Knowing About Trade Finance.
All the emerging businesses need a backbone of funds for running them efficiently. Many times due to lack of working capital, the business operation faces a downfall in the operations which ultimately affects the whole business. While Trading or dealing domestically or across borders, there are several factors necessary right from purchasing or manufacturing the product till receiving the final payment. This whole process requires funds to overcome all the problems, hence Trade financing helps in dealing in India as well as International market.
Concept of Trade Finance
Trade Finance is financing to cash flows required for dealing in domestic as well in the international market. It majorly helps to mitigate the risk involved in trading beyond the border. Many times while transacting across borders both the seller and buyer is unknown which again arise the risk. Will the buyer return money in time? Will he make a payment or not? This issue is solved by taking assistance of Trade Finance. There is the involvement of two parties in a trade transaction: (1) an exporter, who requires payment for their goods or services, and (2) an importer who wants to make sure they are paying for the correctly according to quality and quantity of goods or services provided by the exporter.
Benefits of Trade Finance:
Trade Finance helps in reducing the risk while dealing in domestic as well as international market. Being unaware of each other, both buyer and seller need surety for transacting with each other which is solved by financial instruments used in Trade Finance.
By choosing Trade Finance, the crunch of working capital will be resolved, which will increase the cash flow of the business. The main characteristic of trade finance is working capital management which generates revenue and earnings for the business.
The relationship between the buyer and seller is strengthened due to the availability of financial instruments like Bank Guarantee, LC Discounting, Factoring, etc. The financial instruments gain confidence between parties and build relationship due to the guarantee given by Banker or Financial Institution.
Process in Trade Finance:
- The borrower agrees to purchase the goods from a supplier
- Borrower agrees terms with funder and funder pays the agreed amount to supplier.
- Supplier then ships the goods to the borrower.
- After receiving goods from supplier, borrower sold the goods to the Buyer and receives payment of goods.
- The borrower then repays money back to the funder.
Parties involved in Trade Finance:
Borrower/Seller: The borrower is the person who is in the trading business and need funds for Trading activities.
Buyer: The buyer will buy goods from borrower/seller.
Funder: Due to lack of funds, the borrower seeks finances for trade from the funder/lending institution.
Supplier/Manufacturer: The supplier is the person who supplies goods to the borrower who then sells goods to the customers.
Instruments involved in Trade Finance
Factoring is availed to domestic as well as to the International customers. Factoring is the financial instrument or debtor finance in which the seller sells its accounts receivable to a third party called ‘factor’ at a discount. There are three parties involved in such a transaction: seller, buyer and a factoring company. In simple words, it is selling unpaid invoices for the requirement of instant cash.
Line of credit / Letter of Credit is a guarantee provided by a financial institution to pay sellers on behalf of buyers in case of default on their part. Letter of Credit discounting serves as financial security for businesses involved in either export or import or both.
Bank Guarantee is a type of financial instrument offered by Banks or Financial Institution which ensure the liabilities of the debtor will be met. i.e. the bank will be held responsible for non-payment of the debtor. It is generally a promise made by the bank to any third person to undertake the payment risk on behalf of its customers. The banker charge interest or fees on such an instrument which is based on the risk involved in the transaction.
Why Terkar Capital?
Trade finance is the financing for undertaking Trade to the clients working at domestic as well as International level. The process is complicated but we at Terkar Capital makes it convenient for our clients. We arrange several options in both debt and equity funding. We analyse all the aspects of the business and then suggest appropriate product according to the financials. Our reliable and quick process makes us different from all others.
