Trade Finance

Trade finance refers to the financial support offered for trading transactions both domestically and abroad through a variety of financial instruments. Trade finance is simply the money and assistance offered to carry out business transactions. Banks and other financial institutions are primarily responsible for approving trade finance.

Trade Finance Types:

1. Loan or Working Capital Facility
2. Loan terms
3. Credit Letter 
4. Discounting of Receivables (also known as Factoring, Discounting, and Cheque Discounting)
5. Bonds or Assurances

Options for Trade Finance

GSPU’s trade finance advising service has real-world expertise in assisting firms.

1.Working Capital

The gap between current assets (cash, inventory, and accounts receivable) and liabilities (accounts payable, short-term borrowing, and accrued liabilities) is known as working capital.

In other words, from the time the company purchases raw materials until it receives payment from sales of its products and pays its suppliers, it is crucial to understand the operating cycle from raw material and inventory acquisition through supplier payment. For the examination of working capital, the number of days required for this conversion cycle is crucial. The finance team may identify the working capital shortfall based on this research and plan to source the funding to close it.

2.Loan terms

A term loan is an advance from the bank that must be paid back over a predetermined number of instalments. Along with the fixed instalment, term loans require a rate of interest that is either fixed or changing. Term loans are typically used by businesses to buy fixed assets. According to the length of the loan, term loans can be divided into three categories: short-term loans, intermediate-term loans, and long-term loans. Collateral may also be needed for a term loan to lower the risk of a payment default.

3.Credit Letter

Documentary credit, often known as a letter of credit (LC), is an irrevocable commitment made by a bank to pay a beneficiary if the beneficiary presents the required documents and the LC’s terms and conditions are met. Due to variables like distance and ambiguity about a party’s sincerity, the Exporter and Importer in international trade use an intermediary such as a bank to guarantee the payments and delivery of goods. If the buyer is unable to pay, the bank will be obligated to cover the entire sum.

Credit Letter’s advantages

To the buyer

1. Facility not reliant on funds
2. Option for financing without interest

To the seller

1. Reduces the credit risk
2. Utilize pre-shipment financing based on the LC.
3. Timely money receipt

Discounting of receivables

Discounting of invoices: Discounting of invoices enables a firm to collect a portion of the increased invoice amount upon presentation of the invoice and the remaining portion upon receipt of the customer’s payment. The ability to quickly receive funds through invoice discounting will improve the company’s cash flow. This facility is often customer-specific and under the Bank’s agreement with the customer. Before discounting an invoice, the bank will consider the clients’ ability to pay, the borrower’s creditworthiness, and additional security.

Cheque discounting: A facility offered by the bank entails financing the transaction and supplying monies in advance of the due date of a PDC issued by a client. With this agreement, the provider receives the money right away, giving the customer a grace period to pay.

Bonds or Assurances

Bonds or guarantees are services provided by a bank that gives the buyer security if the seller is unable to fulfil the commitment. When the seller fails to deliver the ordered items, the customer is compensated by the bank. These are primarily utilized for specific projects or in the construction industry. Tender Bond, Performance Bond, Advance Payment Bond, Retention Bond, and Payment Guarantee are some examples of the various bonds or guarantees based on “on-demand” and “conditional” classes.