Trade Finance

Trade finance represents the financial instruments and products that are used by companies to facilitate international trade and commerce. Trade finance makes it possible and easier for importers and exporters to transact business through trade. Trade finance is an umbrella term meaning it covers many financial products that banks and companies utilize to make trade transactions feasible.

Trade finance or trade loan is a borrowing facility offered by various lending institutions to firms involved in trading goods and services with parties within the country or outside the country. These loans usually work as a fully revolving credit facility which bridges the monetary gap between the period it has to pay for the purchased goods and the period when it receives funds from the sale of those goods.

Types of Trade Finance

There are different types of trade loans. Trade finance is provided at several levels since trade finance involves different types of products and services. Trade finance is available under various categories.

Letter of credit

In this the buyer’s bank gives an undertaking to the seller that once the shipping of the items is concluded and the necessary documents are received by the buyer’s bank, then the latter will pay the seller. In this case, the financing is provided by the buyer’s bank to the seller. In other words, if you are the buyer of a product, then your bank will provide a letter of credit to the seller (from whom you are purchasing goods), that once the goods have been shipped then your bank will release the payment to the seller. Since banks are involved in the transaction, it provides comfort to the seller that the payment will be made.
Bank guarantee

Bank guarantees protect against default. This guarantee is offered by the buyer’s bank that in case the buyer defaults in making payment, the guarantor bank will have to make payment on the money due.

Here again, the guarantor bank is providing the loan to the buyer, who is a client of the bank. There are different bank guarantees available such as financial guarantee, performance guarantee, tender bonds, etc. In each case, the seller gets a guarantee from the buyer’s bank that in case of default by the purchaser, the bank will make the applicable payment on the receivables. In most cases of trade transactions, sellers usually insist on a bank guarantee from the buyer before they proceed with the transaction.

Bill discounting and collection

Bill discounting and collection services are provided by banks so that customers can get instant finance against receivables while they get money for payables.

In such types of trade financing, the bank takes over the payables and the receivables of the customer providing instant finance to the latter and then later collects it from the counterparty with whom the customer is transacting. There is a certain cost associated with such services, and this is built into the amount at which the bank takes over the bills. This cost will be borne by the customer and depends to a large extent on the customer’s relationship with the bank, track record in making payments and the kind of clients that the customer has.

UNSECURED LOAN

Trade Finance Features

The loan advanced varies from one lender to another but it can be extended up to Rs. 10 crores, depending on the nature of the business, the personal situation of the borrower, collateral provided, size of the business, etc.

The tenure of the loan again varies from one lender to another. The tenure also depends on the loan facility you take. In case of term loans, the repayment period may stretch up to 10 years. Trade finance is usually revolving in nature, that is, it is available whenever the customer wants it and thus has a standing credit facility with the bank.

Trade loans are usually backed by some collateral or security and depending upon that the margin money could be around 40% of the security. Higher or lower margins may be applied by the lender on case to case basis.

Immovable properties such as residential property, commercial property, etc, can be pledged as collateral or security by the borrower. The lenders might also accept shares, fixed deposits, government bonds, etc. taken in the name of the borrower as security or collateral.

Trade Finance Eligibility Criteria

Globally, an eligibility criterion for availing trade finance remains more or less the same. Since it is a loan by all means, most of the regulations and requirements of conventional trade finance remain standard. Based upon specific banks, additional criteria might come into play, but on an average, the following conditions, if met, qualify a customer to avail a trade loan without any hassle –

1. Age

As with any kind of loan, the interested customer must be of legal voting age or above and allowed to conduct business, either in partnership or proprietorship

2. Business Age

The minimum years required for a business to be functional varies from bank to bank, but could be anywhere between 2 years to 4 years

A few of the necessary details that are common to most trade finance schemes are mentioned below –

1. Loan Limits

These again vary with differing banks, lower limits being close to INR 15,000 to INR 30,000. The upper limits could be decided as per the need of the customer and the limits set by the bank. Generally, a maximum of INR 2 crores to INR 3 crores can be approved

2. Loan Tenure

Tenures for repayment of the loan can be as high as 60 months and can be as low as decided by the customer or permissible by the bank

3. Loan Security

Most banks will allow securities in the form of mortgaged land (excepting agricultural land), National Savings Certificates, government bonds or fixed deposits with the bank. Some banks might also accept life insurance policies in the name of the borrower, partner, proprietor or director as security

4. Margin on Loans

Based on the security provided, the margin allowed by different banks could vary between 5% to 45% of the provided security

Documentation for Trade Finance

Apart from the proof of identity, proof of residence and other KYC documents, there are some specific documents to be provided for availing trade finance.

• The loan applicant has to furnish the balance sheet and profit and loss account statement of the business for the previous 2 years or more depends on the lender.

• Annual sales tax returns (now GST) and income tax returns, stock statements, insurance for the premises and the stock are some of the documents that the financial institution will ask for before providing financing.

The bank will also ask for the proof of an agreement between the buyer and seller to check the legitimacy of the transaction and ensure that goods are indeed being transferred from the seller to the buyer.

Advantages of Trade Finance

Trade finance is helpful for those who undertake a lot of domestic and international transactions.
Processing of documents becomes easier when banks are involved especially in the case of international trade.
Trade finance ensures that small business owners can make upfront payments to their customers through an arrangement with their banks or other financial institutions.
Since the payments are made through banks, business owners do not have the hassle of currency conversions and they can pay in their home currencies.
The seller is assured of payments by the borrower’s bank, thus leading to harmonious relations between buyer and seller.

Disadvantages of Trade Finance

It is usually based on having a good track record in terms of operations and repayments, and therefore less accessible for new companies
It can become very expensive, if payments are not made on time
LC (Letter of Credit) might need to be “cash backed” or have a property asset as security

Debt Syndication

FxmTrack Financials Financials provides well-structured financial solutions in order to fulfil the capital and financing needs. We help our customers in reinforcing their accounting reports by conveying Customized Capital Structure Alternatives intended for most extreme benefits. We help to arrange funds through various debt instruments. We construct a solid lifetime relationship with our customers by acting as an advisor and by giving them convenient and redid answers to satisfy their budgetary objectives.

Letter Of Credit

FxmTrack Financials understands that for doing a business and to expand it you have to deal with a lot of unknown suppliers. Your suppliers may require payment affirmation for doing a business exchange. FxmTrack Financials offers Letter of Credit Facility (LC) in order to which provides you with guarantee of payment which will help in easy purchase of goods.

Bank Guarantee

A bank guarantee is a confirmation that a bank gives to an agreement between two external parties, a purchaser and a seller.FxmTrack Financials helps in lending monetary assistance to you in form of Bank Guarantee (BG).

Financial Structuring

Financial structure refers to the mix of debt and equity that a company uses to finance its operations. FxmTrack Financials provides advisory and consultancy on optimal structuring of debt and equity in order to maximize the value of the business.