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Do you import or export goods? Trade Finance may be the solution to maximise your cash flow and protect your business.
What is Trade Finance?
The function of trade finance is to introduce a third-party to transactions to remove the payment risk and the supply risk while providing the exporter with receivables according to the agreement and the importer with extended credit. Suppliers, banks, syndicates, trade finance houses and buyers all provide trade financing.
Repayments of a trade finance facility will usually not exceed past 180 days. This type of financing creates a safety net to protect the interests of buyers and sellers in the international marketplace and help complete transactions that may involve multiple currencies. Should a term be required to extend past the standard 180 days, a domestic facility would be required to cover any short fall of repayment.
Trade finance is not exclusive to international trading of goods. Many domestic trades are completed via Trade Finance usually when the item being traded has a high value or trade between the two parties require more in depth security.
Although international trade has been in existence for centuries, trade finance facilitates its advancement. The widespread use of trade finance has contributed to enormous international trade growth. Trade finance is of vital importance to the global economy with the World Trade Organisation estimating that 80 to 90 percent of global trade relies on this financing method.
What facilities are available under Trade Finance?
- Trade Finance Loan – Trade Finance Loans are an advance provided in either a domestic or foreign currency to meet the obligation of payment. This enables importers/exporters to finance their trade commitments on a transnational basis. To obtain such finance there is a requirement for there to be a genuine trade agreement between parties. Most Trade finance loans act in a similar manner to that of a temporary overdraft where a pre-approved amount is issued to the borrower and a set date is made to ensure the facility balance is returned (180 days)
- Documentary Letter of Credit – a formal undertaking usually issued by a bank or trusted financial provided, engaging to honour drawings provided certain requirements, which it contains, are complied with. Typically used by buyers and sellers that are yet to establish a strong relationship. The Buyers require a prearranged documentary credit facility with their bank.
- Standby Letter of Credit – Standby Letters of Credit are payment guarantees, by the bank, to a beneficiary. This product is requested by a seller or a service provider as a back-up for another transaction. It can only be activated in case of non-performance or default of the underlying transaction and hence differs from the traditional irrevocable Documentary Letter of Credit.
- Performance Bond – Most capital works projects put out to tender require the successful tenderer to lodge a Performance Bond after being awarded the contract. The Performance Bond is an indication that the applicant company has the necessary skills and capabilities to carry out the required work and comply with the agreed terms and conditions of the contract.