers' payment and get cash instantly.

What Are The Benefits Of Trade Finance?

The benefits of Trade Financing for business, i.e., overseas business, are numerous. These are as follows:

Reduces Risk

In international trading, both exporter and importer fear the issues of non-payment upon delivering products overseas and non-receipt of goods upon getting payment. These issues can easily be alleviated by opting for Trade Finance, as this type of credit facility allows both exporters and importers to get funding as per requirement.

Decrease Currency Fluctuation Risk

International trading has an inherent risk of currency fluctuation. The rate of the dollar, euro or other currency and the buyer country’s currency can change overnight. This can thrust importers and exporters into massive financial hardships. However, Trade Finance can safeguard importers and exporters from currency fluctuations by maintaining a specific exchange rate for the transaction upfront.

Enhances Cash Flow

Trade Finance enables individuals involved in the overseas business to get financing in various ways, thus managing cash and improving cash flow. This becomes possible as importer or buyer’s banks guarantee payment which compels exporters to deliver or ship products timely and manage cash flow efficiently.

Relying on Trade Finance reduces the time of collecting payments from overseas buyers and focuses more on export orders with improved cash flow.